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PIMCO Funds:
Multi-Manager Series
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1997
PIMCO Funds: Multi-Manager Series (the "Trust"), formerly PIMCO Funds:
Equity Advisors Series, PIMCO Advisors Institutional Funds, PFAMCo Funds, and
PFAMCo Fund, is an open-end management investment company ("mutual fund")
currently offering twenty-four separate diversified investment portfolios (the
"Funds"): the Equity Income Fund, the Value Fund, the Renaissance Fund, the
Enhanced Equity Fund, the Growth Fund, the Capital Appreciation Fund, the Mid
Cap Growth Fund, the Core Equity Fund, the Mid Cap Equity Fund, the Target Fund,
the Small Cap Value Fund, the Small Cap Growth Fund, the Opportunity Fund, the
Micro Cap Growth Fund, the Innovation Fund, the International Fund, the
International Developed Fund, the International Growth Fund, the Emerging
Markets Fund, the Tax-Managed Structured Emerging Markets Fund, the Structured
Emerging Markets Fund, the Precious Metals Fund, the Balanced Fund and the Tax
Exempt Fund.
The Trust's investment adviser is PIMCO Advisors L.P. ("PIMCO Advisors" or the
"Adviser"), 800 Newport Center Drive, Suite 100, Newport Beach, California
92660.
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with the Prospectuses for the Trust, each dated November 1,
1997, as supplemented from time to time. The Trust offers up to five classes of
shares of each of its Funds through two Prospectuses. Class A, Class B and
Class C shares of certain Funds are offered through the "Retail Prospectus," and
Institutional and Administrative Class shares of certain Funds are offered
through the "Institutional Prospectus" (collectively with the Retail Prospectus,
the "Prospectuses"). A copy of the applicable Prospectus may be obtained free
of charge at the address and telephone number(s) listed below.
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Institutional Prospectus: Retail Prospectus:
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PIMCO Funds PIMCO Funds Distribution Company
840 Newport Center Drive 2187 Atlantic Street
Suite 360 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: (800) 426-0107
Telephone: (800) 927-4648 (Current Shareholders)
(800) 800-0952 (New Accounts)
(800) 987-4626 (PIMCO Infolink Audio
Response Network)
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES.................................................... 3
U.S. Government Securities.................................................... 3
Inflation-Indexed Bonds....................................................... 3
Borrowing..................................................................... 4
Preferred Stock............................................................... 5
Corporate Debt Securities..................................................... 5
High Yield Securities ("Junk Bonds").......................................... 5
Participation on Creditors Committees......................................... 7
Variable and Floating Rate Securities......................................... 7
Mortgage-Related and Asset-Backed Securities.................................. 8
Foreign Securities............................................................ 12
Bank Obligations.............................................................. 13
Commercial Paper.............................................................. 14
Derivative Instruments........................................................ 15
When-Issued, Delayed Delivery and Forward Commitment
Transactions.................................................................. 20
Warrants to Purchase Securities............................................... 21
Tax Exempt Bonds.............................................................. 21
Metal-Indexed Notes and Precious Metals....................................... 22
Repurchase Agreements......................................................... 23
Securities Loans.............................................................. 23
INVESTMENT RESTRICTIONS............................................................... 24
Fundamental Investment Restrictions........................................... 24
Non-Fundamental Investment Restrictions....................................... 26
MANAGEMENT OF THE TRUST............................................................... 28
Trustees...................................................................... 28
Officers...................................................................... 29
Trustees' Compensation........................................................ 32
Investment Adviser............................................................ 33
Fund Administrator............................................................ 40
DISTRIBUTION OF TRUST SHARES.......................................................... 42
Distributor and Multi-Class Plan.............................................. 42
Contingent Deferred Sales Charge and Initial Sales Charge..................... 43
Distribution and Servicing Plans for Class A, Class B and
Class C Shares................................................................ 44
Distribution and Administrative Services Plans for
Administrative Class Shares................................................... 50
Purchases, Exchanges and Redemptions.......................................... 52
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 53
Investment Decisions.......................................................... 53
Brokerage and Research Services............................................... 53
Portfolio Turnover............................................................ 56
NET ASSET VALUE....................................................................... 56
TAXATION.............................................................................. 57
Distributions................................................................. 58
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Sales of Shares.............................................................. 59
Backup Withholding........................................................... 59
Options, Futures, Forward Contracts and Swap Agreements...................... 59
Passive Foreign Investment Companies......................................... 60
Foreign Currency Transactions................................................ 61
Foreign Taxation............................................................. 61
Original Issue Discount...................................................... 62
Other Taxation............................................................... 62
OTHER INFORMATION.................................................................... 63
Capitalization............................................................... 63
Performance Information...................................................... 63
Calculation of Yield......................................................... 64
Calculation of Total Return.................................................. 65
Voting Rights................................................................ 77
Certain Ownership of Trust Shares............................................ 77
Custodian.................................................................... 97
Independent Accountants...................................................... 97
Registration Statement....................................................... 98
Financial Statements......................................................... 98
APPENDIX............................................................................. A-1
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund are
described in the Prospectuses. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts
issued in connection with so-called trademark zero coupon securities, such as
CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury
securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
Inflation-Indexed Bonds
The Balanced Fund may invest in inflation-indexed bonds, which are fixed
income securities whose principal value is periodically adjusted according to
the rate of inflation. The interest rate on these bonds is generally fixed at
issuance at a rate lower than typical bonds. Over the life of an inflation-
indexed bond, however, interest will be paid based on a principal value which is
adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semi-annual basis, equal to a fixed percentage of the inflation-
adjusted principal amount. For example, if an investor purchased an inflation-
indexed bond with a par value of $1,000 and a 3% real rate of return coupon
(payable 1.5% semi-annually), and inflation over the first six months were 1%,
the mid-year par value of the bond would be $1,010 and the first semi-annual
interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year reached 3%, the end-of-year par value of the bond would
be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030
times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the
current market value of the bonds is not guaranteed, and will fluctuate. The
Balanced Fund may also invest in other inflation-related bonds which may or may
not provide a similar guarantee. If such a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal. The value of inflation-indexed bonds is
expected to change in response to changes in real interest rates. Real interest
rates in turn are tied to the relationship between nominal interest rates and
the rate of inflation. Therefore, if inflation were to rise at a faster rate
than nominal interest rates, real interest rates might decline, leading to an
increase in value of inflation-indexed bonds. In contrast, if nominal interest
rates increased
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at a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility a Fund may be forced to liquidate positions when it
would not be advantageous to do so. There also can be no assurance that the U.S.
Treasury will issue any particular amount of inflation-indexed bonds. Certain
foreign governments, such as the United Kingdom, Canada and Australia, have a
longer history of issuing inflation-indexed bonds, and there may be a more
liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food,
transportation and energy. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation index,
calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in
the prices of goods and services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
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.
Borrowing
Subject to the limitations described under "Investment Restrictions"
below, a Fund may be permitted to borrow for temporary purposes and/or for
investment purposes. Such a practice will result in leveraging of a Fund's
assets and may cause a Fund to liquidate portfolio positions when it would not
be advantageous to do so. This borrowing may be unsecured. Provisions of the
Investment Company Act of 1940 ("1940 Act") require a Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed, with an
exception for borrowings not in excess of 5% of the Fund's total assets made for
temporary administrative purposes. As noted under "Investment Restrictions," the
Funds are subject to limitations on borrowings which are more strict than those
imposed by the 1940 Act. Any borrowings for temporary administrative purposes in
excess of 5% of the Fund's total assets must maintain continuous asset coverage.
If the 300% asset coverage should decline as a result of market fluctuations or
other reasons, a Fund may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time. Borrowing will tend to exaggerate the effect on net
asset value of any increase or decrease in the market value of a Fund's
portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements if permitted to do so under its investment
restrictions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. The Fund will maintain a segregated
account with its custodian consisting of assets determined to be liquid by the
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Adviser or the Fund's sub-adviser (the Funds' sub-advisers are referred to
herein as "Portfolio Managers") in accordance with procedures established by the
Board of Trustees and equal (on a daily mark-to-market basis) to its obligations
under reverse repurchase agreements with broker-dealers (but not banks).
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. Reverse
repurchase agreements will be subject to the Funds' limitations on borrowings as
specified under "Investment Restrictions" below.
Preferred Stock
All Funds may invest in preferred stock. Preferred stock is a form of equity
ownership in a corporation. The dividend on a preferred stock is a fixed payment
which the corporation is not legally bound to pay. Certain classes of preferred
stock are convertible, meaning the preferred stock is convertible into shares of
common stock of the issuer. By holding convertible preferred stock, a Fund can
receive a steady stream of dividends and still have the option to convert the
preferred stock to common stock.
Corporate Debt Securities
All Funds may invest in corporate debt securities. The Equity Income, Value,
Capital Appreciation, Mid Cap Growth, Micro Cap Growth, Small Cap Value, Small
Cap Growth, Core Equity, Mid Cap Equity, Enhanced Equity, Emerging Markets,
Structured Emerging Markets, Tax-Managed Structured Emerging Markets and
International Developed Funds' investments in corporate debt securities are
limited to short-term corporate debt securities. The investment return of
corporate debt securities reflects interest earnings and changes in the market
value of the security. The market value of a corporate debt obligation may be
expected to rise and fall inversely with interest rates generally. There also
exists the risk that the issuers of the securities may not be able to meet their
obligations on interest or principal payments at the time called for by an
instrument.
A Fund's investments in U.S. dollar or foreign currency-denominated corporate
debt securities of domestic or foreign issuers are limited to corporate debt
securities (corporate bonds, debentures, notes and other similar corporate debt
instruments, including convertible securities) which meet the minimum ratings
criteria set forth for the Fund, or, if unrated, are deemed to be comparable in
quality to corporate debt securities in which the Fund may invest. The rate of
return or return of principal on some debt obligations may be linked or indexed
to the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate debt securities in which the Funds may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to non-
convertible debt securities. Convertible securities rank senior to common stock
in a corporation's capital structure and, therefore, generally entail less risk
than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party.
High Yield Securities ("Junk Bonds")
Certain of the Funds may invest in debt/fixed income securities of domestic or
foreign issuers that meet minimum ratings criteria set forth for a Fund, or, if
unrated, are of comparable quality in the opinion of the Fund's Portfolio
Manager. A description of the ratings categories used is set forth in the
Appendix to this Statement of Additional Information.
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A security is considered to be below "investment grade" quality if it is
either (1) not rated in one of the four highest rating categories by one of the
Nationally Recognized Statistical Rating Organizations ("NRSROs") (i.e., rated
Ba or below by Moody's Investors Services, Inc. ("Moody's") or BB or below by
Standard & Poor's Corporation ("S&P")) or (2) if unrated, determined by the
Adviser or relevant Portfolio Manager to be of comparable quality to obligations
so rated.
The Renaissance, Growth, Balanced and Tax Exempt Funds may purchase high yield
securities (as defined in the Prospectuses) rated in either the fifth or (except
for the Tax Exempt Fund) sixth highest rating categories by any NRSRO or
comparable unrated securities, and the Renaissance Fund may invest up to 10% of
its total assets in high yield securities rated below the sixth highest rating
category by an NRSRO or comparable unrated securities (but will not purchase any
security in default on the date of acquisition). The Growth Fund will generally
invest no more than 5% of its net assets in high yield securities. Investment
in high yield securities generally provides greater income and increased
opportunity for capital appreciation than investments in higher quality
securities, but it also typically entails greater price volatility as well as
principal and income risk. High yield securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. The market for these securities is relatively new, and
many of the outstanding high yield securities have not endured a major business
recession. A long-term track record on default rates, such as that for
investment grade corporate bonds, does not exist for this market. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt/fixed income securities. Each Fund of
the Trust that may purchase high yield securities may continue to hold such
securities following a decline in their rating if in the opinion of the Adviser
or the Portfolio Manager, as the case may be, it would be advantageous to do so.
Investments in high yield securities that are eligible for purchase by certain
of the Funds are described as "speculative" by both Moody's and S&P.
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 than investments in higher rated debt securities, high yield securities
typically entail greater potential price volatility and may be less liquid than
investment grade debt. High yield securities may be regarded as predominately
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher quality debt
securities, and achievement of a Fund's investment objective may, to the extent
of its investments in high yield securities, depend more heavily on the
Portfolio Manager's creditworthiness analysis than would be the case if the Fund
were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities are likely to be 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/fixed income securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Funds investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash.
Prices of high yield/high risk securities have been found to be less sensitive
to interest rate changes than more highly rated investments, but more sensitive
to economic downturns or individual corporate developments. The secondary
market on which high yield securities are traded may be less liquid than the
market for higher grade securities. Less liquidity in the secondary trading
market could adversely affect the price at which the Funds could sell a high
yield security, and could adversely affect the daily net asset value of the
shares. Lower liquidity in secondary markets could adversely affect the value
of high yield/high risk securities held by the Renaissance,
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Growth, Tax Exempt and Balanced Funds. While lower rated securities typically
are less sensitive to interest rate changes than higher rated securities, the
market prices of high yield/high risk securities structured as "zero coupon" or
"pay-in-kind" securities may be affected to a greater extent by interest rate
changes. See Appendix A to this Statement of Additional Information for further
information regarding high yield/high risk securities. For instance, 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.
Debt securities are purchased and sold principally in response to current
assessments of future changes in business conditions and the levels of interest
rates on debt/fixed income securities of varying maturities, the availability of
new investment opportunities at higher relative yields, and current evaluations
of an issuer's continuing ability to meet its obligations in the future. The
average maturity or duration of the debt/fixed income securities in a Fund's
portfolio may vary in response to anticipated changes in interest rates and to
other economic factors. Securities may be bought and sold in anticipation of a
decline or a rise in market interest rates. In addition, a Fund may sell a
security and purchase another of comparable quality and maturity (usually, but
not always, of a different issuer) at approximately the same time to take
advantage of what are believed to be short-term differentials in values or
yields.
Participation on Creditors Committees
A Fund may from time to time participate on committees formed by creditors to
negotiate with the management of financially troubled issuers of securities held
by the Fund. Such participation may subject a Fund to expenses such as legal
fees and may make the Fund an "insider" of the issuer for purposes of the
federal securities laws, and therefore may restrict the Fund's ability to trade
in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by a Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws governing the rights of creditors and debtors. A Fund would
participate on such committees only when the Adviser and the relevant Portfolio
Manager believe 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.
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.
Certain of the Funds may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied
to another interest rate, such as a money-market index or U.S. Treasury bill
rate. The interest rate on a floater resets periodically, typically every six
months. Because of the interest rate reset feature, floaters provide a Fund
with a certain degree of protection against rises in interest rates, but
generally do not allow the Fund to participate fully in appreciation resulting
from any general decline in interest rates.
Certain Funds 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 generally will exhibit greater
price volatility than a fixed rate obligation of similar credit quality. See
"Mortgage-Related and Asset-Backed Securities" below.
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Mortgage-Related and 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" below). Certain debt securities are also secured with collateral
consisting of mortgage-related securities (see "Collateralized Mortgage
Obligations" below).
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 the
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 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 the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. 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 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/services 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.
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 services 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
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interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees, and the creditworthiness of
the issuers thereof, will be considered in determining whether a mortgage-
related security meets the Trust's investment quality standards. There can be
no assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. A 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, the Portfolio Manager determines that the securities meet the Fund's
quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. A Fund will not purchase mortgage-related securities or
any other assets which in the Portfolio Manager's opinion are illiquid if, as a
result, more than 15% of the value of the Fund's net assets (taken at market
value at the time of investment) will be invested in illiquid securities.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instru mentalities, are not subject to a Fund's
industry concentration restrictions, see "Investment Restrictions," by virtue of
the exclusion from that test available to all U.S. Government securities. In
the case of privately issued mortgage-related securities, the Funds take the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real
properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
--------
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the 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 begin 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.
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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 semi-annual 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 CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
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
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
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to changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances a Fund may fail to recoup some or all of its initial
investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only recently developed and CMO residuals currently may not
have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not,
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. 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 "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Fund's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, 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 a Fund's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Adviser and Portfolio
Managers expect that other asset-backed securities (unrelated to mortgage loans)
will be offered to investors in the future and may be purchased by the Funds
that may invest in mortgage-related securities. Several types of asset-backed
securities have already been offered to investors, including Certificates for
Automobile Receivables(SM) ("CARS(SM)"). CARS(SM) represent undivided fractional
interests in a trust whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS(SM) are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor's return
on CARS(SM) may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
Consistent with a Fund's investment objectives and policies, the Adviser
and Portfolio Manager also may invest in other types of asset-backed securities.
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Foreign Securities
The Emerging Markets, Structured Emerging Markets, Tax-Managed Structured
Emerging Markets, International Developed, International Growth and
International Funds may invest in U.S. dollar or foreign currency-denominated
corporate debt securities of foreign issuers; preferred securities of foreign
issuers; certain foreign bank obligations; and U.S. dollar- or foreign currency-
denominated obligations of foreign governments or their subdivisions, agencies
and instrumentalities, international agencies and supranational entities. Each
of the Funds except for the Tax Exempt Fund may invest in American Depository
Receipts ("ADRs"). The Emerging Markets, Structured Emerging Markets, Tax-
Managed Structured Emerging Markets, International Developed, International
Growth, International and Precious Metals Funds may also invest in common stocks
issued by foreign companies or in securities represented by European Depository
Receipts ("EDRs"), or Global Depository Receipts ("GDRs"). ADRs are dollar-
denominated receipts issued generally by domestic banks and represent the
deposit with the bank of a security of a foreign issuer. The Core Equity and Mid
Cap Equity Funds may invest in ADRs, EDRs and GDRs. EDRs are foreign currency-
denominated receipts similar to ADRs and are issued and traded in Europe, and
are publicly traded on exchanges or over-the-counter in the United States. GDRs
may be offered privately in the United States and also trade in public or
private markets in other countries. ADRs, EDRs and GDRs may be issued as
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities trade in the form of ADRs, EDRs or GDRs. In
unsponsored programs, the issuer may not be directly involved in the creation of
the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. The Precious Metals Fund may invest primarily
in securities of foreign issuers, securities denominated in foreign currencies,
securities principally traded on securities markets outside of the United States
and in securities of foreign issuers that are traded on U.S. securities markets.
The Renaissance, Core Equity, Mid Cap Equity, Growth, Target, Opportunity and
Innovation Funds each may invest up to 15% of their respective net assets in
securities which are traded principally in securities markets outside the United
States (Eurodollar certificates of deposit are excluded for purposes of these
limitations), and (except for the Core Equity and Mid Cap Equity Funds) may
invest without limit in securities of foreign issuers that are traded in U.S.
securities markets. The Enhanced Equity Fund may invest in common stock of
foreign issuers if it is included in the index from which stocks are selected.
The Balanced Fund may invest up to 20% of its assets allocated for investment in
fixed income securities in securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities of foreign
issuers.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
taxes withheld from payments on those securities. Foreign securities often trade
with less frequency and volume than domestic securities and therefore may
exhibit greater price volatility. Changes in foreign exchange rates will affect
the value of those securities which are denominated or quoted in currencies
other than the U.S. dollar.
The risks of investing in foreign securities are particularly high when
securities of issuers based in developing (or "emerging market") countries are
involved. Investing in emerging market countries involves certain risks not
typically associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: greater risks of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; greater social, economic and
political uncertainty and instability (including the risk of war); more
substantial government involvement in the economy; higher rates of inflation;
less government supervision and regulation of the securities markets and
participants in those markets; controls on foreign investment and limitations on
repatriation of invested capital and on the Fund's ability to exchange local
currencies for U.S. dollars; unavailability of currency hedging
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<PAGE>
techniques in certain emerging market countries; the fact that companies in
emerging market countries may be smaller, less seasoned and newly organized
companies; the difference in, or lack of, auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets.
The Renaissance, Core Equity, Mid Cap Equity, Growth, Target, Opportunity,
Innovation, International, International Developed, International Growth,
Emerging Markets, Structured Emerging Markets, Tax-Managed Structured Emerging
Markets, Precious Metals and Balanced Funds may enter into forward foreign
currency exchange contracts to reduce the risks of adverse changes in foreign
exchange rates. In addition, the Emerging Markets, Structured Emerging Markets,
Tax-Managed Structured Emerging Markets, International, International Developed,
International Growth, Balanced and Precious Metals Funds may buy and sell
foreign currency futures contracts and options on foreign currencies and foreign
currency futures.
All of the Funds that may buy or sell foreign currencies may enter into
forward foreign currency exchange contracts to reduce the risks of adverse
changes in foreign exchange rates. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. By entering into a
forward foreign currency exchange contract, the fund "locks in" the exchange
rate between the currency it will deliver and the currency it will receive for
the duration of the contract. As a result, a Fund reduces its exposure to
changes in the value of the currency it will deliver and increases its exposure
to changes in the value of the currency it will exchange into. Contracts to sell
foreign currencies would limit any potential gain which might be realized by a
Fund if the value of the hedged currency increases. A Fund may enter into these
contracts for the purpose of hedging against foreign exchange risks arising from
the Funds' investment or anticipated investment in securities denominated in
foreign currencies. Such hedging transactions may not be successful and may
eliminate any chance for a Fund to benefit from favorable fluctuations in
relevant foreign currencies.
The International, International Developed, International Growth, Emerging
Markets, Structured Emerging Markets and Tax-Managed Structured Emerging Markets
Funds may also enter into forward foreign currency exchange contracts for
purposes of increasing exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one currency to another. To the extent that
they do so, the International, International Developed, Emerging Markets,
Structured Emerging Markets and Tax-Managed Structured Emerging Markets Funds
will be subject to the additional risk that the relative value of currencies
will be different than anticipated by the particular Fund's Portfolio Manager. A
Fund may use one currency (or a basket of currencies) to hedge against adverse
changes in the value of another currency (or a basket of currencies) when
exchange rates between the two currencies are positively correlated. A Fund will
segregate assets determined to be liquid by the Portfolio Manager in accordance
with procedures established by the Board of Trustees in a segregated account to
cover forward currency contracts entered into for non-hedging purposes. The
Funds may also use foreign currency futures contracts and related options on
currencies for the same reasons for which forward foreign currency exchange
contracts are used.
Bank Obligations
Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or
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(2) provide for withdrawal penalties upon prepayment (other than overnight
deposits) if, in the aggregate, more than 15% of its net assets (taken at market
value at the time of investment) would be invested in such deposits, repurchase
agreements maturing in more than seven days and other illiquid assets. Each Fund
may also hold funds on deposit with its sub-custodian bank in an interest-
bearing account for temporary purposes.
Each Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Renaissance, Growth, Target, Core Equity, Mid Cap Equity, Opportunity,
Innovation, International, Emerging Markets, Structured Emerging Markets, Tax-
Managed Structured Emerging Markets, International Developed, International
Growth, Precious Metals and Balanced Funds limit their investments in foreign
bank obligations to obligations of foreign banks (including United States
branches of foreign banks) which at the time of investment (i) have more than
$10 billion, or the equivalent in other currencies, in total assets; (ii) are
among the 75 largest foreign banks in the world in terms of total assets; (iii)
have branches or agencies (limited purpose offices which do not offer all
banking services) in the United States; and (iv) in the opinion of the relevant
Portfolio Manager, are of an investment quality comparable to obligations of
United States banks in which the Funds may invest. Subject to each Fund's
limitation on concentration of no more than 25% of its assets in the securities
of issuers in a particular industry, there is no limitation on the amount of a
Fund's assets which may be invested in obligations of foreign banks which meet
the conditions set forth above.
Obligations of foreign banks involve certain risks associated with
investing in foreign securities described under "Foreign Securities" above,
including the possibilities that their liquidity could be impaired because of
future political and economic developments, that their obligations may be less
marketable than comparable obligations of United States banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
Commercial Paper
All Funds may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Funds consists of U.S. dollar-denominated obligations of
domestic issuers, or, additionally for the Renaissance, Growth, Target, Core
Equity, Mid Cap Equity, Opportunity, Innovation, Emerging Markets, Structured
Emerging Markets, Tax-Managed Structured Emerging Markets, International,
International Developed and International Growth, Precious Metals and Balanced
Funds, foreign currency-denominated obligations of domestic or foreign issuers
which, at the time of investment, are (i) rated "P-1" or "P-2" by Moody's or "A-
1" or "A-2" or better by S&P, (ii) issued or guaranteed as to principal and
interest by issuers or guarantors having an existing debt security rating of "A"
or better by Moody's or "A" or better by S&P, or (iii) securities which, if not
rated, are, in the opinion of the Portfolio Manager, of an investment quality
comparable to rated commercial paper in which the Fund may invest. The rate of
return on commercial paper may be linked or indexed to the level of exchange
rates between the U.S. dollar and a foreign currency or currencies.
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Derivative Instruments
The following describes certain derivative instruments and products in
which the Funds may invest (to the extent described in the Prospectuses and
under "Investment Restrictions" below) and the risks associated therewith.
Options on Securities and Indexes. A Fund may, to the extent specified for
the Fund in the Prospectuses and under "Investment Restrictions" below, 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 National
Association of Securities Dealers Automated Quotations ("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.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Fund. For a call
option on an index, the option is covered if the Fund maintains with its
custodian assets determined to be liquid by the Portfolio Manager 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 assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees in a segregated account with its custodian. A put option on a security
or an index is "covered" if the Fund maintains assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees equal to the exercise price in a segregated account with its custodian.
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 assets determined to be liquid by the Portfolio Manager in accordance
with procedures established by the Board of Trustees in a segregated account
with the Fund's custodian.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund
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will realize a capital gain or, if it is less, the Fund will realize a capital
loss. The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded as
a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
OTC Options. The Renaissance, Growth, Target, Opportunity, Innovation,
International, International Growth, Precious Metals and Tax Exempt Funds will
enter into over-the-counter ("OTC") options transactions only with primary
dealers in U.S. Government securities and only pursuant to agreements that will
assure that the relevant Fund will at all times have the right to repurchase the
option written by it from the dealer at a specified formula price. The Funds
will treat the amount by which such formula price exceeds the intrinsic value of
the option (i.e., the amount, if any, by which the market price of the
underlying security exceeds the exercise price of the option) as an illiquid
investment.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Fund forgoes, during
the option's life, the opportunity to profit from increases in the market value
of the security covering the call option above the sum of the premium and the
exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Foreign Currency Options. Each of the Funds that may buy or sell foreign
currencies may buy or sell put and call options on foreign currencies either on
exchanges or in the over-the-counter market. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the
exercise price until the option expires. A call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options.
Futures Contracts and Options on Futures Contracts. A Fund may use interest
rate, foreign currency or index futures contracts, as specified in the
Prospectuses. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the
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index contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including but not limited to: the S&P 500; the S&P Midcap 400; the Nikkei 225;
the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the French franc;
the Swiss franc; the Mexican peso; and certain multinational currencies, such as
the European Currency Unit ("ECU"). It is expected that other futures contracts
in which the Funds may invest will be developed and traded in the future.
Certain Funds may purchase and write call and put futures options. 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 holder acquires a short position and
the writer is assigned the opposite long position.
A Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or in the case of futures options, for which an established
over-the-counter market exists.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets determined to be liquid by the Portfolio Manager in
accordance with procedures established by the Board of Trustees ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. Margin requirements on foreign exchanges may be different than U.S.
exchanges. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (i.e.,
with the 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. Any transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options. In general, the Funds
intend to enter into positions in futures contracts and related options only for
"bona fide hedging" purposes. With respect to positions in futures and related
options that do not constitute bona fide hedging positions, a Fund will not
enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-
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money," would exceed 5% of the Fund's net assets. A call option is "in-the-
assets if the value of the futures contract that is the subject of the option
exceeds the exercise price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Portfolio Manager 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 total market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a put option on
the same futures contract with a strike price as high or higher than the price
of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Portfolio Manager in accordance with procedures established by the Board of
Trustees that are equal to the market value of the instruments underlying the
contract. Alternatively, the Fund may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to that of the
index on which the futures contract is based), or by holding a call option
permitting the Fund to purchase the same futures contract at a price no higher
than the price of the contract written by the Fund (or at a higher price if the
difference is maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Portfolio Manager in accordance with procedures established by the
Board of Trustees that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Portfolio Manager 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.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. Some of the risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation. For
example, if the price of the futures contract moves more than the price of the
hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. 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.
To compensate for imperfect correlations,
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a Fund may purchase or sell futures contracts in a greater dollar amount than
the hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the futures contracts. Conversely, a Fund may
purchase or sell fewer contracts if the volatility of the price of the hedged
securities is historically less than that of the futures contracts. The risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches. 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 Tax Exempt 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 Tax Exempt 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 a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts and Forward Currency Exchange Contracts and Options thereon.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees; and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Trust's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
Swap Agreements. The Emerging Markets, Structured Emerging Markets, Tax-
Managed Structured Emerging Markets, and International Developed Funds may enter
into equity index swap agreements for purposes of attempting to gain exposure to
the stocks making up an index of securities in a foreign market without actually
purchasing those stocks. The Balanced Fund may enter into swap agreements to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices. 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. The gross returns to be
exchanged or "swapped" between
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the parties are calculated with respect to a "notional amount," i.e., the return
on or increase in value of a particular dollar amount invested in a "basket" of
securities representing a particular index.
Most swap agreements entered into by the Funds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counter party will be covered by the maintenance of a
segregated account consisting of assets determined to be liquid by the Portfolio
Manager 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 a Fund's investment restriction concerning senior securities. A Fund
will not enter into a swap agreement with any single party if the net amount
owed or to be received under existing contracts with that party would exceed 5%
of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Portfolio Manager's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Funds will enter into swap
agreements only with counter parties that meet certain standards of
creditworthiness (generally, such counter parties would have to be eligible
counter parties under the terms of the Funds' repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
When-Issued, Delayed Delivery and Forward Commitment Transactions
A Fund may purchase or sell securities on a when-issued or delayed delivery
basis. These transactions involve a commitment by the Fund to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Fund will set aside and maintain until the
settlement date in a segregated account, assets determined to be liquid by the
Portfolio Manager 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 purchased on a delayed delivery basis prior to the
time delivery of the securities is made, although a Fund may earn income on
securities it has deposited in a segregated account. When purchasing a security
on a delayed delivery 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 a
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 delayed delivery
purchases are outstanding, the delayed delivery purchases may result in a form
of leverage. When the Fund has sold a security on a delayed delivery basis, the
Fund does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. A Fund may dispose of or renegotiate a
delayed delivery transaction after it is entered into, and may sell when-issued
securities before they are delivered, which may result in a capital gain or
loss. There is no percentage limitation on the extent to which the Funds may
purchase or sell securities on a delayed delivery basis.
Each Fund may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the Fund
either (i) holds, and maintains until the settlement date in a
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segregated account, assets determined to be liquid by the Portfolio Manager in
accordance with procedures established by the Board of Trustees in an amount
sufficient to meet the purchase price or (ii) enters into an offsetting contract
for the forward sale of securities of equal value that it owns. Certain Funds
may enter into forward commitments for the purchase or sale of foreign
currencies. Forward commitments may be considered securities in themselves.
They involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. A Fund may dispose of a commitment
prior to settlement and may realize short-term profits or losses upon such
disposition.
Warrants to Purchase Securities
Certain Funds may invest in warrants to purchase equity or fixed income
securities. Bonds with warrants attached to purchase equity securities have
many characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value.
Tax Exempt Bonds
As noted in the Retail Prospectus, it is a policy of the Tax Exempt 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 ("Tax Exempt Bonds") which are rated Baa or higher by
Moody's or BBB or higher by S&P, or in one of the four highest rating categories
of any other NRSRO, or which are unrated and determined by the Portfolio Manager
to be of quality comparable to obligations so rated. Under such policy, the
Fund may invest up to 20% of its net assets in Tax Exempt Bonds rated in the
fifth highest rating category by any NRSRO, or unrated obligations determined by
the Portfolio Manager to be of quality comparable to obligations so rated. A
description of these ratings is set forth in Appendix A hereto. From time to
time, however, the Fund may have less than 80% of its net assets invested in Tax
Exempt Bonds for temporary defensive purposes. The ability of the Fund to
invest in securities other than Tax Exempt Bonds is limited by a requirement of
the Internal Revenue Code that at least 50% of the Fund's total assets be
invested in Tax Exempt Bonds at the end of each calendar quarter. See "Taxes."
Tax Exempt Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and multi-
state agencies or authorities. The Tax Exempt Bonds which the Tax Exempt 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.
Tax Exempt 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.
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The Tax Exempt 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 Tax Exempt Bonds due to changes in
the Portfolio Manager's evaluation of the issuer or cash needs resulting from
redemption requests for Fund shares. The secondary market for Tax Exempt 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 Tax Exempt
Bonds at then-current market prices, especially in periods when other investors
are attempting to sell the same securities.
Prices and yields on Tax Exempt Bonds are dependent on a variety of factors,
including general money-market conditions, the financial condition of the
issuer, general conditions of the Tax Exempt 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 Tax Exempt Bonds may not be as extensive as that which is made
available by corporations whose securities are publicly traded.
Obligations of issuers of Tax Exempt 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 Tax Exempt 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 Tax Exempt 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 Tax Exempt Bonds in the same manner.
Metal-Indexed Notes and Precious Metals
The Precious Metals Fund may invest in notes, the principal amount or
redemption price of which is indexed to, and thus varies directly with, changes
in the market price of gold bullion or other precious metals ("Metal-Indexed
Notes"). It is expected that the value of Metal-Indexed Notes will be as
volatile as the price of the underlying metal.
The Precious Metals Fund will only purchase Metal-Indexed Notes which are
rated investment grade or are issued by issuers that have outstanding debt
obligations rated investment grade or commercial paper rated in the top rating
category by any NRSRO, or Metal-Indexed Notes issued by issuers that the
Portfolio Manager has determined to be of similar creditworthiness. Debt
obligations rated in the fourth highest rating category by an NRSRO are
considered to have some speculative characteristics. The Metal-Indexed Notes
might be backed by a bank letter of credit, performance bond or might be
otherwise secured, and any such security, which would be held by the Fund's
custodian, would be taken into account in determining the creditworthiness of
the securities. The Precious Metals Fund might purchase unsecured Metal-Indexed
Notes if the issuer thereof met the Fund's credit standards without any such
security. While the principal amount or redemption price of Metal-Indexed Notes
would vary with the price of the resource, such securities would not be secured
by a pledge of the resource or any other security interest in or claim on the
resource. In the case of Metal-Indexed Notes not backed by a performance bond,
letter of credit or similar security, it is expected that such securities
generally would not be secured by any other specific assets.
The Precious Metals Fund anticipates that if Metal-Indexed senior securities
were to be purchased, such securities would be issued by precious metals or
commodity brokers or dealers, by mining companies, by commercial banks or by
other financial institutions. Such issuers would issue notes to hedge their
inventories and reserves of the resource, or to borrow money at a relatively low
cost (which would include the nominal rate of interest paid on Metal-Indexed
Notes, described below, and the cost of hedging the issuer's metals exposure).
The Precious Metals Fund would not purchase a Metal-Indexed Note issued by a
broker or dealer if as a result of such purchase more than 5% of the value of
the Fund's total assets would be invested in securities of such issuer. The
Precious Metals Fund
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might purchase Metal-Indexed Notes from brokers or dealers which are not also
securities brokers or dealers. Precious metals or commodity brokers or dealers
are not subject to supervision or regulation by any governmental authority or
self-regulatory organization in connection with the issuance of Metal-Indexed
Notes.
Until fairly recently, there were no Metal-Indexed Notes outstanding and
consequently there is no secondary trading market for such securities. Although
a limited secondary market might develop among institutional traders, there is
no assurance that such a market will develop. No public market is expected to
develop, since the Precious Metals Fund expects that Metal-Indexed Notes will
not be registered under the 1933 Act, and therefore disposition of such
securities, other than to the issuer thereof (as described below), would be
dependent upon the availability of an exemption from such registration.
Any Metal-Indexed Notes which the Precious Metals Fund might purchase
generally will have maturities of one year or less. Such notes, however, will
be subject to being called for redemption by the issuer on relatively short
notice. In addition, it is expected that the Metal-Indexed Notes will be
subject to being put by the Precious Metals Fund to the issuer or to a stand-by
broker meeting the credit standards set forth above, with payments being
received by the Precious Metals Fund on no more than seven days' notice. A
stand-by broker might be a securities broker-dealer, in which case the Precious
Metals Fund's investment will be limited by applicable regulations of the
Securities and Exchange Commission (the "SEC"). The put feature of the Metal-
Indexed Notes will ensure liquidity even in the absence of a secondary trading
market. The securities will be repurchased upon exercise of the holder's put at
the specified exercise price, less repurchase fees, if any, which are not
expected to exceed 1% of the redemption or repurchase proceeds. Depending upon
the terms of particular Metal-Indexed Notes, there might be a period as long as
five days between the date upon which the Precious Metals Fund notifies the
issuer of the exercise of the put and determination of the sale price.
It is expected that any Metal-Indexed Notes which the Precious Metals Fund
might purchase will bear interest or pay preferred dividends at relatively
nominal rates under 2% per annum. The Precious Metals Fund's holdings of such
senior securities therefore would not generate appreciable current income, and
the return from such senior securities would be primarily from any profit on the
sale or maturity thereof at a time when the price of the relevant precious metal
is higher than it was when the senior securities were purchased.
Repurchase Agreements
Each of the Funds may enter into repurchase agreements with domestic
commercial banks or registered broker/dealers. A repurchase agreement is a
contract under which a Fund would acquire a security for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). In the case of repurchase
agreements with broker-dealers, the value of the underlying securities (or
collateral) will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. The Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities. The Adviser and the Portfolio Managers,
as appropriate, will monitor the creditworthiness of the counter parties.
Securities Loans
Subject to certain conditions described in the Prospectuses, each of the
Equity Income, Value, Enhanced Equity, Capital Appreciation, Mid Cap Growth,
Small Cap Value, Small Cap Growth, Core Equity, Mid Cap Equity, Target, Micro
Cap Growth, International Developed, Emerging Markets, Structured Emerging
Markets, Tax-Managed Structured Emerging Markets and Balanced Funds may make
secured loans of its portfolio securities amounting to no more than 33% of its
total assets, and each of the Renaissance, Growth, Opportunity, Innovation,
International, International Growth, Tax Exempt and Precious Metals Funds may
make such loans amounting to no more than 25% of its total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail
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financially. However, such loans will be made only to broker-dealers that are
believed by the Adviser or the Portfolio Manager to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral at least equal at all
times to the market value of the securities lent. The borrower pays to the
lending Fund an amount equal to any dividends or interest received on the
securities lent. The Fund may invest only the cash collateral received in
interest-bearing, short-term securities or receive a fee from the borrower. In
the case of cash collateral, the Fund typically pays a rebate to the lender.
Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, the Fund retains the right to call the loans at
any time on reasonable notice, and it will do so in order that the securities
may be voted by the Fund if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. The Fund may
also call such loans in order to sell the securities involved.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The investment restrictions set forth below are fundamental policies of the
Renaissance, Growth, Target, Opportunity, Innovation, International,
International Growth, Precious Metals and Tax Exempt Funds and may not be
changed with respect to any such Fund without shareholder approval by vote of a
majority of the outstanding voting securities of that Fund. Under these
restrictions, none of the above-mentioned Funds may:
----
(1) borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of such Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will be
repaid before any additional investments are purchased;
(2) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of such Fund's total assets (taken at cost) and then only to
secure borrowings permitted by Restriction (1) above. (The deposit of
securities or cash or cash equivalents in escrow in connection with the writing
of covered call or put options, respectively, is not deemed to be pledges or
other encumbrances.) (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, futures contracts, options
on futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are deemed
to be the issuance of a senior security.);
(3) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
(4) purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate, except that the Precious Metals Fund may purchase or sell
agricultural land;
(5) acquire more than 10% of the voting securities of any issuer, both
with respect to any such Fund and to the Funds to which this policy relates, in
the aggregate; or
(6) concentrate more than 25% of the value of its total assets in any one
industry, or, in the case of the Tax Exempt Fund, in industrial development
revenue bonds based, directly or indirectly, on the credit of private entities
in any one industry; except that the Precious Metals Fund will concentrate more
than 25% of its total assets in securities of companies principally engaged in
the extraction, processing, distribution or marketing of precious metals, and
the Innovation Fund will concentrate more than 25% of its assets in companies
which use innovative technologies to gain a strategic, competitive advantage in
their industry as well as companies that provide and service
24
<PAGE>
those technologies. Investments of the Tax Exempt Fund in utilities, gas,
electric, water and telephone companies will be considered as being in separate
industries.
The investment objective of each of the above-referenced Funds is non-
fundamental and may be changed with respect to each such Fund by the Trustees
without shareholder approval.
The investment objective of each of the Equity Income, Value, Enhanced
Equity, Capital Appreciation, Mid Cap Growth, Small Cap Value, Small Cap Growth,
Core Equity, Mid Cap Equity, Micro Cap Growth, International Developed, Emerging
Markets, Structured Emerging Markets, Tax-Managed Structured Emerging Markets
and Balanced Funds, as set forth in the Prospectuses under "Investment
Objectives and Policies," together with the investment restrictions set forth
below, are fundamental policies of each such Fund and may not be changed with
respect to any such Fund without shareholder approval by vote of a majority of
the outstanding shares of that Fund. Under these restrictions, none of the
----
above-mentioned Funds may:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(4) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(5) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Fund may
engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(6) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures, and except that effecting short sales will be deemed not
to constitute a margin purchase for purposes of this restriction;
(7) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Fund may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts as described in the Prospectuses
and in this Statement of Additional Information (the deposit of assets in escrow
in connection with the writing of covered put and call options and the purchase
of securities on a when-issued or delayed delivery basis and collateral
arrangements with respect to initial or variation margin deposits for futures
contracts, options on futures contracts, and forward foreign currency contracts
will not be deemed to be pledges of such Fund's assets);
25
<PAGE>
(8) issue senior securities, except insofar as such Fund may be deemed to
have issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies, and except for purposes of this investment
restriction, collateral, escrow, or margin or other deposits with respect to the
making of short sales, the purchase or sale of futures contracts or related
options, purchase or sale of forward foreign currency contracts, and the writing
of options on securities are not deemed to be an issuance of a senior security;
(9) lend any funds or other assets, except that such Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans, (b) enter into repurchase agreements and reverse
repurchase agreements, and (c) lend its portfolio securities in an amount not to
exceed one-third of the value of its total assets, provided such loans are made
in accordance with applicable guidelines established by the SEC and the Trustees
of the Trust; or
(10) 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.
Notwithstanding the provisions of fundamental investment restrictions (7)
and (8) above, a Fund may borrow money for temporary administrative purposes.
To the extent that borrowings for temporary administrative purposes exceed 5% of
the total assets of a Fund, such excess shall be subject to the 300% asset
coverage requirement of fundamental investment restriction (7).
Non-Fundamental Investment Restrictions
Each Fund is also subject to the following non-fundamental restrictions and
policies (which may be changed without shareholder approval) and, unless
otherwise indicated, may not:
(1) invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities the disposition of which is restricted under
federal securities laws, (c) repurchase agreements maturing in more than seven
days, (d) OTC options (to the extent described above under "Derivative
Instruments -- OTC Options"), and (e) IO/PO SMBS (as described above under
"Mortgage-Related and Asset-Backed Securities -- Stripped Mortgage -Backed
Securities") if, as a result, more than 15% of a Fund's net assets, taken at
current value, would then be invested in securities described in (a), (b), (c),
(d) and (e) above. For the purpose of this restriction, securities subject to a
7-day put option or convertible into readily saleable securities or commodities
are not included with subsections (a) or (b);
(2) with respect to the Tax Exempt Fund, invest less than 80% of such
Fund's net assets in Tax Exempt Bonds rated Baa or higher by Moody's or BBB or
higher by S&P or which are unrated and determined by such Fund's Portfolio
Manager to be of comparable quality;
(3) purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment by a Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.);
(4) make short sales of securities or maintain a short position for the
account of a Fund unless at all times when a short position is open such Fund
owns an equal amount of such securities or owns or has the right to acquire
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
(5) purchase or sell commodities or commodity contracts except that a Fund
may purchase and sell financial futures contracts and related options and the
Precious Metals Fund may purchase and sell precious metals and other commodities
and futures thereon;
26
<PAGE>
(6) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth, Precious Metals and Tax Exempt
Funds, make loans, except by purchase of debt obligations or by entering into
repurchase agreements (in the case of the Tax Exempt Fund, with respect to not
more than 20% of its total assets) or through the lending of the Fund's
portfolio securities with respect to not more than 25% of its total assets (33
1/3% in the case of the Target Fund);
(7) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth, Precious Metals and Tax Exempt
Funds, and in each case with respect to 75% of such Fund's total assets, invest
in securities of any issuer if, immediately after such investment, more than 5%
of the total assets of such Fund (taken at current value) would be invested in
the securities of such issuer; provided that this limitation does not apply to
bank certificates of deposit or to obligations issued or guaranteed as to
interest and principal by the U.S. government or its agencies or
instrumentalities. For the purpose of this restriction, each state and each
separate political subdivision, agency, authority or instrumentality of such
state, each multi-state agency or authority, and each guarantor, if any, are
treated as separate issuers of Tax Exempt Bonds;
(8) purchase securities the disposition of which is restricted under the
federal securities laws (excluding for purposes of this restriction securities
offered and sold pursuant to Rule 144A of the 1933 Act and Section 4(2)
commercial paper) if, as a result, such investments would exceed 15% of the
value of the net assets of the relevant Fund;
(9) write (sell) or purchase options except that (i) each Fund (other than
the Tax Exempt Fund) may (a) write covered call options or covered put options
on securities that it is eligible to purchase and enter into closing purchase
transactions with respect to such options, and (b) in combination therewith, or
separately, purchase put and call options on securities it is eligible to
purchase, and (c) each Fund may engage in options on securities indexes, options
on foreign currencies, options on futures contracts, and options on other
financial instruments or one or more groups of instruments; (ii) the Tax Exempt
Fund may purchase put options with respect to all or any part of its portfolio
securities and call options with respect to securities that it is eligible to
purchase; provided that the premiums paid by each Fund on all outstanding
options it has purchased do not exceed 5% of its total assets. Each Fund may
enter into closing sale transactions with respect to options it has purchased;
(10) invest more than 15% of the net assets of a Fund (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include repurchase agreements maturing in more than
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide withdrawal penalties upon prepayment (other
than overnight deposits), or other securities which legally or in the Adviser's
or Portfolio Manager's opinion may be deemed illiquid (other than securities
issued pursuant to Rule 144A under the 1933 Act and certain commercial paper
that the Adviser or Portfolio Manager has determined to be liquid under
procedures approved by the Board of Trustees);
(11) borrow money (excluding reverse repurchase agreements which are
subject to such Fund's fundamental borrowing restriction), except for temporary
administrative purposes.
Unless otherwise indicated, all limitations applicable to Fund investments
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 resulting from market fluctuations or
other changes in a Fund's total assets will not require a Fund to dispose of an
investment until the Adviser or Portfolio Manager determines that it is
practicable to sell or close out the investment without undue market or tax
consequences to the Fund. In the event that ratings services assign different
ratings to the same security, the Adviser or Portfolio Manager will determine
which rating it believes best reflects the security's quality and risk at that
time, which may be the higher of the several assigned ratings.
The phrase "shareholder approval," as used in the Prospectuses, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
27
<PAGE>
outstanding shares of the Fund or the Trust, as the case may be, or (2) 67% or
more of the shares of the Fund or the Trust, as the case may be, present at a
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
MANAGEMENT OF THE TRUST
Trustees
The Trustees of the Trust, their ages, and a description of their principal
occupations during the past five years are listed below. Except as shown, each
Trustee's principal occupation and business experience for the last five years
have been with the employer(s) indicated, although in some cases the Trustee may
have held different positions with such employer(s).
<TABLE>
<CAPTION>
Name, Address and Age Principal Occupation(s) During the Past Five Years
- --------------------------------------------------------------------------------
<S> <C>
E. Philip Cannon Trustee, Cash Accumulation Trust ("CAT");
2401 Claremont Lane Headmaster, St. John's School, Houston, Texas.
Houston, TX 77019 Formerly, Trustee of PIMCO Advisors Funds ("PAF"),
Age 56 General Partner, J.B. Poindexter & Co., Houston,
Texas (private partnership), and Partner, Iberia
Petroleum Company (oil and gas production). Mr.
Cannon was a director of WNS Inc., a retailing
company which filed a petition in bankruptcy
within the last five years.
- --------------------------------------------------------------------------------
Donald P. Carter Trustee, CAT; Formerly, Trustee of PAF, Chairman,
434 Stable Lane Executive Vice President and Director, Cunningham
Lake Forest, IL 60045 & Walsh, Inc., Chicago (advertising agency).
Age 70
- --------------------------------------------------------------------------------
Gary A. Childress Trustee, CAT; Chairman and Director, Bellefonte
11 Longview Terrace Lime Company, Inc.; Mr. Childress is a partner in
Madison, CT 06443 GenLime, L.P., a private limited partnership,
Age 63 which has filed a petition in bankruptcy within
the last five years. Formerly, Trustee of PAF.
- --------------------------------------------------------------------------------
(*) William D. Cvengros Trustee, CAT; Chairman of the Board of the Trust;
800 Newport Center Drive Chief Executive Officer, President, and member of
Newport Beach, CA 92660 the Operating Board, Operating Committee, and
Age 49 Equity Board, PIMCO Advisors; Director, PIMCO
Funds Distribution Company ("PFDCO"). Formerly,
Trustee of PAF, President of the Trust, and
Director, Vice Chairman, and Chief Investment
Officer, Pacific Life Insurance Company ("Pacific
Life").
- --------------------------------------------------------------------------------
Gary L. Light Trustee, CAT; President, E.V.A. Investors, Inc.
523 Cornwall Ct. (private investments); Director, The Somerset
Carmel, IN 46032 Group, Inc.; Consultant to and, prior to March,
Age 60 1987, Executive Vice President, Mayflower
Corporation (trucking and transportation); Vice
Chairman and Chief Financial Officer, Sofamor
Danek (medical devices). Formerly, Trustee of PAF.
- --------------------------------------------------------------------------------
Richard L. Nelson Trustee, CAT; President, Nelson Financial
8 Cherry Hills Lane Consultants; Director, Wynn's International, Inc.;
Newport Beach, CA 92660 Trustee, Pacific Select Fund. Formerly, Partner,
Age 67 Ernst & Young.
- --------------------------------------------------------------------------------
Lyman W. Porter Trustee, CAT; Professor of Management at the
2639 Bamboo Street University of California, Irvine; Trustee, Pacific
Newport Beach, CA 92660 Select Fund.
Age 67
- --------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
(*) Robert A. Prindiville Trustee, CAT. Formerly, Trustee of PAF, President
2187 Atlantic Street and Director, Thomson Advisory Group, Inc.;
Stamford, CT 06903 Director and Chairman, PFDCO; Executive Vice
Age 62 President, PIMCO Advisors.
- --------------------------------------------------------------------------------
Alan Richards Trustee, CAT; President, Alan Richards Consulting,
7381 Elegans Place Inc.; Trustee, Pacific Select Fund; Director,
Carlsbad, CA 92009 Western National Corporation. Formerly,
Age 67 President, Chief Executive Officer and Director,
E.F. Hutton Insurance Group, Inc.; Chairman of the
Board, Chief Executive Officer and President, E.F.
Hutton Life Insurance Company; Director, E.F.
Hutton & Company, Inc.
- --------------------------------------------------------------------------------
Joel Segall Trustee, CAT; Formerly, Trustee of PAF, President
11 Linden Shores and University Professor, Bernard M. Baruch
Branford, CT 06405 College, The City University of New York; Deputy
Age 74 Under Secretary for International Affairs, United
States Department of Labor; Professor of Finance,
University of Chicago; Board of Managers, Coffee,
Sugar and Cocoa Exchange.
- --------------------------------------------------------------------------------
W. Bryant Stooks Trustee, CAT; President, Bryant Investments, Ltd.;
1530 E. Montebello Director, American Agritec LLC. Formerly, Trustee
Phoenix, AZ 85014 of PAF, President, Senior Vice President, Director
Age 57 and Chief Executive Officer, Archirodon Group
Inc.; Partner, Arthur Andersen & Co.
- --------------------------------------------------------------------------------
Gerald M. Thorne Trustee, CAT; Director, UPI Inc., Kaytee Inc., and
5 Leatherwood Lane American Orthodontics Corp. Formerly, Trustee of
Savannah, GA 31414 PAF, President and Director, Firstar National Bank
Age 59 of Milwaukee; Chairman, President and Director,
Firstar National Bank of Sheboygan; Director,
Bando-McGlocklin.
- --------------------------------------------------------------------------------
(*) Stephen J. Treadway President and Chief Executive Officer of the
2187 Atlantic Street Trust; Trustee, President and Chief Executive
Stamford, CT 06902 Officer of CAT; Executive Vice President, PIMCO
Age 50 Advisors; Director, Chairman and President PFDCO.
Formerly, Executive Vice President, Smith Barney
Inc.
- --------------------------------------------------------------------------------
</TABLE>
* Trustee is an "interested person" of the Trust (as defined in Section
2(a)(19) of the 1940 Act).
Officers
The chart below sets forth the name, address, age, position with the Trust,
and principal occupation during the past five years of each officer of the
Trust. Unless otherwise indicated, the business address of all persons listed
below is 840 Newport Center Drive, Suite 360, Newport Beach, California 92660:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name, Address and Age Position(s) with the Principal Occupation(s)
Trust During the Past Five Years
- --------------------------------------------------------------------------------
<S> <C> <C>
Stephen J. Treadway Trustee, President and President, CAT; Executive
2187 Atlantic Street Chief Executive Officer Vice President, PIMCO
Stamford, CT 06902 Advisors; Director and
Age 50 Chairman, PFDCO.
Formerly, Executive Vice
President, Smith Barney
Inc.
- --------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
R. Wesley Burns Executive Vice Vice President of PAF and
Age 38 President CAT; President, PIMCO
Funds: Pacific Investment
Management Series;
Executive Vice President,
Pacific Investment
Management Company
("Pacific Investment
Management"); Trustee and
President, PIMCO Variable
Insurance Trust.
Formerly, Vice President,
Pacific Investment
Management and PAF.
- --------------------------------------------------------------------------------
Newton B. Schott, Jr. Vice President and Vice President and Clerk
2187 Atlantic Street Secretary of CAT; Director,
Stamford, CT 06902 Executive Vice President
Age 55 and Secretary, PFDCO.
Formerly, Vice President
and Clerk of PAF, Senior
Vice President-Legal and
Secretary, PIMCO
Advisors; Executive Vice
President, Secretary and
General Counsel, Thomson
Advisory Group and PIMCO
Advisors.
- --------------------------------------------------------------------------------
Jeffrey M. Sargent Vice President Vice President and
Age 35 Manager of Fund
Shareholder Servicing,
Pacific Investment
Management; Vice
President of PIMCO Funds:
Pacific Investment
Management Series; Vice
President, PIMCO Variable
Insurance Trust.
Formerly, Project
Specialist, Pacific
Investment Management.
- --------------------------------------------------------------------------------
Richard M. Weil Vice President Senior Vice President -
Age 34 Legal, PIMCO Advisors.
Formerly, Vice President,
Bankers Trust Company;
Associate, Simpson,
Thatcher & Bartlett.
- --------------------------------------------------------------------------------
John P. Hardaway Treasurer Treasurer of CAT and
Age 40 PIMCO Funds: Pacific
Investment Management
Series; Treasurer, PIMCO
Variable Insurance Trust;
Vice President and
Manager of Fund
Operations, Pacific
Investment Management.
Formerly, Treasurer of
PAF.
- --------------------------------------------------------------------------------
Joseph D. Hattesohl Assistant Treasurer Manager of Fund Taxation,
Age 34 Pacific Investment
Management; Assistant
Treasurer of PIMCO Funds:
Pacific Investment
Management Series;
Assistant Treasurer of
PIMCO Variable Insurance
Trust. Formerly, Director
of Financial Reporting,
Carl I. Brown & Co.; Tax
Manager, Price Waterhouse
LLP.
- --------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
Garlin G. Flynn Assistant Secretary Senior Fund
Age 51 Administrator, Pacific
Investment Management;
Secretary of PIMCO Funds:
Pacific Investment
Management Series;
Secretary, PIMCO Variable
Insurance Trust.
Formerly, Senior Mutual
Fund Analyst, PIMCO
Advisors Institutional
Services; Senior Mutual
Fund Analyst, PFAMCo.
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Trustees' Compensation
Trustees other than those affiliated with PIMCO Advisors, a Portfolio
Manager, or Pacific Investment Management, receive an annual retainer of
$45,000, plus $2,000 for each Board of Trustees meeting attended, and $500 for
each Audit and Performance Committee meeting attended, plus reimbursement of
related expenses. Each Audit and Performance Committee member receives an
additional annual retainer of $1,000, the Chairman of the Audit and Performance
Committees receives an additional annual retainer of $2,000, the Chairman of the
Independent Trustees receives an additional annual retainer of $6,000, and each
Vice Chairman of the entire Board receives an additional annual retainer of
$3,000. Trustees do not currently receive any pension or retirement benefits
from the Trust or the Fund Complex. The Trust has adopted a deferred
compensation plan for the Trustees, which went into place during 1997, which
permits the Trustees to defer their receipt of compensation from the Trust, at
their election, in accordance with the terms of the plan. Certain of the
Trustees earned deferred compensation for their services on behalf of PIMCO
Advisors Funds ("PAF") and CAT which was carried forward under the Trust's plan.
The following table sets forth information regarding compensation received
by those Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Trust for the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
-------------------------------------------------------------
(1) (2) (3)
Total
Aggregate Compensation
Name of Trustee Compensation from from Trust and
Trust/1/ Fund Complex/2/
-------------------------------------------------------------
<S> <C> <C>
E. Philip Cannon/3/ $24,750.00 $54,000.00
-------------------------------------------------------------
Donald P. Carter/3/ $28,800.00 $60,000.00
-------------------------------------------------------------
Gary A. Childress/3/ $24,750.00 $54,000.00
-------------------------------------------------------------
</TABLE>
- --------------------------
/1/ The Trust has adopted a deferred compensation plan (the "Plan") which
went into place during fiscal 1997. Aggregate deferred compensation earned in
prior years by certain Trustees under a deferred compensation plan for PAF was
carried forward under the Plan. Of the amounts listed in column (2), the
following Trustees elected to have the following amounts deferred from the Trust
and all investment companies in the Fund Complex, respectively: Cannon -
$24,750, $54,000; Carter - $0, $28,000; Segall - $25,875, $56,750; Thorne -
$24,750, $54,000; Porter - $24,750, $27,500.
/2/ The amounts listed in column (3) include total compensation paid to the
Trustees for their services as Trustees of the Trust (for all Trustees), PAF
(for Messrs. Cannon, Carter, Childress, Light, Segall, Stooks and Thorne), CAT
(for all Trustees), and Pacific Select Fund (for Messrs. Nelson, Porter, and
Richards) for the twelve-month period ended June 30, 1997. By virtue of having
PIMCO Advisors or an affiliate of PIMCO Advisors as investment adviser, the
Trust, PAF, CAT and Pacific Select Fund are considered to be part of the same
"Fund Complex" for these purposes. PAF ceased operations on January 17, 1997
and did not pay compensation for services rendered after that date. Messrs.
Nelson, Porter and Richards became Trustees of CAT in February 1997 and did not
receive compensation from CAT prior thereto.
/3/ Messrs. Cannon, Carter, Childress, Light, Segall, Stooks and Thorne
became Trustees of the Trust in December 1997 and did not receive compensation
from the Trust prior thereto.
32
<PAGE>
<TABLE>
<S> <C> <C>
-------------------------------------------------------------
Gary L. Light/3/ $25,650.00 $56,000.00
-------------------------------------------------------------
Richard L. Nelson $43,150.00 $70,000.00
-------------------------------------------------------------
Lyman W. Porter $41,750.00 $71,500.00
-------------------------------------------------------------
Alan Richards $44,500.00 $67,500.00
-------------------------------------------------------------
Joel Segall/3/ $25,875.00 $56,750.00
-------------------------------------------------------------
W. Bryant Stooks/3/ $24,750.00 $54,000.00
-------------------------------------------------------------
Gerald M. Thorne/3/ $24,750.00 $54,000.00
-------------------------------------------------------------
</TABLE>
Investment Adviser
PIMCO Advisors serves as investment adviser to each of the Funds pursuant
to an investment advisory agreement ("Advisory Agreement") between PIMCO
Advisors and the Trust. PIMCO Advisors was organized as a limited partnership
under Delaware law in 1987; PIMCO Partners, G.P. ("PIMCO GP"), PIMCO Advisors's
sole general partner, is a general partnership with two partners: (i) an
indirect wholly-owned subsidiary of Pacific Life; and (ii) PIMCO Partners,
L.L.C. ("LLC"), a limited liability company, all of the interests of which are
held directly by the Managing Directors of Pacific Investment Management
Company, who are William H. Gross, Dean S. Meiling, James F. Muzzy, William F.
Podlich, III, Frank B. Rabinovitch, Brent R. Harris, John L. Hague, William S.
Thompson, Jr., William C. Powers, David H. Edington, Benjamin L. Trosky, William
R. Benz, II and Lee R. Thomas, III (collectively, the "Managing Directors").
PIMCO GP has substantially delegated its management and control of PIMCO
Advisors to an Equity Board and an Operating Board of PIMCO Advisors. The
activities of PIMCO Advisors are controlled by its Operating Board, except that
certain non-routine or extraordinary actions may not be effected by the
Operating Board without the approval of PIMCO Advisors's Equity Board. The
Operating Board has in turn delegated the authority to manage day-to-day
operations and policies to an Operating Committee. The Operating Board is
composed of twelve members, of which seven (including the chairman) are
designated by Pacific Investment Management, which is a subsidiary general
partnership of PIMCO Advisors. The Equity Board is composed of twelve members
including the chief executive officer of PIMCO Advisors, three members
designated by PFAMCO, the chairman of the Operating Board, two members
designated by LLC, two members designated by holders of Series B Preferred Stock
of Thomson Advisory Group Inc., the former general partner of PIMCO Advisors,
and three independent members. Because of the ability to designate a majority
of the Members of the Operating Board, Pacific Investment Management and the
Managing Directors could be said to control PIMCO Advisors, although the
Managing Directors disclaim such control. PIMCO Advisors and PIMCO GP are
located at 800 Newport Center Drive, Suite 100, Newport Beach, CA 92660. PIMCO
Advisors and its subsidiary partnerships had approximately $130.6 billion of
assets under management as of September 30, 1997.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Funds and for
managing, either directly or through others selected by the Adviser, the
investment of the Funds. PIMCO Advisors also furnishes to the Board of Trustees
periodic reports on the investment performance of each Fund. For all of the
Funds except the Precious Metals Fund, PIMCO Advisors has engaged affiliates to
serve as Portfolio Managers.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Funds in accordance with applicable laws and regulations. The
investment advisory services of PIMCO Advisors to the Trust are not exclusive
under the terms of the Advisory Agreement. PIMCO Advisors is free to, and does,
render investment advisory services to others.
33
<PAGE>
The Advisory Agreement will continue in effect with respect to a Fund for
two years from its effective date, and thereafter on a yearly basis, provided
such continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Fund or by the Board of Trustees and (ii)
by 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 Advisory Agreement. The Advisory Agreement may be terminated without
penalty by vote of the Trustees or the shareholders of the Trust, or by the
Adviser, on 60 days' written notice to the other party and will terminate
automatically in the event of its assignment. In addition, the Advisory
Agreement may be terminated with regard to the Renaissance, Growth, Target,
Opportunity, Innovation, Tax Exempt, International and Precious Metals Funds by
vote of a majority of the Trustees who are not interested persons of PIMCO
Advisors, on 60 days' written notice to PIMCO Advisors.
The Adviser currently receives a monthly investment advisory fee from each
Fund at the following annual rates (based on the average daily net assets of the
particular Funds):
<TABLE>
<CAPTION>
Fund Advisory
- ---- Fee Rate
--------
<S> <C>
Tax Exempt Fund.......................................... .30%
Equity Income, Value, Capital Appreciation,
Mid Cap Growth, Structured Emerging Markets,
Tax-Managed Structured Emerging Markets,
Enhanced Equity and Balanced Funds..................... .45%
Growth Fund.............................................. .50%
International and Target Funds........................... .55%
Core Equity Fund......................................... .57%
Small Cap Value, Renaissance, Precious Metals
and International Developed Funds....................... .60%
Mid Cap Equity Fund...................................... .63%
Opportunity and Innovation Funds......................... .65%
Emerging Markets and International Growth Funds.......... .85%
Small Cap Growth Fund.................................... 1.00%
Micro Cap Growth Fund.................................... 1.25%
</TABLE>
For the fiscal years ended June 30, 1997, June 30, 1996, and October
31, 1995 (the fiscal year ended June 30, 1996 being an eight-month period) the
Funds paid the Adviser (or its predecessor) the following amounts under the
Advisory Contract:
34
<PAGE>
<TABLE>
<CAPTION>
Year Period Year
Ended Ended Ended
Fund 6/30/97 6/30/96 10/31/95
- ---- -------- -------- --------
<S> <C> <C> <C>
Equity Income Fund $555,146 $425,899 $445,739
Value Fund 463,869 65,873 60,686
Small Cap Value Fund 249,347 156,721 203,158
Core Equity Fund 234,333 145,931 73,930
Mid Cap Equity Fund 48,656 35,315 26,276
Capital Appreciation Fund 1,953,374 883,498 881,358
Mid Cap Growth Fund 1,219,531 617,546 650,017
Micro Cap Growth Fund 1,390,317 669,726 609,540
Small Cap Growth Fund 327,245 426,098 594,905
Enhanced Equity Fund 292,187 274,512 319,036
Emerging Markets Fund 568,277 440,978 638,097
International Developed Fund 525,817 294,777 282,055
Balanced Fund 306,756 235,529 417,190
Renaissance Fund * 913,256 N/A N/A
Growth Fund* 3,758,433 N/A N/A
Target Fund* 2,887,743 N/A N/A
Opportunity Fund* 2,324,663 N/A N/A
Innovation Fund* 750,414 N/A N/A
International Fund* 559,353 N/A N/A
Precious Metals Fund* 119,710 N/A N/A
Tax Exempt Fund* 66,977 N/A N/A
----------- ---------- ----------
TOTAL $19,515,404 $4,672,403 $5,201,987
- --------------
</TABLE>
* For the period 1/18/97 through 6/30/97
In addition, the predecessors of the Renaissance, Growth, Target,
Opportunity, Innovation, International, Precious Metals and Tax Exempt Funds
(each of which is a former series of PAF which reorganized as a Fund of the
Trust on January 17, 1997) paid the Adviser the following amounts for the fiscal
period ended January 17, 1997 and the fiscal years ended September 30, 1996 and
1995 under separate management contracts between the Adviser and PAF:
<TABLE>
<CAPTION>
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 9/30/96 9/30/95
- ---- ------- ------- -------
<S> <C> <C> <C>
Renaissance Fund $653,744 $1,627,632 $1,371,809
Growth Fund 3,370,567 9,987,541 8,268,603
Target Fund 2,584,257 7,295,767 5,294,008
Opportunity Fund 1,898,337 6,183,575 5,000,057
Innovation Fund 545,586 1,063,584 265,836
International Fund 537,647 1,872,608 2,097,974
Precious Metals Fund 107,290 397,969 434,323
Tax Exempt Fund 99,023 333,349 369,918
---------- ----------- -----------
TOTAL $9,796,451 $28,762,025 $23,102,528
</TABLE>
35
<PAGE>
Portfolio Management Agreements
The Adviser employs Portfolio Managers to provide investment advisory
services to each Fund pursuant to portfolio management agreements (each a
"Portfolio Management Agreement") between the Adviser and the relevant Portfolio
Manager. Each Portfolio Manager is an affiliate of the Adviser except for Van
Eck Associates Corporation ("Van Eck"), which advises the Precious Metals Fund.
The Adviser currently has six subsidiary partnerships which manage the remaining
Funds: Pacific Investment Management, Parametric Portfolio Associates
("Parametric"), Cadence Capital Management ("Cadence"), NFJ Investment Group
("NFJ"), Columbus Circle Investors ("Columbus Circle"), and Blairlogie Capital
Management ("Blairlogie").
Pacific Investment Management
- -----------------------------
Pursuant to a Portfolio Management Agreement between the Adviser and Pacific
Investment Management, Pacific Investment Management provides investment advice
with respect to the portion of the assets of the Balanced Fund allocated by the
Adviser for investment in fixed income securities. For the services provided,
the Adviser (not the Trust) pays Pacific Investment Management a fee at the
annual rate of .25% of the average daily net assets of the Balanced Fund
allocated to Pacific Investment Management for investment in fixed income
securities.
Pacific Investment Management is an investment management firm organized as
a general partnership. Pacific Investment Management has two partners: PIMCO
Advisors as the supervisory partner, and PIMCO Management Inc. as the managing
partner. The predecessor investment adviser to Pacific Investment Management
commenced operations in 1971. Pacific Investment Management is located at 840
Newport Center Drive, Suite 360, Newport Beach, California 92660. Pacific
Investment Management also provides investment advisory services to PIMCO Funds:
Pacific Investment Management Series, Harbor Fund, various funds advised by
Frank Russell Investment Management Company, Total Return Bond Portfolio and
Intermediate Term Bond Portfolio of Prudential Securities Target Portfolio
Trust, Total Return Bond and Limited Maturity Bond Portfolios of American
Skandia Trust, Total Return Fund of Fremont Mutual Fund, Inc., Managed Bond and
Government Securities Series of Pacific Select Fund, and the PaineWebber Short-
Term U.S. Government Income Fund, a series of PaineWebber Managed Investments
Trust, all of which are open-end management investment companies. Pacific
Investment Management also advises PIMCO Commercial Mortgage Securities Trust,
Inc. which is a closed-end management investment company, and managed accounts
consisting of proceeds from various pension and profit sharing plans. Pacific
Investment Management had approximately $108.5 billion of assets under
management as of September 30, 1997.
Parametric
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Parametric, Parametric is the Portfolio Manager and provides investment advisory
services to the Enhanced Equity, Structured Emerging Markets and Tax-Managed
Structured Emerging Markets Funds. For the services provided to each Fund, the
Adviser (not the Trust) pays Parametric a monthly fee for each Fund at the
following annual rates (based on the average daily net assets of the particular
Fund): .35% for the Enhanced Equity Fund, .35% for the Structured Emerging
Markets Fund, and .35% for the Tax-Managed Structured Emerging Markets Fund.
Parametric is an investment management firm organized as a general
partnership. Parametric is the successor investment adviser to Parametric
Portfolio Associates, Inc., a wholly-owned corporate subsidiary of PFAMCo.
Parametric has two partners: PIMCO Advisors as the supervisory partner, and
Parametric Management, Inc. as the managing partner. The predecessor investment
adviser to Parametric commenced operations in 1987. Parametric is located at
7310 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104-7090.
Parametric provides investment management services to a number of institutional
accounts, including employee benefit plans, college endowment funds and
foundations. Accounts managed by Parametric had combined assets, as of September
30, 1997, of approximately $2.5 billion.
36
<PAGE>
Cadence
- -------
Pursuant to a Portfolio Management Agreement between the Adviser and
Cadence, Cadence provides investment advisory services to the Capital
Appreciation Fund, the Mid Cap Growth Fund, the Micro Cap Growth Fund, the Small
Cap Growth Fund and a portion of the Balanced Fund allocated by the Adviser for
investment in common stocks. For the services provided, the Adviser (not the
Trust) pays Cadence a monthly fee for each Fund at the following annual rates
(based on the average daily net assets of the particular Fund): .35% for the
Capital Appreciation Fund, .35% for the Mid Cap Growth Fund, .35% for the
portion of the Balanced Fund's assets allocated to Cadence for investment in
common stock, .90% for the Small Cap Growth Fund, and 1.15% for the Micro Cap
Growth Fund.
Cadence is an investment management firm organized as a general partnership.
Cadence is the successor investment adviser to Cadence Capital Management
Corporation, a wholly owned subsidiary of PFAMCo. Cadence has two partners:
PIMCO Advisors as the supervisory partner, and Cadence Capital Management, Inc.
as the managing partner. The predecessor investment adviser to Cadence
commenced operations in 1988. Cadence is located at Exchange Place, 53 State
Street, Boston, Massachusetts 02109. Cadence provides investment management
services to a number of institutional accounts, including employee benefit
plans, college endowment funds and foundations. Accounts managed by Cadence had
combined assets, as of September 30, 1997, of approximately $4.9 billion.
NFJ
- ---
Pursuant to a Portfolio Management Agreement between the Adviser and NFJ,
NFJ provides investment advisory services to the Equity Income Fund, the Value
Fund, the Small Cap Value Fund, and a portion of the Balanced Fund allocated by
the Adviser for investment in common stocks. For the services provided, the
Adviser (not the Trust) pays NFJ a monthly fee for each Fund at the following
annual rates (based on the average daily net assets of the particular Fund):
.35% for the Equity Income Fund, .35% for the Value Fund, .35% for the portion
of the Balanced Fund allocated to NFJ for investment in common stock, and .50%
for the Small Cap Value Fund.
NFJ is an investment management firm organized as a general partnership.
NFJ is the successor investment adviser to NFJ Investment Group, Inc., a wholly
owned subsidiary of PFAMCo. NFJ has two partners: PIMCO Advisors as the
supervisory partner, and NFJ Management, Inc. as the managing partner. The
predecessor investment adviser to NFJ commenced operations in 1989. NFJ is
located at 2121 San Jacinto, Suite 1840, Dallas, Texas 75201. NFJ provides
investment management services to a number of large accounts, including employee
benefit plans, college endowment funds and foundations. Accounts managed by NFJ
had combined assets, as of September 30, 1997, of approximately $2.3 billion.
Columbus Circle
- ---------------
Pursuant to a Portfolio Management Agreement between the Adviser and
Columbus Circle, Columbus Circle provides investment advisory services to the
Renaissance, Growth, Target, Opportunity, Innovation, Tax Exempt, Core Equity,
Mid Cap Equity, and International Growth Funds. For the services provided, the
Adviser (not the Trust) pays Columbus Circle a monthly fee for each Fund at the
following annual rates (based on the average daily net assets of the particular
Fund): .30% for the Tax Exempt Fund, .34% for the Growth Fund, .36% for the
Target Fund, .38% for the Renaissance Fund, .38% for the Innovation Fund, .47%
for the Core Equity Fund, .48% for the Opportunity Fund, .53% for the Mid Cap
Equity Fund, and .75% for the International Growth Fund.
Columbus Circle is an investment management firm organized as a general
partnership. Columbus Circle is the successor investment adviser to the Columbus
Circle Investors Division of Thomson Advisory Group L.P. ("TAG"). Columbus
Circle has two partners: PIMCO Advisors as the supervisory partner, and
Columbus Circle
37
<PAGE>
Investors Management, Inc. as the managing partner. Columbus Circle's ultimate
predecessor commenced operations in 1975. Columbus Circle is located at Metro
Center, One Station Place, 8th Floor, Stamford, Connecticut 06902. Columbus
Circle manages discretionary accounts for institutions, including corporate,
government and union pension and profit-sharing plans, foundations and
educational institutions, as well as the Active Short-Term Fund and the National
Money Market Fund of CAT. Accounts managed by Columbus Circle had combined
assets, as of September 30, 1997, of $11.5 billion.
Blairlogie
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Blairlogie, Blairlogie provides investment advisory services to the
International, International Developed and Emerging Markets Funds. For the
services provided, the Adviser (not the Trust) pays Blairlogie a monthly fee for
each Fund at the following annual rates (based on the average daily net assets
of the particular Fund): .40% for the International Fund, .50% for the
International Developed Fund, and .75% for the Emerging Markets Fund.
Blairlogie is an investment management firm organized as a limited
partnership under the laws of Scotland, United Kingdom. Blairlogie is the
successor investment adviser to Blairlogie Capital Management Ltd., an indirect
subsidiary of PFAMCo, which commenced operations in 1992. Blairlogie has two
general partners and one limited partner. The general partners are PIMCO
Advisors, which serves as the supervisory partner, and Blairlogie Holdings
Limited, a wholly-owned corporate subsidiary of PIMCO Advisors, which serves as
the managing partner. The limited partner is Blairlogie Partners L.P., a
limited partnership, the general partner of which is PFAMCo, and the limited
partners of which are the principal executive officers of Blairlogie Capital
Management. Blairlogie Partners L.P. has agreed with PIMCO Advisors that PIMCO
Advisors will acquire its 25% interest in four annual installments of 10%, 5%,
5% and 5%, respectively, beginning December 31, 1998. Blairlogie is located at
4th Floor, 125 Princes Street, Edinburgh EH2 4AD, Scotland. Blairlogie provides
investment management services to a number of institutional accounts, including
employee benefit plans, college endowment funds and foundations. Accounts
managed by Blairlogie had combined assets, as of September 30, 1997, of
approximately $875 million.
Van Eck
- -------
Pursuant to a Portfolio Management Agreement between the Adviser and Van
Eck, Van Eck provides investment advisory services to the Precious Metals Fund.
For the Services provided, the Adviser (not the Trust) pays Van Eck a monthly
fee at the annual rate of .35% based on the average daily net assets of the
Precious Metals Fund.
Van Eck is a Delaware corporation registered as an investment adviser with
the SEC. Van Eck and its affiliates advise other mutual funds and private
accounts. Van Eck is controlled by John C. Van Eck who, along with members of
his immediate family, owns 100% of the stock of Van Eck. Van Eck is located at
99 Park Avenue, New York, New York 10001. Accounts managed by Van Eck had
combined assets as of September 30, 1997 of approximately $1.5 billion.
PIMCO Advisors determines the allocation of the Balanced Fund's assets among
the various asset classes and types of securities in which the Fund invests.
PIMCO Advisors reserves the right to allocate a portion of the Fund's assets for
investment in money market instruments and reserves the right to manage the
investment of such assets.
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
amount of portfolio management fees paid by the Adviser (or its predecessor) to
the applicable Portfolio Manager (or its predecessor) for each of the Funds was
as follows:
38
<PAGE>
<TABLE>
<CAPTION>
Year Period Year
Ended Ended Ended
Fund 06/30/97 06/30/96 10/31/95
- ----- -------- -------- --------
<S> <C> <C> <C>
Equity Income Fund $ 492,429 $ 425,899 $ 445,739
Value Fund 388,966 65,873 60,686
Small Cap Value Fund 224,788 156,721 203,158
Core Equity Fund 215,998 136,615 62,906
Mid Cap Equity Fund 45,074 23,814 13,832
Capital Appreciation Fund 1,714,191 883,498 881,358
Mid Cap Growth Fund 1,059,242 617,546 650,017
Micro Cap Growth Fund 1,325,695 669,726 609,540
Small Cap Growth Fund 311,280 426,098 594,905
Enhanced Equity Fund 268,021 274,512 319,036
Emerging Markets Fund 501,411 385,438 550,590
International Developed Fund 478,789 237,138 241,135
Balanced Fund 228,898 161,345 332,255
Renaissance Fund* 575,288 N/A N/A
Growth Fund* 2,544,364 N/A N/A
Target Fund* 1,869,073 N/A N/A
Opportunity Fund* 1,709,827 N/A N/A
Innovation Fund* 435,246 N/A N/A
International Fund* 348,938 N/A N/A
Precious Metal Fund* 66,070 N/A N/A
Tax Exempt Fund* 66,756 N/A N/A
----------- ---------- ----------
TOTAL $14,870,344 $4,464,223 $4,965,157
</TABLE>
- -----------------
*For the period 1/18/97 through 6/30/97.
39
<PAGE>
The Adviser paid the Portfolio Managers for the predecessors of the
Renaissance, Growth, Target, Opportunity, Innovation, International, Precious
Metals and Tax Exempt Funds (each of which is a former series of PAF which
reorganized as a Fund of the Trust on January 17, 1997) the following amounts
for the fiscal period ended January 17, 1997 and the fiscal years ended
September 30, 1996 and 1995 under separate sub-adviser agreements between the
Adviser and the relevant Portfolio Manager:
<TABLE>
<CAPTION>
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 09/30/96 09/30/95
- ---- ------- -------- --------
<S> <C> <C> <C>
Renaissance Fund $ 326,864 $ 813,816 $ 595,500
Growth Fund 1,685,284 4,993,770 3,634,403
Target Fund 1,292,168 3,647,884 2,353,106
Opportunity Fund 949,192 3,091,788 2,205,293
Innovation Fund 272,772 531,792 132,918
International Fund 268,824 936,304 889,339
Precious Metals Fund 53,837 198,985 217,162
Tax Exempt Fund 49,512 166,675 159,370
---------- ----------- -----------
TOTAL $4,898,453 $14,381,014 $10,187,091
</TABLE>
Fund Administrator
In addition to its services as Adviser, PIMCO Advisors serves as
administrator (and is referred to in this capacity as the "Administrator") to
the Funds pursuant to an administration agreement (the "Administration
Agreement") with the Trust. The Administrator provides or procures
administrative services to the Funds, which include clerical help and
accounting, bookkeeping, internal audit services and certain other services
required by the Funds, and preparation of reports to the Funds' shareholders and
regulatory filings. PIMCO Advisors has retained Pacific Investment Management
as sub-administrator to provide such services pursuant to a sub-administration
agreement (the "Sub-Administration Agreement"). PIMCO Advisors may also retain
other affiliates to provide such services. In addition, the Administrator
arranges at its own expense for the provision of legal, audit, custody, transfer
agency and other services necessary for the ordinary operation of the Funds, and
is responsible for the costs of registration of the Funds' shares and the
printing of prospectuses and shareholder reports for current shareholders.
Under the Administration Agreement, the Administrator has agreed to provide or
procure these services, and to bear these expenses, at the following annual
rates for each Fund (each expressed as a percentage of the Fund's average daily
net assets attributable to the indicated classes of shares on an annual basis):
<TABLE>
<CAPTION>
Administrative Fee Rate
-----------------------
Institutional and
Administrative Class A, Class B and
Fund Class Shares* Class C Shares*
- ---- ------------ --------------
<S> <C> <C>
Emerging Markets, Structured .50% .65% of first $2.5 billion
Emerging Markets, Tax-Managed .60% of amounts in excess of $2.5 billion
Structured Emerging Markets,
International Developed,
International Growth and
International Funds
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
Precious Metals Fund .30% .45% of first $2.5 billion
.40% of amounts in excess of $2.5 billion
All Other Funds .25% .40% of first $2.5 billion
.35% of amounts in excess of $2.5 billion
</TABLE>
* The Administrator receives administrative fees based on a Fund's average daily
net assets attributable in the aggregate to the Funds' Institutional and
Administrative Class shares on the one hand, and to the Funds' Class A, Class B
and Class C shares on the other.
Except for the expenses paid by the Administrator, the Trust bears all
costs of its operations. The Trust is responsible for the following expenses:
(i) salaries and other compensation of any of the Trust's executive officers and
employees who are not officers, directors, stockholders, or employees of PIMCO
Advisors, Pacific Investment Management, or their 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 Advisors, any Portfolio Manager, or the Trust, and any counsel
retained exclusively for their benefit; (vi) extraordinary expenses, including
costs of litigation and indemnification expenses; (vii) expenses which are
capitalized in accordance with generally accepted accounting principals; and
(viii) any expenses allocated or allocable to a specific class of shares
("Class-specific expenses").
Class-specific expenses include distribution and/or service fees payable
with respect to the Class A, Class B, Class C or Administrative Class shares and
may include certain other expenses as permitted by the Trust's Amended and
Restated Multi-Class Plan (the "Multi-Class Plan") adopted pursuant to Rule 18f-
3 under the 1940 Act, which is subject to review and approval by the Trustees.
It is not presently anticipated that any expenses other than distribution and/or
service fees will be allocated on a class-specific basis.
The Administration Agreement may be terminated by the Trust at any time by
vote of (1) a majority of the Trustees, (2) a majority of the outstanding voting
securities of the Trust, or (3) with respect to the Renaissance, Growth, Target,
Opportunity, Innovation, Tax Exempt, International and Precious Metals Funds, by
a majority of the Trustees who are not interested persons of the Trust or PIMCO
Advisors, on 60 days' written notice to PIMCO Advisors. Following its initial
term of two years, the Administration Agreement would continue from year to year
if approved by the Trustees, including a majority of the disinterested Trustees.
After an initial two-year term, the Sub-Administration Agreement will
continue from year to year upon the approval of the parties thereto. The Sub-
Administration Agreement may be terminated at any time by PIMCO Advisors or
Pacific Investment Management upon 60 days' written notice to the other party
and, with respect to the services rendered to the Trust, at any time by vote of
a majority of the disinterested Trustees of the Trust. The Sub-Administration
Agreement will also terminate upon termination of the Administration Agreement.
41
<PAGE>
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
aggregate amount of the administration fees paid by the Funds was as follows
(Class A, Class B and Class C shares were not offered prior to January 17,
1997):
<TABLE>
<CAPTION>
Year Period Year
Ended Ended Ended
Fund 06/30/97 06/30/96 10/31/95
- ---- -------- -------- --------
<S> <C> <C> <C>
Equity Income Fund 311,798 $ 236,611 $ 247,633
Value Fund 318,624 36,596 33,714
Small Cap Value Fund 114,067 65,176 84,649
Core Equity Fund 102,634 63,942 32,425
Mid Cap Equity Fund 19,291 14,011 10,427
Capital Appreciation Fund 1,093,013 490,803 489,643
Mid Cap Growth Fund 729,997 342,880 361,121
Micro Cap Growth Fund 278,025 133,934 121,908
Small Cap Growth Fund 81,774 106,715 148,726
Enhanced Equity Fund 161,982 151,842 177,243
Emerging Markets Fund 312,540 259,300 375,351
International Developed Fund 437,490 244,350 235,046
Balanced Fund 170,134 130,017 231,772
Renaissance Fund* 605,566 N/A N/A
Growth Fund* 2,993,370 N/A N/A
Target Fund* 2,076,748 N/A N/A
Opportunity Fund* 1,424,856 N/A N/A
Innovation Fund* 458,154 N/A N/A
International Fund* 567,025 N/A N/A
Precious Metals Fund* 84,947 N/A N/A
Tax Exempt Fund* 89,008 N/A N/A
----------- ---------- ----------
TOTAL $12,431,043 $2,276,177 $2,549,658
- ------------------------
</TABLE>
* For the period from 1/17/97 through 6/30/97
The predecessor series of the Renaissance, Growth, Target,
Opportunity, Innovation, International, Precious Metals and Tax Exempt Funds
(each a series of PAF which reorganized as a Fund of the Trust on January 17,
1997) received administrative services during fiscal 1997, 1996 and 1995 under
separate management contracts between the Adviser and PAF on behalf of each such
series. See "Investment Adviser" above for the amounts paid to the Adviser by
these series under such management contracts during fiscal 1997, 1996 and 1995.
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distribution Company (the "Distributor") serves as the
distributor of each class of the Trust's shares pursuant to a distribution
contract (the "Distribution Contract") with the Trust. The Distributor is a
wholly-owned subsidiary of PIMCO Advisors. The Distribution Contract is
terminable with respect to a Fund or class without penalty, at any time, by the
Fund or class by not more than 60 days' nor less than 30 days' written
42
<PAGE>
notice to the Distributor, or by the Distributor upon not more than 60 days' nor
less than 30 days' written notice to the Trust. The Distributor is not
obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect with respect to each
Fund and each class of shares thereof for successive one-year periods, provided
that each such continuance is specifically approved (i) by the vote of a
majority of the entire Board of Trustees or by the majority of the outstanding
shares of the Fund or class, and (ii) by a majority of the Trustees who are not
interested persons (as defined in the 1940 Act) of the Trust and who have no
direct or indirect interest financial interest in the Distribution Contract or
the Distribution and/or Servicing Plans described below, by vote cast in person
at a meeting called for the purpose. If the Distribution Contract is terminated
(or not renewed) with respect to one or more Funds or classes, it may continue
in effect with respect to any Fund or class as to which it has not been
terminated (or has been renewed).
The Trust offers up to five classes of shares of each of the Funds:
Class A, Class B, Class C, Institutional Class and Administrative Class shares.
Class A, Class B and Class C shares of the Trust are offered through firms
("participating brokers") which are members of the National Association of
Securities Dealers, Inc. ("NASD"), and which have dealer agreements with the
Distributor, or which have agreed to act as introducing brokers for the
Distributor ("introducing brokers"). Shares of the Institutional Class are
offered primarily for direct investment by investors such as pension and profit
sharing plans, employee benefit trusts, endowments, foundations, corporations,
and high net worth individuals (Institutional Class shares may also be offered
through certain financial intermediaries that charge their customers transaction
or other fees with respect to the customers' investments in the Funds). Shares
of the Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers, and other intermediaries, and each Fund pays service
or distribution fees to such entities for services they provide to
Administrative Class shareholders.
Under the Trust's Multi-Class Plan, shares of each class of each Fund
represent an equal pro rata interest in the Fund and, generally, have identical
voting, dividend, liquidation, and other rights preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that:
(a) each class has a different designation; (b) each class of shares bears any
class-specific expenses allocated to it; (c) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution or service arrangements; and (d) each class has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class. In addition, each class may
have a differing sales charge structure, and differing exchange and conversion
features.
Contingent Deferred Sales Charge and Initial Sales Charge
As described in the Retail Prospectus under the caption "How to
Redeem," a contingent deferred sales charge is imposed upon certain redemptions
of Class A, Class B and Class C shares. No contingent deferred sales charge is
currently imposed upon redemptions of Institutional Class or Administrative
Class shares. Because contingent deferred sales charges are calculated on a
Fund-by-Fund basis, shareholders should consider whether to exchange shares of
one Fund for shares of another Fund prior to redeeming an investment if such an
exchange would reduce the contingent deferred sales charge applicable to such
redemption.
During the fiscal year ended June 30, 1997, the Distributor received
an aggregate of $40,456, $789,851, and $533,975, in contingent deferred sales
charges on, respectively, Class A shares, Class B shares and Class C shares of
the Funds.
The Funds did not offer Class A, B and C shares in prior fiscal years.
However, during the fiscal year ended September 30, 1996, the Distributor
received the following amounts in contingent deferred sales charges on shares of
series of PAF which reorganized as the following Funds of the Trust: Class A
-------
shares: Growth -$9,168, Target - $14 and Opportunity - $4,190. Class B shares:
- ------ --------------
Renaissance - $8,722, Growth - $37,445, Target - $31,670, Innovation - $36,477,
International - $6,359, Precious Metals - $1,179 and Tax Exempt -
43
<PAGE>
$4,055. Class C shares: Renaissance - $12,809, Growth - $124,264, Target -
--------------
$89,334, Opportunity - $37,154, Innovation - $29,110, International - $22,016,
Precious Metals - $15,384 and Tax Exempt - $1,596.
As described in the Retail Prospectus under the caption "Alternative
Purchase Arrangements - Initial Sales Charge Alternative - Class A Shares,"
Class A shares of the Trust are sold pursuant to an initial sales charge, which
declines as the amount of the purchase reaches certain defined levels. For the
fiscal year ended June 30, 1997, the Distributor received an aggregate of
$2,927,636 and retained an aggregate of $369,546, in initial sales charges paid
by Class A shareholders of the Trust.
The Trust did not offer Class A shares in prior fiscal years.
However, during the fiscal year ended September 30, 1996, the Distributor
received the following amounts in initial sales charges paid by shareholders of
PAF series which reorganized as the following Funds of the Trust: Renaissance -
$205,419, Growth -549,330, Target - $852,363, Opportunity - $176,391, Innovation
- - $685,093, International - $91,177, Precious Metals - $72,503 and Tax Exempt -
$37,180, and retained the following amounts: Renaissance - $27,477, Growth -
$83,657, Target - $126,693, Opportunity - $29,605, Innovation - $114,091,
International - $13,871, Precious Metals - $7,738 and Tax Exempt - $3,140.
During the fiscal year ended September 30, 1995, the Distributor received an
aggregate of $3,708,105 and retained an aggregate of $366,062 in initial sales
charges paid by shareholders of PAF.
Distribution and Servicing Plans for Class A, Class B and Class C Shares
As stated in the text of the Retail Prospectus under the caption
"Distributor and Distribution and Servicing Plans," Class A, Class B and Class C
shares of the Trust are continuously offered through participating brokers which
are members of the NASD and which have dealer agreements with the Distributor,
or which have agreed to act as introducing brokers.
Pursuant to separate Distribution and Servicing Plans for Class A,
Class B and Class C shares (the "Retail Plans"), as described in the Retail
Prospectus, the Distributor receives (i) in connection with the distribution of
Class B and Class C shares of the Trust, certain distribution fees from the
Trust, and (ii) in connection with personal services rendered to Class A, Class
B and Class C shareholders of the Trust and the maintenance of shareholder
accounts, certain servicing fees from the Trust. Subject to the percentage
limitations on these distribution and servicing fees set forth in the Retail
Prospectus, the distribution and servicing fees may be paid with respect to
services rendered and expenses borne in the past with respect to Class A, Class
B and Class C shares as to which no distribution and servicing fees were paid on
account of such limitations. The Distributor pays (i) all or a portion of the
distribution fees it receives from the Trust to participating and introducing
brokers, and (ii) all or a portion of the servicing fees it receives from the
Trust to participating and introducing brokers, certain banks and other
financial intermediaries.
Each Retail Plan may be terminated with respect to any Fund to which
the Plan relates by vote of a majority of the Trustees who are not interested
persons of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or the Distribution
Contract ("disinterested Retail Plan Trustees"), or by vote of a majority of the
outstanding voting securities of the relevant class of that Fund. Any change in
any Retail Plan that would materially increase the cost to the class of shares
of any Fund to which the Plan relates requires approval by the affected class of
shareholders of that Fund. The Trustees review quarterly written reports of
such costs and the purposes for which such costs have been incurred. Each
Retail Plan may be amended by vote of the Trustees, including a majority of the
disinterested Retail Plan Trustees, cast in person at a meeting called for the
purpose. As long as the Retail Plans are in effect, selection and nomination of
those Trustees who are not interested persons of the Trust shall be committed to
the discretion of such disinterested Trustees.
The Retail Plans will continue in effect with respect to each Fund and
each class of shares thereof for successive one-year periods, provided that each
such continuance is specifically approved (i) by the vote of a
44
<PAGE>
majority of the disinterested Retail Plan Trustees and (ii) by the vote of a
majority of the entire Board of Trustees cast in person at a meeting called for
the purpose of voting on such approval.
The Retail Plans went into effect for the Funds in January 1997. If a
Retail Plan is terminated (or not renewed) with respect to one or more Funds, it
may continue in effect with respect to any class of any Fund as to which it has
not been terminated (or has been renewed).
The Trustees believe that the Retail Plans will provide benefits to the
Trust. In this regard, the Trustees believe that the Retail Plans will result
in greater sales and/or fewer redemptions of Trust shares, although it is
impossible to know for certain the level of sales and redemptions of Trust
shares that would occur in the absence of the Retail Plans or under alternative
distribution schemes. Although the Funds' expenses are essentially fixed, the
Trustees believe that the effect of the Retail Plans on sales and/or redemptions
may benefit the Trust by reducing Fund expense ratios and/or by affording
greater flexibility to Portfolio Managers. From time to time, expenses of the
Distributor incurred in connection with the sale of Class B and Class C shares
of the Funds, and in connection with the servicing of Class B and Class C
shareholders of the Funds and the maintenance of shareholder accounts, may
exceed the distribution and servicing fees collected by the Distributor. The
Trustees consider such unreimbursed amounts, among other factors, in determining
whether to cause the Funds to continue payments of distribution and servicing
fees in the future with respect to Class B and Class C shares.
Payments Pursuant to Class A Plans
For the fiscal year ended June 30, 1997, the Trust paid the Distributor
an aggregate of $1,147,572 pursuant to the Class A Retail Plan. Such payments
were allocated among the operational Funds as follows:
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ---- --------
<S> <C>
Equity Income Fund $ 938
Value Fund 14,876
Small Cap Value Fund 2,770
Core Equity Fund N/A
Mid Cap Equity Fund N/A
Capital Appreciation Fund 5,510
Mid Cap Growth Fund 12,246
Micro Cap Growth Fund N/A
Small Cap Growth Fund N/A
Enhanced Equity Fund N/A
Emerging Markets Fund 108
International Developed Fund 169
Balanced Fund 173
Renaissance 53,527
Growth 290,828
Target 288,012
Opportunity 320,127
Innovation 99,910
International 34,195
Precious Metals 14,218
Tax Exempt 9,965
</TABLE>
During the fiscal year ended June 30, 1997, the amounts collected
pursuant to the Class A Retail Plan and the contingent deferred sales charge
imposed on Class A shares were used as follows by the Distributor: sales
commissions and other compensation to sales personnel, $1,166,294; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders), and
45
<PAGE>
other expenses (including data processing, legal and operations), $397,691. The
total, if allocated among the Funds, based on the net assets attributable to
their Class A shares at June 30, 1997, would have been as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- -----
<S> <C> <C> <C>
Equity Income Fund $ 3,107 $ 1,059 $ 4,166
Value Fund 27,041 9,221 36,262
Small Cap Value Fund 11,241 3,833 15,074
Core Equity Fund N/A N/A N/A
Mid Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 11,288 3,849 15,137
Mid Cap Growth Fund 20,972 7,151 28,123
Micro Cap Growth Fund N/A N/A N/A
Small Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 356 121 477
International Developed Fund 549 187 736
Balanced Fund 632 216 848
Renaissance 58,097 19,810 77,907
Growth 256,697 87,530 344,227
Target 263,570 89,874 353,444
Opportunity 367,870 125,439 493,309
Innovation 94,778 32,318 127,096
International 33,683 11,485 45,168
Precious Metals 6,932 2,364 9,296
Tax Exempt 9,480 3,833 13,313
</TABLE>
The Trust did not offer Class A shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $1,556,119 and $1,064,958, respectively, pursuant to a Distribution
and Servicing Plan applicable to the Class A shares of PAF (the "PAF Class A
Plan"), which is similar to the Class A Plan of the Trust. Such payments were
allocated among the predecessors of the following Funds (each of which was
formerly a series of PAF which reorganized as a series of the Trust on January
17, 1997) as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Renaissance $ 38,973 $ 33,249
Growth 351,506 289,263
Target 338,598 251,511
Opportunity 308,794 255,940
Innovation 88,089 28,918
International 42,411 49,788
Precious Metals 21,416 22,178
Tax Exempt 10,288 6,485
</TABLE>
The remainder of the total payments made under the PAF Class A Plan
for such fiscal years was allocated among other series of PAF which either
merged with Funds of the Trust or merged with/reorganized as series of PIMCO
Funds: Pacific Investment Management Series, an affiliated mutual fund family,
in transactions which took place on January 17, 1997.
46
<PAGE>
Payments Pursuant to Class B Plans
For the fiscal year ended June 30, 1997, the Trust paid the
Distributor an aggregate of $1,670,623 pursuant to the Class B Retail Plan.
Such payments were allocated among the operational Funds as follows:
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ---- --------
<S> <C>
Equity Income Fund $ 5,019
Value Fund 101,067
Small Cap Value Fund 17,419
Core Equity Fund N/A
Mid Cap Equity Fund N/A
Capital Appreciation Fund 5,077
Mid Cap Growth Fund 104,374
Micro Cap Growth Fund N/A
Small Cap Growth Fund N/A
Enhanced Equity Fund N/A
Emerging Markets Fund 633
International Developed Fund 2,256
Balanced Fund 2,223
Renaissance 204,965
Growth 351,684
Target 450,009
Innovation 332,295
International 53,098
Precious Metals 21,713
Tax Exempt 18,818
</TABLE>
During the fiscal year ended June 30, 1997, the amounts collected
pursuant to the Class B Retail Plan and the contingent deferred sales charge
imposed on Class B shares were used as follows by the Distributor: sales
commissions and other compensation to sales personnel, $499,840; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders), and other expenses
(including data processing, legal and operations), $170,439. The total, if
allocated among the Funds, based on the net assets attributable to their Class B
shares at June 30, 1997, would have been as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- -----
<S> <C> <C> <C>
Equity Income Fund $ 4,235 $ 1,444 $ 5,679
Value Fund 42,327 14,433 56,760
Small Cap Value Fund 18,336 6,252 24,588
Core Equity Fund N/A N/A N/A
Mid Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 5,026 1,714 6,740
Mid Cap Growth Fund 45,721 15,590 61,311
Micro Cap Growth Fund N/A N/A N/A
Small Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 514 175 689
International Developed Fund 1,836 626 2,462
Balanced Fund 1,872 638 2,510
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C> <C>
Renaissance 62,109 21,178 83,287
Growth 92,401 31,507 123,908
Target 113,822 38,812 152,634
Innovation 85,939 29,304 115,243
International 14,406 4,912 19,318
Precious Metals 7,073 2,412 9,485
Tax Exempt 4,225 1,441 5,666
</TABLE>
The Trust did not offer Class B shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $1,839,931 and $87,552, respectively, pursuant to a Distribution
and Servicing Plan applicable to the Class B shares of PAF (the "PAF Class B
Plan"), which is similar to the Class B Plan of the Trust. Such payments were
allocated among the predecessors of the following Funds (each of which was
formerly a series of PAF which reorganized as a series of the Trust on January
17, 1997) as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Renaissance $ 62,195 $ 2,071
Growth 211,778 12,583
Target 241,125 11,816
Opportunity N/A N/A
Innovation 166,747 9,364
International 289,719 555
Precious Metals 14,083 270
Tax Exempt 14,673 745
</TABLE>
The remainder of the total payments made under the PAF Class B Plan
for such fiscal years was allocated among other series of PAF which either
merged with Funds of the Trust or merged with/reorganized as series of PIMCO
Funds: Pacific Investment Management Series, an affiliated mutual fund family,
in transactions which took place on January 17, 1997.
Payments Pursuant to Class C Plans
For the fiscal year ended June 30, 1997, the Trust paid the
Distributor an aggregate of $28,944,078 pursuant to the Class C Retail Plan.
Such payments were allocated among the operational Funds as follows:
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ---- --------
<S> <C>
Equity Income Fund $ 13,919
Value Fund 245,893
Small Cap Value Fund 39,558
Core Equity Fund N/A
Mid Cap Equity Fund N/A
Capital Appreciation Fund 28,078
Mid Cap Growth Fund 197,365
Micro Cap Growth Fund N/A
Small Cap Growth Fund N/A
Enhanced Equity Fund N/A
Emerging Markets Fund 5,070
International Developed Fund 4,936
Balanced Fund 1,876
</TABLE>
48
<PAGE>
<TABLE>
<S> <C>
Renaissance 2,024,245
Growth 11,107,219
Target 7,238,372
Opportunity 4,950,118
Innovation 1,149,018
International 1,354,452
Precious Metals 255,508
Tax Exempt 328,451
</TABLE>
During the fiscal year ended June 30, 1997, the amounts collected
pursuant to the Class C Retail Plan and the contingent deferred sales charge
imposed on Class C shares were used as follows by the Distributor: sales
commissions and other compensation to sales personnel, $6,664,535; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders), and other expenses
(including data processing, legal and operations), $2,272,518. The total, if
allocated among the Funds, based on the net assets attributable to their Class C
shares at June 30, 1997, would have been as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------- -----
<S> <C> <C> <C>
Equity Income Fund $ 10,972 $ 3,741 $ 14,713
Value Fund 106,994 36,484 143,478
Small Cap Value Fund 34,094 11,626 45,720
Core Equity Fund N/A N/A N/A
Mid Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 21,817 7,439 29,256
Mid Cap Growth Fund 89,419 30,491 119,910
Micro Cap Growth Fund N/A N/A N/A
Small Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 3,057 1,043 4,100
International Developed Fund 4,160 1,419 5,579
Balanced Fund 1,470 501 1,971
Renaissance 519,433 177,120 696,553
Growth 2,534,587 854,261 3,388,848
Target 1,618,653 551,939 2,170,592
Opportunity 1,049,063 357,717 1,406,780
Innovation 271,932 92,725 364,657
International 287,886 98,165 386,051
Precious Metals 41,949 14,304 56,253
Tax Exempt 69,048 23,544 92,592
</TABLE>
The Trust did not offer Class C shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $41,704,155 and $34,667,013, respectively, pursuant to a
Distribution and Servicing Plan applicable to the Class C shares of PAF (the
"PAF Class C Plan"), which is similar to the Class C Plan of the Trust. Such
payments were allocated among the predecessors of the following Funds (each of
which was formerly a series of PAF Fund which reorganized as a series of the
Trust on January 17, 1997) as follows:
49
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Renaissance $ 1,965,449 $ 1,694,012
Growth 13,593,775 11,397,447
Target 8,684,223 6,402,149
Opportunity 7,455,633 5,976,316
Innovation 899,377 229,411
International 1,858,512 2,422,761
Precious Metals 430,849 490,116
Tax Exempt 499,738 589,843
</TABLE>
The remainder of the total payments made under the PAF Class C Plan
for such fiscal years was allocated among other series of PAF which either
merged with Funds of the Trust or merged with/reorganized as series of PIMCO
Funds: Pacific Investment Management Series, an affiliated mutual fund family,
in transactions which took place on January 17, 1997.
Distribution and Administrative Services Plans for Administrative Class Shares
The Trust has adopted an Administrative Services Plan with respect to
the Administrative Class shares of each Fund. The Trust also has adopted a
Distribution Plan (together with the Administrative Services Plan, the
"Administrative Plans") with respect to the Administrative Class shares of each
Fund except the Emerging Markets, Capital Appreciation and Mid Cap Growth Funds,
which are not subject to such Distribution Plan.
Under the terms of the Administrative Distribution Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each applicable Fund, in an amount up to 0.25% on an annual
basis of the average daily net assets of that class, financial intermediaries
for costs and expenses incurred in connection with the distribution and
marketing of Administrative Class shares and/or the provision of certain
shareholder services to its customers that invest in Administrative Class shares
of the Funds. Such services may include, but are not limited to, the following:
providing facilities to answer questions from prospective investors about a
Fund; receiving and answering correspondence, including requests for
prospectuses and statements of additional information; preparing, printing and
delivering prospectuses and shareholder reports to prospective shareholders;
complying with federal and state securities laws pertaining to the sale of
Administrative Class shares; and assisting investors in completing application
forms and selecting dividend and other account options.
Under the terms of the Administrative Services Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each Fund, in an amount up to 0.25% on an annual basis of the
average daily net assets of that class, financial intermediaries that provide
certain administrative services for Administrative Class shareholders. Such
services may include, but are not limited to, the following: receiving,
aggregating and processing shareholder orders; furnishing shareholder sub-
accounting; providing and maintaining elective shareholder services such as
check writing and wire transfer services; providing and maintaining pre-
authorized investment plans; communicating periodically with shareholders;
acting as the sole shareholder of record and nominee for shareholders;
maintaining accounting records for shareholders; answering questions and
handling correspondence from shareholders about their accounts; and performing
similar account administrative services.
The same entity may be the recipient of fees under both the
Administrative Distribution Plan and the Administrative Services Plan, but may
not receive fees under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to
increase materially the costs which Administrative Class shareholders may bear
under the Plan without the approval of a majority of the outstanding voting
securities of the Administrative Class, and by vote of a majority of both (i)
the Trustees of the Trust and
50
<PAGE>
(ii) those Trustees ("disinterested Administrative Plan Trustees") who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Plan or any
agreements related to it, cast in person at a meeting called for the purpose of
voting on the Plan and any related amendments.
Each Administrative Plan provides that it may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Administrative Plan Trustees. The Administrative Class
Distribution Plan further provides that it may not take effect unless approved
by the vote of a majority of the outstanding voting securities of the
Administrative Class.
Each Administrative Plan provides that it shall continue in effect so
long as such continuance is specifically approved at least annually by the
Trustees and the disinterested Administrative Plan Trustees. Each
Administrative Plan provides that any person authorized to direct the
disposition of monies paid or payable by a class pursuant to the Plan or any
related agreement shall provide to the Trustees, and the Board shall review at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made.
Each Administrative Plan provides that expenses payable under the Plan
may be carried forward for reimbursement for up to twelve months beyond the date
in which the expense is incurred, subject to the limit that not more than 0.25%
of the average daily net assets of Administrative Class shares may be used in
any month to pay expenses under the Plan. Each Administrative Plan requires
that Administrative Class shares incur no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be
paid by mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
Payments Pursuant to Administrative Distribution Plan
For the fiscal year ended June 30, 1997, the Trust made no payments
pursuant to the Administrative Distribution Plan. The Administrative
Distribution Plan was not in effect in prior fiscal years.
Payments Pursuant to Administrative Services Plan
For the fiscal year ended June 30, 1997, the Trust paid qualified service
providers an aggregate of $132,422 pursuant to the Administrative Services Plan.
Such payments were allocated among the operational Funds as follows:
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ---- --------
<S> <C>
Equity Income Fund $ 16,938
Value Fund 0
Small Cap Value Fund 12,276
Core Equity Fund 79,366
Mid Cap Equity Fund 0
Capital Appreciation Fund 3,297
Mid Cap Growth Fund 4,723
Micro Cap Growth Fund 1,898
Small Cap Growth Fund 137
Enhanced Equity Fund 0
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
Emerging Markets Fund 582
International Developed Fund 13,205
Balanced Fund 0
Renaissance 0
Growth 0
Target 0
Opportunity 0
Innovation 0
International 0
Precious Metals 0
Tax Exempt 0
</TABLE>
The Trust has been informed that all of these amounts constituted "service
fees" under applicable NASD rules. The Administrative Services Plan was not in
effect in prior fiscal years.
Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of Class A, Class B and Class C shares
are discussed in the Retail Prospectus under the headings "How to Buy Shares,"
"Exchange Privilege," and "How to Redeem." Purchases, exchanges and redemptions
of Institutional Class and Administrative Class shares are discussed in the
Institutional Prospectus under the headings "Purchase of Shares," "Redemption of
Shares," and "Net Asset Value."
Certain clients of the Adviser or a Portfolio Manager whose assets would be
eligible for purchase by one or more of the Funds may purchase shares of the
Trust with such assets. Assets so purchased by a Fund will be valued in
accordance with procedures adopted by the Board of Trustees.
One or more classes of shares of the Funds may not be qualified or
registered for sale in all States. Prospective investors should inquire as to
whether shares of a particular Fund or class are available for offer and sale in
their state of domicile or residence. Shares of a Fund may not be offered or
sold in any State unless registered or qualified in that jurisdiction, unless an
exemption from registration or qualification is available.
As described in the Retail Prospectus under the caption "Exchange
Privilege," and in the Institutional Prospectus under the caption "Redemption of
Shares," a shareholder may exchange shares of any Fund for shares of the same
class of any other Fund of the Trust that is available for investment, or any
series of PIMCO Funds: Pacific Investment Management Series, a mutual fund
family advised by Pacific Investment Management, on the basis of their
respective net asset values. The original purchase date(s) of shares exchanged
for purposes of calculating any contingent deferred sales charge will carry over
to the investment in the new Fund. For example, if a shareholder invests in the
Class C shares of one Fund and 6 months later (when the contingent deferred
sales charge upon redemption would normally be 1%) exchanges his shares for
Class C shares of another Fund, no sales charge would be imposed upon the
exchange, but the investment in the other Fund would be subject to the 1%
contingent deferred sales charge until one year after the date of the
shareholder's investment in the first Fund as described in the Retail Prospectus
under "Alternative Purchase Arrangements." With respect to Class B or Class C
shares, or Class A shares subject to a contingent deferred sales charge, if less
than all of an investment is exchanged, any portion of the investment
attributable to capital appreciation and/or reinvested dividends or capital
gains distributions will be exchanged first, and thereafter any portions
exchanged will be from the earliest investment made in the Fund from which the
exchange was made.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of regular
trading on the New York Stock Exchange on any business day will be executed at
the respective net asset values determined at the close of the next business
day.
52
<PAGE>
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12-month
period or in any calendar quarter. The Trust reserves the right to 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 a Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Funds, limited in amount with respect to each
shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1%
of the net asset value of the Trust at the beginning of such period. Although
the Trust will normally redeem all shares for cash, it may, in unusual
circumstances, redeem amounts in excess of the lesser of (i) or (ii) above by
payment in kind of securities held in the Funds' portfolios.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, currently set at $250 for Class A, Class B and Class C shares,
and $100,000 with respect to Institutional Class and Administrative Class
shares. An investor will be notified that the value of the account is less than
the minimum and allowed at least 30 days to bring the value of the account up to
at least the specified amount before the redemption is processed. The Trust's
Agreement and Declaration of Trust, as amended and restated (the "Declaration of
Trust"), also authorizes the Trust to redeem shares under certain other
circumstances as may be specified by the Board of Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser and Portfolio Managers are made with a view to achieving
their respective investment objectives. Investment decisions are the product of
many factors in addition to basic suitability for the particular client involved
(including the Trust). Thus, a particular security may be bought or sold for
certain clients even though it could have been bought or sold for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the security. In some instances,
one client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in the Adviser's or the Portfolio Manager's opinion is equitable to each
and in accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
Brokerage and Research Services
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price paid
by the Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the
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transaction. Transactions in foreign securities generally involve the payment
of fixed brokerage commissions, which are generally higher than those in the
United States.
The Adviser and/or each Portfolio Manager places orders for the purchase
and sale of portfolio securities, options and futures contracts and buys and
sells such securities, options and futures for the Trust through a substantial
number of brokers and dealers. In so doing, the Adviser or Portfolio Manager
uses its best efforts to obtain for the Trust the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions as described below. In seeking the most favorable price
and execution, the Adviser or Portfolio Manager, 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.
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
following amounts of brokerage commissions were paid by the Funds:
<TABLE>
<CAPTION>
Year Period Year
Ended Ended Ended
Fund 6/30/97 6/30/96 10/31/95
- ---- ------- ------- --------
<S> <C> <C> <C>
Equity Income Fund $ 161,012 $ 221,694 $ 170,712
Value Fund 203,403 65,062 39,801
Small Cap Value Fund 146,551 74,170 74,739
Capital Appreciation Fund 889,931 467,569 411,595
Mid Cap Growth Fund 634,436 382,764 332,045
Micro Cap Growth Fund 315,009 124,194 202,678
Small Cap Growth Fund 113,103 76,333 111,918
Enhanced Equity Fund 196,460 114,363 47,226
Emerging Markets Fund 591,312 622,328 1,061,823
International Developed Fund 498,041 306,741 301,313
Balanced Fund 197,598 95,606 32,346
Core Equity Fund 114,173 57,047 40,203
Mid Cap Equity Fund 31,940 16,961 20,084
Renaissance Fund* 717,040 N/A N/A
Growth Fund* 2,632,126 N/A N/A
Target Fund* 2,584,198 N/A N/A
Opportunity Fund* 1,187,818 N/A N/A
Innovation Fund* 224,529 N/A N/A
International Fund* 748,412 N/A N/A
Precious Metals Fund* 81,251 N/A N/A
Tax Exempt Fund* 0 N/A N/A
----------- ---------- ----------
TOTAL $12,268,343 $2,624,832 $2,846,483
</TABLE>
- ------------------
* For the period 1/18/97 through 6/30/97.
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For the fiscal period ended January 17, 1997 and the fiscal years ended
September 30, 1996 and 1995, the following amounts of brokerage commissions were
paid by the predecessors of the Funds listed below (each of which was a series
of PAF during such periods and reorganized as a Fund of the Trust on January 17,
1997):
<TABLE>
<CAPTION>
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 9/30/96 9/30/95
- ---- ------- ------- -------
<S> <C> <C> <C>
Renaissance Fund $ 363,501 $ 993,617 $ 605,124
Growth Fund 1,064,573 2,985,777 3,500,524
Target Fund 1,375,601 3,080,238 2,289,076
Opportunity Fund 505,221 1,757,263 1,728,282
Innovation Fund 105,556 228,473 84,173
International Fund 393,808 1,530,476 2,727,326
Precious Metals Fund 53,096 79,838 48,592
Tax Exempt Fund 0 0 0
---------- ----------- -----------
TOTAL $3,861,356 $10,655,682 $10,983,097
</TABLE>
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser and Portfolio Managers receive research services from many broker-
dealers with which the Adviser and Portfolio Managers place the Trust's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such matters as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser and Portfolio Managers in advising various
of their clients (including the Trust), although not all of these services are
necessarily useful and of value in managing the Trust. The advisory fees paid
by the Trust are not reduced because the Adviser and Portfolio Managers receive
such services.
In reliance on the "safe harbor" provided by Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), the Adviser and
Portfolio Managers may cause the Trust to pay broker-dealers which provide them
with "brokerage and research services" (as defined in the 1934 Act) an amount of
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, the Adviser or Portfolio Managers 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.
The Adviser or a Portfolio Manager may place orders for the purchase and
sale of exchange-listed portfolio securities with a broker-dealer that is an
affiliate of the Adviser or Portfolio Manager where, in the judgment of the
Adviser or Portfolio Manager, such firm will be able to obtain a price and
execution at least as favorable as other qualified broker-dealers.
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Pursuant to rules of the SEC, a broker-dealer that is an affiliate of the
Adviser or a Portfolio Manager may receive and retain compensation for effecting
portfolio transactions for a Fund on a national securities exchange of which the
broker-dealer is a member if the transaction is "executed" on the floor of the
exchange by another broker which is not an "associated person" of the affiliated
broker-dealer, and if there is in effect a written contract between the Adviser
or Portfolio Manager and the Trust expressly permitting the affiliated broker-
dealer to receive and retain such compensation.
SEC rules further require that commissions paid to such an affiliated
broker-dealer, the Adviser, or Portfolio Manager by a Fund on exchange
transactions not exceed "usual and customary brokerage commissions." The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time."
Portfolio Turnover
The Adviser and Portfolio Managers manage the portfolios of the Funds
without regard generally to restrictions on portfolio turnover, except those
imposed on their ability to engage in short-term trading by provisions of the
federal tax laws, see "Taxation." The use of futures contracts and other
derivative instruments with relatively short maturities may tend to exaggerate
the portfolio turnover rate for some of the Funds. Trading in fixed income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. The higher
the rate of portfolio turnover of a Fund, the higher these transaction costs
borne by the Fund generally will be.
The portfolio turnover rate of a Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less. Proceeds from short sales and assets used to
cover short positions undertaken are included in the amounts of securities sold
and purchased, respectively, during the year.
NET ASSET VALUE
As indicated in the Retail Prospectus under the heading "How Net Asset
Value is Determined" and in the Institutional Prospectus under the heading "Net
Asset Value," the Trust's net asset value per share for the purpose of pricing
purchase and redemption orders is determined at 4:00 p.m. (Eastern time) on each
day the New York Stock Exchange is open for trading. Net asset value will not
be determined on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
The values of portfolio securities that are traded on stock exchanges
outside the United States are based upon the price on the exchange as of the
close of business of the exchange immediately preceding the time of valuation.
Securities traded in over-the-counter markets in European and Pacific Basin
countries are normally completed well before 4:00 p.m. (Eastern time). In
addition, European and Pacific Basin securities trading may not take place on
all business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which net asset value of these Funds is not
calculated. The calculation of the net asset value of certain Funds that invest
in foreign securities may not take place contemporaneously with the
determination of the prices of portfolio securities used in such calculation. If
events materially affecting the values of portfolio securities occur between the
time their prices are determined and 4:00 p.m. (Eastern time), these securities
will be valued at fair value as determined by the Adviser or a Portfolio Manager
and approved in good faith by the Board of Trustees.
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<PAGE>
TAXATION
The following discussion is general in nature and should not be regarded as
an exhaustive presentation of all possible tax ramifications. All shareholders
should consult a qualified tax adviser regarding their investment in a Fund.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company,
each Fund generally must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies ("Qualifying
Income Test"); (b) with respect to tax years beginning on or prior to August 5,
1997, derive in each taxable year less than 30% of its gross income from the
sale or other disposition of certain assets held less than three months, namely
(1) stocks or securities, (2) options, futures, or forward contracts (other than
those on foreign currencies), and (3) foreign currencies (or options, futures,
and forward contracts on foreign currencies) not directly related to the Fund's
principal business of investing in stock or securities; and (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of the Fund's total assets is represented by cash, cash items
(including receivables), U.S. Government securities, 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 (other than U.S.
Government securities or the securities of other regulated investment companies)
of any one issuer or of two or more issuers which the Fund controls and which
are engaged in the same, similar or related trades or businesses. In order to
qualify for the special tax treatment accorded regulated investment companies, a
Fund must 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. Under the
30% of gross income test described above, the Fund will be restricted from
selling certain assets held (or considered under Code rules to have been held)
for less than three months, and in engaging in certain hedging transactions
(including hedging transactions in futures and options) that in some
circumstances could cause certain Fund assets to be treated as held for less
than three months. By qualifying as a regulated investment company, each Fund
will not be subject to federal income taxes to the extent that its net
investment income, net short-term capital gains and net long-term capital gains
are distributed. In addition, the Treasury Department is authorized to
promulgate regulations under which gains from foreign currencies (and options,
futures, and forward contracts on foreign currency) would not constitute
qualifying income for purposes of the Qualifying Income Test if such gains are
not directly related to investing in securities. To date, such regulations have
not been issued.
The Tax Exempt Fund must have at least 50% of its total assets invested in
Tax Exempt Bonds at the end of each calendar quarter so that dividends derived
from its net interest income on Tax Exempt Bonds and so designated by the Fund
will be "exempt-interest dividends," which are exempt from federal income tax
when received by an investor. Certain exempt-interest dividends, as described
in the Retail Prospectus, may increase alternative minimum taxable income for
purposes of determining a shareholder's liability for the alternative minimum
tax. In addition, exempt-interest dividends allocable to interest from certain
"private activity bonds" will not be tax exempt for purposes of the regular
income tax to shareholders who are "substantial users" of the facilities
financed by such obligations or "related persons" of such "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
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<PAGE>
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 Tax Exempt 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 Tax Exempt Fund receiving social security or railroad
retirement benefits may be taxed on a portion of those benefits as a result of
receiving tax exempt income (including exempt-interest dividends distributed by
the Fund). The tax may be imposed on up to 50% of a recipient's benefits in
cases where the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits,
exceeds a base amount. In addition, up to 85% of a recipient's benefits may be
subject to tax if the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits
exceeds a higher base amount. Shareholders receiving social security or
railroad retirement benefits should consult with their tax advisors.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares. Since certain of the Tax Exempt Fund's
expenses attributable to earning tax-exempt income do not reduce such Fund's
current earnings and profits, it is possible that distributions, if any, in
excess of such Fund's net tax-exempt and taxable income will be treated as
taxable dividends to the extent of such Fund's remaining earnings and profits
(i.e., the amount of such expenses).
The proper tax treatment of income or loss realized by the Precious Metals
Fund from the retirement or sale of a Metal-Indexed Note is unclear. The
Precious Metals Fund will report such income or loss as capital or ordinary
income or loss in a manner consistent with any Internal Revenue Service position
on the subject following the publication of such a position. Gain or loss from
the sale or exchange of preferred stock indexed to the price of a natural
resource is expected to be capital gain or loss to the Precious Metals Fund.
Distributions
As a regulated investment company, a Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders on a
timely basis. Each Fund intends to distribute to its shareholders, at least
annually, substantially all of its investment company taxable income and any net
capital gains. In addition, amounts not distributed by a Fund on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the twelve month period
ending on October 31 of the calendar year, and (3) all ordinary income and
capital gains for previous years that were not distributed during such years. A
distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Fund in October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To avoid application of the
excise tax, each Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
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The tax status of each Fund and the distributions which it may make are
summarized in the Retail Prospectus under the captions "Distributions" and
"Taxes" and in the Institutional Prospectus under the caption "Dividends,
Distributions and Taxes." Except for exempt-interest dividends paid by the Tax
Exempt Fund, all dividends and distributions of a Fund, whether received in
shares or cash, are taxable and must be reported on each shareholder's federal
income tax return. Distributions received by tax-exempt shareholders will not
be subject to federal income tax to the extent permitted under the applicable
tax exemption. A dividend or capital gains distribution received after the
purchase of a Fund's shares reduces the net asset value of the shares by the
amount of the dividend or distribution and will be subject to federal income
taxes.
A portion of the dividends paid by Funds that invest in stock of U.S.
corporations may qualify for the deduction for dividends received by
corporations (subject generally to a 46-day holding period requirement).
Dividends paid by the other Funds generally are not expected to qualify for the
deduction for dividends received by corporations.
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains, regardless of how long the
shareholder has held a Fund's shares and are not eligible for the dividends
received deduction. Under the Taxpayer Relief Act of 1997, long-term capital
gains will generally be taxed at a 28% or 20% rate depending upon the holding
period of the portfolio security. Any distributions that are not from a Fund's
investment company taxable income or net capital gains may be characterized as a
return of capital to shareholders or, in some cases, as capital gain. The tax
treatment of dividends and distributions will be the same whether a shareholder
reinvests them in additional shares or elects to receive them in cash.
Sales of Shares
Upon the disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Under the Taxpayer Relief Act of
1997, long-term capital gains will generally be taxed at a 28% or 20% rate
depending upon the holding period of the portfolio security. Any loss realized
on a disposition will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a shareholder on a disposition of shares held by the shareholder for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the shareholder with respect
to such shares.
Backup Withholding
A Fund may be required to withhold 31% of all taxable distributions payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
Options, Futures, Forward Contracts and Swap Agreements
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Funds may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by a Fund at the end of each taxable year
(and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code)
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<PAGE>
are "marked to market" with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or loss is treated
as ordinary or 60/40 gain or loss.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund, may result in
"straddles" for U.S. federal income tax purposes. In some cases, the straddle
rules also could apply in connection with swap agreements. The straddle rules
may affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because there is relatively little guidance regarding the straddle
rules, the tax consequences of transactions in options, futures, forward
contracts, and swap agreements to a Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging trans actions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Emerging Markets, Structured Emerging Markets, International Developed and
Balanced Funds intend to account for such transactions in a manner they deem to
be appropriate, the Internal Revenue Service might not accept such treatment.
If it did not, the status of a Fund as a regulated investment company might be
affected. The Trust intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
regulated investment company may limit the extent to which a Fund will be able
to engage in swap agreements.
The 30% limit on gains from the disposition of certain options, futures,
forward contracts, and swap agreements held less than three months and the
qualifying income and diversification requirements applicable to a Fund's assets
may limit the extent to which a Fund will be able to engage in transactions in
options, futures contracts, forward contracts, and swap agreements. The 30%
limit will apply only until the start of a Fund's first tax year beginning after
August 5, 1997.
Passive Foreign Investment Companies
Certain Funds may invest in the stock of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to stockholders.
In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
stock. A Fund itself will be subject to a U.S. federal income tax (including
interest) on the portion, if any, of an excess distribution that is so allocated
to prior taxable years. Certain distributions from a PFIC as well as gain from
the sale of PFIC stock are treated as excess distributions.
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<PAGE>
Excess distributions are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently is available in some
circumstances, a Fund generally would be required to include its share of the
PFIC's income and net capital gain annually, regardless of whether distributions
are received from the PFIC in a given year. If this election were made, the
special rules discussed above relating to the taxation of excess distributions
would not apply. In addition, another election may be available that would
involve marking to market a Fund's PFIC shares at the end of each taxable year
(and on certain other dates prescribed in the Code), with the result that
unrealized gains are treated as though they were realized. If this election
were made, tax at the Fund level under the PFIC rules would generally be
eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. A Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains and the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, and may subject a Fund itself
to tax on certain income from PFIC shares, the amount that must be distributed
to shareholders and will be taxed to shareholders as ordinary income or long-
term capital gain may be increased or decreased substantially as compared to a
fund that did not invest in PFIC shares.
Foreign Currency Transactions
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of certain
other instruments, gains or losses attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Foreign Taxation
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser and each Portfolio Manager intends to manage
the Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
such Fund will be eligible to elect to "pass-through" to the Fund's shareholders
the amount of eligible foreign income and similar taxes paid by the Fund. If
this election is made, a shareholder generally subject to tax will be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by the Fund, and may be entitled
either to deduct (as an itemized deduction) his or her pro rata share of foreign
taxes in computing his taxable income or to use it as a foreign tax credit
against his or her U.S. federal income tax liability, subject to certain
limitations. In particular, shareholders must hold their shares (without
protection from risk of loss) on the ex-dividend date and for at least 15 more
days during the 30-day period surrounding the ex-dividend date to be eligible to
claim a foreign tax credit with respect to a gain dividend. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Each shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year.
61
<PAGE>
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election
is made, the source of the electing Fund's income will flow through to
shareholders of the Trust. With respect to such Funds, gains from the sale of
securities will be treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency-denominated
debt securities, receive ables and payables will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income, and to certain other types of
income. Shareholders may be unable to claim a credit for the full amount of
their proportionate share of the foreign taxes paid by the Fund. The foreign tax
credit can be used to offset only 90% of the revised alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. A
Fund may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
Other Taxation
Pursuant to Treasury Department regulations, certain expenses of
nonpublicly offered regulated investment companies, including advisory fees, are
not deductible by those regulated investment companies for purposes of
calculating the income of certain shareholders, generally including individuals
and entities that compute their taxable income in the same manner as an
individual (thus, for example, a qualified pension plan is not subject to this
rule). The shareholder's pro rata portion of such expenses will be treated as
income to the shareholder and will be deductible by the shareholder, subject to
the 2% "floor" on miscellaneous itemized deductions and other limitations on
itemized deductions set forth in the Code. A regulated investment company
generally will be classified as nonpublicly offered unless it either has 500
shareholders at all times during a taxable year or continuously offers shares
pursuant to a public offering.
62
<PAGE>
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund will provide information
annually to shareholders indicating the amount and percentage of a Fund's
dividend distribution which is attributable to interest on federal obligations,
and will indicate to the extent possible from what types of federal obligations
such dividends are derived. The Trust is organized as a Massachusetts business
trust. Under current law, so long as each Fund qualifies for the federal income
tax treatment described above, it is believed that neither the Trust nor any
Fund will be liable for any income or franchise tax imposed by Massachusetts.
Shareholders, in any event, are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust as amended and restated on January 14, 1997.
The capitalization of the Trust consists solely of an unlimited number of shares
of beneficial interest. The Board of Trustees may establish additional series
(with different investment objectives and fundamental policies) at any time in
the future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of a Fund, each shareholder is
entitled to receive his pro rata share of the net assets of that Fund.
Performance Information
Performance information is computed separately for each class of a
Fund's shares. Each Fund may from time to time include the total return of each
class of its shares in advertisements or in information furnished to present or
prospective shareholders. As noted below, in accordance with SEC rules and
informal guidance, total return presentations for periods prior to the inception
date of a particular class of a Fund are based on the historical performance of
an older class of the Fund (specified below) restated to reflect the current
sales charges (if any) of the newer class, but not reflecting any higher
operating expenses such as distribution and servicing fees and administrative
fees associated with the newer class. All other things being equal, such higher
expenses would have adversely affected (i.e., reduced) total return for the
newer classes (i.e., if they had been offered since the inception of the Fund)
by the amount of such higher expenses compounded over the relevant periods. The
Tax Exempt, Renaissance and Balanced Funds may from time to time include the
yield and total return of each class of their shares in advertisements or
information furnished to present or prospective shareholders. Each Fund may
from time to time include in advertisements the total return of each class (and
yield of each class in the case of the Tax Exempt and Balanced Funds) and the
ranking of those performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services as having the same
investment objectives. Information provided to any newspaper or similar listing
of the Fund's net asset values and public offering prices will separately
present each class of shares. The Funds also may compute current distribution
rates and use this information in their Prospectuses and Statement of Additional
Information, in reports to current shareholders, or in certain types of sales
literature provided to prospective investors.
63
<PAGE>
Calculation of Yield
Quotations of yield for certain of the Funds will be based on all
investment income per share (as defined by the SEC) during a particular 30-day
(or one month) period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[( a-b + 1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends,
and
d = the maximum offering price per share on the last day
of the period.
For the one month period ended June 30, 1997, the yields of the
Balanced Fund, Renaissance Fund and Tax Exempt Fund were as follows:
<TABLE>
<CAPTION>
Fund Institutional Class Administrative Class Class A Class B Class C
- ------------------ -------------------- -------------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balanced Fund 3.23% N/A 2.68% 2.10% 2.09%
Renaissance Fund N/A N/A 0.78% 0.10% 0.09%
Tax Exempt Fund N/A N/A 4.31% 3.77% 3.76%
</TABLE>
The yield of each such Fund will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses of the Trust allocated to the Fund or its classes of shares. These
factors, possible differences in the methods used in calculating yield (and the
tax exempt status of distributions for the Tax-Exempt Fund) should be considered
when comparing a Fund's yield to yields published for other investment companies
and other investment vehicles. Yield should also be considered relative to
changes in the value of a Fund's various classes of shares. These yields do not
take into account any applicable contingent deferred sales charges.
The Tax Exempt Fund may advertise a tax equivalent yield of each class
of its shares, calculated as described above except that, for any given tax
bracket, net investment income of each class will be calculated using as gross
investment income an amount equal to the sum of (i) any taxable income of each
class of the Fund plus (ii) the tax exempt income of each class of the Fund
divided by the difference between 1 and the effective federal income tax rates
for taxpayers in that tax bracket. For example, taxpayers with the marginal
federal income tax rates indicated in the following table would have to earn the
tax equivalent yields shown in order to realize an after-tax return equal to the
corresponding tax-exempt yield shown.
64
<PAGE>
<TABLE>
<CAPTION>
Filing Status Marginal tax rate* A tax-exempt yield of
is equivalent to a taxable yield of
Taxable income
<S> <C> <C> <C> <C> <C> <C> <C>
Single (Married filing jointly) 3% 4% 5% 6% 7%
$23,350 or less $39,000 or less 15% 3.53% 4.71% 5.88% 7.06% 8.24%
Over $23,350 but Over $39,000 but 28% 4.17% 5.56% 6.94% 8.33% 9.72%
not over $56,550 not over $94,250
Over $56,550 but Over $94,250 but 31% 4.35% 5.80% 7.25% 8.70% 10.14%
not over $117,950 not over $143,600
Over $117,950 but Over $143,600 but 36% 4.69% 6.25% 7.81% 9.38% 10.94%
not over $256,500 not over $256,500
Over $256,500 Over $256,500 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
</TABLE>
- -------------------
* These marginal tax rates do not take into account the effect of the phaseout
of itemized deductions and personal exemptions.
As is shown in the above table, the advantage of tax-exempt investing
becomes more advantageous to an investor as his or her marginal tax rate
increases.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time in
the future, yields and total return may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
Calculation of Total Return
Quotations of average annual total return for a Fund or class will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, five, and ten
years (up to the life of the Fund), calculated pursuant to the following
formula: P (1 + T)/n/ = ERV (where P = a hypothetical initial payment of $1,000,
T = the average annual total return, n = the number of years, and ERV = the
ending redeemable value of a hypothetical $1,000 payment made at the beginning
of the period). Except as noted below, all total return figures reflect the
deduction of a proportional share of Fund or class expenses on an annual basis,
and assume that (i) the maximum sales load (or other charges deducted from
payments) is deducted from the initial $1,000 payment and that the maximum
contingent deferred sales charge, if any, is deducted at the times, in the
amounts, and under the terms disclosed in the Prospectuses and (ii) all
dividends and distributions are reinvested when paid. Quotations of total return
may also be shown for other periods. The Funds may also, with respect to certain
periods of less than one year, provide total return information for that period
that is unannualized. Any such information would be accompanied by standardized
total return information.
The table below sets forth the average annual total return of each class of
shares of the following Funds for the periods ended June 30, 1997. As noted
below, consistent with SEC rules and informal guidance, total return
presentations for periods prior to the inception date of a particular class are
based on the historical performance of Institutional Class shares restated to
reflect the current sales charges (if any) of the newer class, but not
reflecting any higher operating expenses such as 12b-1 distribution and
servicing fees, which are paid by all classes except the Institutional Class (at
a maximum rate of 1.00% per annum), and the higher administrative fee charges
associated with Class A, Class B and Class C shares (a maximum differential of
.15% per annum). All other things being equal, such higher expenses would have
adversely affected (i.e., reduced) total return for the newer classes (i.e., if
they had been offered since the inception of the Fund) by the amount of such
higher expenses, compounded over the relevant period.
65
<PAGE>
Total Return for Periods Ended June 30, 1997*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Since
Inception Inception Inception
Fund Class** 1 Year 5 Years of Fund Date of Date of
(Annualized) Fund Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Income Institutional 27.67% 16.72% 16.81% 03/08/91 03/08/91
Administrative 27.40% 16.56% 16.68% 11/30/94
Class A 20.43% 15.36% 15.75% 1/17/97
Class B 22.08% 16.39% 16.74% 1/17/97
Class C 26.04% 16.60% 16.74% 1/17/97
- ----------------------------------------------------------------------------------------
Value Institutional 26.38% 19.01% 17.56% 12/30/91 12/30/91
Administrative 26.38% 19.01% 17.56% 1/17/97
Class A 19.17% 17.62% 16.33% 1/17/97
Class B 20.72% 18.69% 17.38% 1/17/97
Class C 24.73% 18.89% 17.47% 1/17/97
- ----------------------------------------------------------------------------------------
Small Cap Institutional 31.99% 18.19% 17.62% 10/1/91 10/1/91
Value Administrative 31.70% 18.10% 17.55% 11/1/95
Class A 24.49% 16.81% 16.45% 1/17/97
Class B 26.40% 17.87% 17.46% 1/17/97
Class C 30.40% 18.08% 17.55% 1/17/97
- ----------------------------------------------------------------------------------------
Capital Institutional 31.52% 20.97% 18.95% 3/8/91 3/8/91
Appreciation Administrative 31.31% 20.93% 18.92% 1/17/97
Class A 24.11% 19.57% 17.88% 1/17/97
Class B 25.96% 20.68% 18.89% 1/17/97
Class C 29.96% 20.87% 18.89% 1/17/97
- ----------------------------------------------------------------------------------------
Mid Cap Institutional 30.58% 20.18% 18.44% 8/26/91 8/26/91
Growth Administrative 30.23% 20.01% 18.30% 11/30/94
Class A 23.16% 18.78% 17.28% 1/17/97
Class B 24.88% 19.86% 18.27% 1/17/97
Class C 28.94% 20.06% 18.36% 1/17/97
- ----------------------------------------------------------------------------------------
Micro Cap Institutional 20.05% N/A 22.61% 6/25/93 6/25/93
Growth Administrative 19.72% N/A 22.51% 4/1/96
Class A N/A N/A N/A 1/17/97
Class B N/A N/A N/A 1/17/97
Class C N/A N/A N/A 1/17/97
- ----------------------------------------------------------------------------------------
Small Cap Institutional 22.82% 19.45% 22.50% 1/7/91 1/7/91
Growth Administrative 23.12% 19.50% 22.54% 9/27/95
Class A N/A N/A N/A 1/17/97
Class B N/A N/A N/A 1/17/97
Class C N/A N/A N/A 1/17/97
- ----------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Enhanced Institutional 31.45% 17.12% 15.54% 2/11/91 2/11/91
Equity Administrative 31.45% 17.12% 15.54% 1/17/97
Class A N/A N/A N/A 1/17/97
Class B N/A N/A N/A 1/17/97
Class C N/A N/A N/A 1/17/97
- ----------------------------------------------------------------------------------------
Emerging Institutional 10.85% N/A 11.25% 6/1/93 6/1/93
Markets Administrative 10.45% N/A 11.04% 11/1/94
Class A 4.60% N/A 9.69% 1/17/97
Class B 5.29% N/A 10.77% 1/17/97
Class C 9.29% N/A 11.12% 1/17/97
- ----------------------------------------------------------------------------------------
International Institutional 10.07% N/A 11.26% 6/8/93 6/8/93
Developed Administrative 9.77% N/A 11.08% 11/30/94
Class A 3.70% N/A 9.64% 1/17/97
Class B 4.57% N/A 10.78% 1/17/97
Class C 8.57% N/A 11.14% 1/17/97
- ----------------------------------------------------------------------------------------
Balanced Institutional 20.37% 12.79% 12.90% 6/25/92 6/25/92
Administrative 20.37% 12.79% 12.90% 6/25/92
Class A 13.51% 11.47% 11.60% 1/17/97
Class B 14.82% 12.44% 12.68% 1/17/97
Class C 18.79% 12.68% 12.80% 1/17/97
- ----------------------------------------------------------------------------------------
Core Equity Institutional 21.59% N/A 23.61% 12/28/94 12/28/94
Administrative 21.20% N/A 23.36% 5/31/95
Class A N/A N/A N/A 1/17/97
Class B N/A N/A N/A 1/17/97
Class C N/A N/A N/A 1/17/97
- ----------------------------------------------------------------------------------------
Mid Cap Institutional 9.61% N/A 22.26% 12/28/94 12/28/94
Equity Administrative 9.61% N/A 22.25% 1/17/97
Class A N/A N/A N/A 1/17/97
Class B N/A N/A N/A 1/17/97
Class C N/A N/A N/A 1/17/97
- ----------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of
shares assume payment of the current maximum sales charge (if any)
applicable to that class at the time of purchase and assume that the
maximum CDSC (if any) for Class A, Class B and Class C shares was deducted
at the times, in the amounts, and under the terms discussed in the Retail
Prospectus.
** For all Funds, consistent with SEC rules and informal guidance, Class A,
Class B, Class C and Administrative Class total return presentations for
periods prior to the Inception Date of a particular class reflect the prior
performance of Institutional Class shares of the Fund adjusted to reflect
the actual sales charges (none in the case of the Administrative Class) of
the newer class. The adjusted Institutional Class performance does not,
however, reflect the higher Fund operating expenses applicable to Class A,
Class B, Class C and Administrative Class shares, such as 12b-1
distribution and servicing fees, which are paid by all classes except the
Institutional Class (at a maximum rate of 1.00% per annum), and the higher
administrative fee charges associated with Class A, Class B and Class C
shares (a maximum differential of .15% per annum). All other things being
equal, such higher expenses would have adversely affected (i.e., reduced)
total return for the newer classes by the amount of such higher expenses,
compounded over the relevant period.
67
<PAGE>
The table below sets forth the average annual total return of each
class of shares of the following Funds (each of which was a series of PAF prior
to its reorganization as a Fund of the Trust on January 17, 1997) for the
periods ended June 30, 1997. The table presents total return information from
the inception of the PAF predecessor series through June 30, 1997. Consistent
with SEC rules and informal guidance, total return presentations for periods
prior to the inception date of a particular class are based on the historical
performance of Class A or Class C shares (the particular class used in each case
is noted below) restated to reflect the current sales charges (if any) of the
newer class, but not reflecting possibly lower operating expenses such as 12b-1
distribution and servicing fees or administrative fee charges associated with
the newer class.
Total Return for Periods Ended June 30, 1997*
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Since
Inception Inception Inception
Fund Class*** 1 Year 5 Years 10 Years of Fund Date of Date of
(Annualized) Fund Class
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Renaissance** Class A 32.16% 17.76% N/A 12.85% 4/18/88 2/1/91
Class B 32.16% 17.76% N/A 12.85% 5/22/95
Class C 26.76% 17.31% N/A 12.76% 4/18/88
Institutional 27.19% 17.31% N/A 12.85% 1/17/97
Administrative 31.16% 17.76% N/A 12.85% 1/17/97
- ---------------------------------------------------------------------------------------------------
Growth Class A 13.88% 13.92% 12.47% 16.38% 2/24/84 10/26/90
Class B 14.64% 13.90% 12.57% 16.42% 5/23/95
Class C 18.59% 14.35% 12.57% 16.42% 2/24/84
- ---------------------------------------------------------------------------------------------------
Target Class A 4.53% N/A N/A 17.18% 12/17/92 12/17/92
Class B 4.79% N/A N/A 17.75% 5/22/95
Class C 8.72% N/A N/A 17.75% 12/17/92
- ---------------------------------------------------------------------------------------------------
Opportunity Class A -14.52% 19.00% 16.95% 17.92% 2/24/84 12/17/90
Class C -11.13% 19.45% 17.06% 18.00% 2/24/84
- ---------------------------------------------------------------------------------------------------
Innovation Class A 5.91% N/A N/A 26.50% 12/22/94 12/22/94
Class B 5.91% N/A N/A 26.50% 5/22/95
Class C 0.09% N/A N/A 23.70% 12/22/94
Institutional 0.12% N/A N/A 25.26% 1/17/97
Administrative 4.06% N/A N/A 25.54% 1/17/97
- ---------------------------------------------------------------------------------------------------
International** Class A 4.06% 8.81% 5.95% 7.33% 8/25/86 2/1/91
Class B 4.28% 8.78% 6.05% 7.43% 5/22/95
Class C 8.29% 9.22% 6.05% 7.43% 8/25/86
- ---------------------------------------------------------------------------------------------------
Precious Class A -33.77% 2.01% N/A -1.58% 10/10/88 2/1/91
Metals** Class B -33.83% 1.97% N/A -1.45% 6/15/95
Class C -30.97% 2.47% N/A -1.75% 10/10/88
- ---------------------------------------------------------------------------------------------------
Tax Exempt Class A 2.10% 5.08% 6.55% 7.37% 11/1/85 3/14/91
Class B 1.02% 5.11% 6.67% 7.48% 5/30/95
Class C 5.30% 5.27% 6.55% 7.49% 11/1/85
- ---------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
* Average annual total return presentations for a particular class of shares
assume payment of the current maximum sales charge (if any) applicable to that
class at the time of purchase and assume that the maximum CDSC (if any) for
Class A, B and C shares was deducted at the times, in the amounts, and under
the terms discussed in the Retail Prospectus.
** The investment objective and policies of the Renaissance Fund and
International Fund were changed effective February 1, 1992 and September 1,
1992, respectively. The investment objective and policies of the Precious
Metals Fund were changed effective November 15, 1994. Performance information
for prior periods does not necessarily represent results that would have been
obtained had the current investment objective and policies then been in
effect.
*** With the exception of the Target Fund and Innovation Fund, Class A,
Class B, Institutional Class and Administrative Class total return
presentations for these Funds for periods prior to the Inception Date of the
particular class reflect the prior performance of Class C shares of the former
relevant PAF Fund adjusted to reflect the actual sales charges (or no sales
charges in the case of Administrative and Institutional Class shares) of the
newer class. The adjusted performance does not, however, reflect possibly
lower operating expenses such as 12b-1 distribution and servicing fees or
administrative fee charges associated with the newer class. For the Target
(for Class B only) and Innovation Funds, (i) Institutional and Administrative
Class total return presentations for periods prior to the Inception Date of a
particular class reflect the prior performance of Class A shares of the former
PAF Fund adjusted in the manner described above and (ii) Class B total return
presentations for periods prior to the Inception Date of that class reflect
the prior performance of Class C shares of the former PAF Fund adjusted in the
manner described above. Note also that, prior to January 17, 1997, Class A,
Class B and Class C shares of the former PAF Funds were subject to a variable
level of expenses for such services as legal, audit, custody and transfer
agency services. As described in the Retail Prospectus, for periods subsequent
to January 17, 1997, Class A, Class B and Class C shares of the Trust are
subject to a fee structure which essentially fixes these expenses (along with
other administrative expenses) under a single administrative fee based on the
average daily net assets of a Fund attributable to Class A, Class B and Class
C shares. Under the current fee structure, the Growth Fund, Target Fund,
Opportunity Fund and International Fund are expected to have higher total Fund
operating expenses than their predecessors had under the fee structure for PAF
(prior to January 17, 1997). All other things being equal, such higher
expenses should adversely affect future total return performance for these
Funds compared to historical periods.
Performance information for a Fund may also be compared to: (i) the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, the Morgan Stanley Capital International EAFE (Europe, Australasia, Far
East) Index, the Morgan Stanley Capital International Emerging Markets Free
Index, the International Finance Corporation Emerging Markets Index, the Baring
Emerging Markets Index, or other unmanaged indexes that measure performance of a
pertinent group of securities; (ii) other groups of mutual funds tracked by
Lipper Analytical Services ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank mutual funds on overall performance or other criteria; and (iii) the
Consumer Price Index (measure for inflation) to assess the real rate of return
from an investment in the Funds. Unmanaged indexes (i.e., other than Lipper)
generally do not reflect deductions for administrative and management costs or
expenses. The Adviser and any of the Portfolio Managers may also report to
shareholders or to the public in advertisements concerning the performance of
the Adviser and/or the Portfolio Managers as advisers to clients other than the
Trust, and on the comparative performance or standing of the Adviser and/or the
Portfolio Managers in relation to other money managers. Such comparative
information may be compiled or provided by independent ratings services or by
news organizations. Any performance information, whether related to the Funds,
the Adviser or the Portfolio Managers, should be considered in light of the
Funds' investment objectives and policies, characteristics and quality of the
Funds, and the market conditions during the time period indicated, and should
not be considered to be representative of what may be achieved in the future.
69
<PAGE>
The total return of each class (and yield of each class in the case of
the Tax Exempt, Renaissance and Balanced Funds) may be used to compare the
performance of each class of a Fund's shares against certain widely acknowledged
standards or indexes for stock and bond market performance, against interest
rates on certificates of deposit and bank accounts, against the yield on money
market funds, against the cost of living (inflation) index, and against
hypothetical results based on a fixed rate of return.
The S&P's Composite Index of 500 Stocks (the "S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 385 industrial, 15 transportation, 45 utilities and 55
financial services concerns. The S&P 500 represents about 77% of the market
value of all issues traded on the New York Stock Exchange.
The S&P's 400 Mid-Cap Index (the "S&P 400 Mid-Cap Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 400 stocks of companies whose capitalization range from $100 million to
over $5 billion and which represent a wide range of industries. As of September
30, 1997, approximately 22% of the 400 stocks were stocks listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") system, 76%
were stocks listed on the New York Stock Exchange and 7% were stocks listed on
the American Stock Exchange. The Standard & Poor's Midcap 400 Index P/TR
consists of 400 domestic stocks chosen for market size (median market
capitalization of $1.52 billion), liquidity and industry group representation.
It is a market value-weighted index (stock price times shares outstanding), with
each stock affecting the index in proportion to its market value. The index is
comprised of industrials, utilities, financials and transportation, in size
order.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market value-
weighted and unmanaged index showing the changes in the aggregate market value
of approximately 3,500 stocks relative to the base measure of 100.00 on February
5, 1971. The NASDAQ Index is composed entirely of common stocks of companies
traded over-the-counter and often through the NASDAQ system. Only those over-
the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest securities in the Russell 3000 Index, representing approximately 7% of
the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of
the U.S. equity market by capitalization. The Russell 1000 Index is composed of
the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Index
represents the universe of stocks from which most active money managers
typically select. This large cap index is highly correlated with the S&P 500.
The Russell 1000 Value Index contains stocks from the Russell 1000 Index with a
less-than-average growth orientation. It represents the universe of stocks from
which value managers typically select.
The Lehman Government Bond Index (the "SL Government Index") is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly-issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the SL Government Index.
The Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,000 bonds. To be included in the SL Government/Corporate Index, an issue must
have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher by an NRSRO.
BanXquote Money Market, a service of Masterfund Inc., provides the
average rate of return paid on
70
<PAGE>
3-month certificates of deposit offered by major banks and the average rate paid
by major banks on bank money market funds. The Donoghue Organization, Inc., a
subsidiary of IBC USA Inc., publishes the Money Fund Report which lists the 7-
day average yield paid on money market funds.
From time to time, the Trust may use, in its advertisements or
information furnished to present or prospective shareholders, data concerning
the performance and ranking of certain countries' stock markets, including
performance and ranking data based on annualized returns over one-, three-,
five- and ten-year periods. The Trust may also use data about the portion of
world equity capitalization represented by U.S. securities. As of December 31,
1996, the U.S. equity market capitalization represented approximately 35% of the
equity market capitalization of all the world's markets. This compares with 52%
in 1980 and 70% in 1972.
From time to time, the Trust may use, in its advertisements and other
information relating to certain of the Funds, data concerning the performance of
stocks relative to that of fixed income investments and relative to the cost of
living over various periods of time. The table below sets forth the annual
returns for each calendar year from 1972 through 1996 (as well as a cumulative
return and average annual return for that 25 year period) for the S&P 500 and
Treasury bills (using the formula set forth after the table) as well as the
rates of inflation (based on the Consumer Price Index) during such periods.
<TABLE>
<CAPTION>
Consumer Price
Period S&P 500 Treasury Bills Index
- ------ ------- -------------- --------------
<S> <C> <C> <C>
1972 18.9 3.8 3.4
1973 -14.7 6.9 8.8
1974 -26.5 8.0 12.2
1975 37.2 5.8 7.0
1976 23.8 5.0 4.8
1977 -7.2 5.1 6.8
1978 6.5 7.2 9.0
1979 18.4 10.4 13.3
1980 32.4 11.2 12.4
1981 -4.9 14.7 8.9
1982 21.4 10.5 3.8
1983 22.5 8.8 3.8
1984 6.3 9.9 3.9
1985 32.2 7.7 3.8
1986 18.5 6.1 1.1
1987 5.2 5.5 4.4
1988 16.8 6.3 4.4
1989 31.5 8.4 4.6
1990 -3.2 7.8 6.1
1991 30.5 5.6 3.1
1992 7.7 3.5 2.9
1993 10.1 2.9 2.7
1994 1.3 3.9 2.7
1995 37.4 5.6 2.7
1996 23.1 5.2 3.3
- --------------------------------------------------------------------------------
Cumulative Return
1972-1996 1,826.8% 458.5% 285.9%
- --------------------------------------------------------------------------------
Average Annual Return
1972-1996 12.6% 7.1% 5.6%
- --------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
The average returns for Treasury bills were computed using the
following method. For each month during a period, the Treasury bill having the
shortest remaining maturity (but not less than one month) was selected. (Only
the remaining maturity was considered; the bill's original maturity was not
considered). The return for the selected Treasury bill was computed based on
the price of the bill as of the last trading day of the previous month and the
price on the last trading day of the current month. The price of the bill (P)
at each time (t) is given by:
P\\t\\ = [1- rd]
---
360
where,
r = decimal yield on the bill at time t (the average of bid and ask
quotes); and
d = the number of days to maturity as of time t.
Advertisements and information relating to the Target Fund may use data
comparing the performance of stocks of medium-sized companies to that of other
companies. The following table sets forth the annual returns for each year from
March 1981 (inception of Mid-Cap Index) through December 31, 1996 (as well as a
cumulative return and average annual return for this period) for stocks of
medium-sized companies (based on the Standard & Poor's Mid-Cap Index), stocks
of small companies (based on the Russell 2000 Index) and stocks of larger
companies (based on the S&P 500).
<TABLE>
<CAPTION>
Small Mid-Sized Large
Period Companies Companies Companies
- ------ --------- --------- ---------
<S> <C> <C> <C>
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
- --------------------------------------------------------------------------------
Cumulative Return
2/28/81-12/31/96 579.7% 1096.3% 901.3%
- --------------------------------------------------------------------------------
Average Annual Return
2/28/81-12/31/96 12.9% 17.0% 15.7%
- --------------------------------------------------------------------------------
</TABLE>
From time to time, the Trust may use, in its advertisements and other
information relating to the Precious Metals Fund, data concerning the relevant
performance and volatility of portfolios consisting of all stocks, portfolios
consisting of all bonds and portfolios consisting of stocks and bonds blended
with stocks of
72
<PAGE>
companies engaged in the extraction, processing, distribution or marketing of
gold and other precious metals. The following table shows the annual returns
for each calendar year from 1972 through 1996 (as well as cumulative return and
average annual return for that 25 year period) for an all-stock portfolio (using
the S&P 500), an all-bond portfolio (using the Salomon Brothers Long Term
Corporate Bond Index), and for a hypothetical portfolio with 45% of its assets
in stocks comprising the S&P 500, 45% in bonds comprising the Salomon Brothers
Long Term Corporate Bond Index and 10% in stocks comprising the Morgan Stanley
Capital International Gold Mining Index.
<TABLE>
<CAPTION>
Stocks 45%
All All Bonds 45%
Period Stocks Bonds Gold Stocks 10%
- ------ ------ ----- ----------------
<S> <C> <C> <C>
1972 19.0 7.3 15.5
1973 -14.7 1.1 4.2
1974 -26.5 -3.1 -10.9
1975 37.5 14.6 20.4
1976 23.8 18.6 15.0
1977 -7.2 1.7 .5
1978 6.5 0.00 3.4
1979 18.4 -4.2 21.3
1980 32.4 -2.6 19.3
1981 -4.9 -0.1 -6.0
1982 21.4 43.8 33.9
1983 22.5 4.7 12.0
1984 6.3 16.4 7.2
1985 32.2 30.9 26.2
1986 18.5 19.8 18.5
1987 5.2 -0.02 6.6
1988 16.8 10.7 9.1
1989 31.5 16.2 26.4
1990 -3.2 6.8 -1.0
1991 30.5 19.9 21.8
1992 7.7 9.4 4.9
1993 10.1 13.2 23.5
1994 1.3 -5.8 -3.1
1995 37.4 27.2 29.0
1996 23.1 1.4 10.5
- --------------------------------------------------------------------------------
Cumulative Return
1972-1996 1819.9% 813.1% 1497.7%
- --------------------------------------------------------------------------------
Average Annual Return
1972-1996 12.6% 9.3% 11.7%
- --------------------------------------------------------------------------------
</TABLE>
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1996/1997 costs of college (using tuition and fees only) and an assumed rate of
increase for such costs. For example, the table below sets forth the projected
cost of four years of college at a public college and a private college assuming
a steady increase in both cases of 3% per year. In presenting this information,
the Trust is making no prediction regarding what will be the actual growth rate
in the cost of a
73
<PAGE>
college education, which may be greater or less than 3% per year and may vary
significantly from year to year. The Trust makes no representation that an
investment in any of the Funds will grow at or above the rate of growth of the
cost of a college education.
<TABLE>
<CAPTION>
Potential College Cost Table
<S> <C> <C> <C> <C> <C>
Start Public Private Start Public Private
Year College College Year College College
- ----- ------- ------- ----- ------- -------
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306
</TABLE>
Costs assume a steady increase in the annual cost of college of 7% per year from
a 1993-94 base year amount. Actual rates of increase may be more or less than 7%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the 25 years from 1972 through 1996 was:
*Stocks: 12.5%
Bonds: 9.2%
T-Bills: 7.0%
Inflation: 5.6%
*Returns of unmanaged indexes do not reflect past or future
performance of any of the Funds of PIMCO Funds: Multi-Manager Series.
Stocks is represented by Ibbotson's Common Stock Total Return Index. Bonds
are represented by Ibbotson's Long-term Corporate Bond Index. Treasury
bills are represented by Ibbotson's Treasury Bill Index and Inflation is
represented by the Cost of Living Index. These are all unmanaged indexes,
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
1996 Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1972 through 1996, the average annual return of stocks comprising the
Ibbotson's Common Stock Total Return Index ranged from -26.5% to 37.4% while the
annual return of a hypothetical portfolio comprised 40% of such common stocks,
40% of bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.1% over the same period. The
average annual returns of each investment for each of the years from 1972
through 1996 is set forth in the following table.
74
<PAGE>
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ------ -------- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1972 18.98% 7.26% 3.84% 3.41% 11.26%
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
</TABLE>
Returns of unmanaged indexes do not reflect past or future performance of
any of the Funds of PIMCO Funds: Multi-Manager Series. Stocks are
represented by Ibbotson's Common Stock Total Return Index. Bonds are
represented by Ibbotson's Long-term Corporate Bond Index. Treasury bills
are represented by Ibbotson's Treasury Bill Index and Inflation is
represented by the Cost of Living Index. Treasury bills are all unmanaged
indexes, 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
1996 Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may use in its advertisements and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
75
<PAGE>
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
<S> <C> <C> <C>
30 Years $1,979 $59,370 $200,000
25 Years $2,955 $73,875 $200,000
20 Years $4,559 $91,180 $200,000
15 Years $7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</TABLE>
This hypothetical example assumes a fixed 7% return compounded annually and
a guaranteed return of principal. The example is intended to show the
benefits of a long-term, regular investment program, and is in no way
representative of any past or future performance of a Fund of PIMCO Funds:
Multi-Manager Series. There can be no guarantee that you will be able to
find an investment that would provide such a return at the times you invest
and an investor in any of the Funds of PIMCO Funds: Multi-Manager Series
should be aware that certain of the Funds of PIMCO Funds: Multi-Manager
Series have experienced periods of negative growth in the past and may
again in the future.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1996:
% of Income for Individuals
Aged 65 Years and Older in 1996*
-------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
1996 43% 57%
* For individuals with an annual income of at least $51,000. Other
includes personal savings, earnings and other undisclosed sources of
income. Source: Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds may appear in various national
publications and services including, but not limited to: The Wall Street
Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual Fund
Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies and The
Donoghue Organization. Some or all of these publications or reports may publish
their own rankings or performance reviews of mutual funds, including the Funds,
and may provide information relating to the Adviser and the Portfolio Managers,
including descriptions of assets under management and client base, and opinions
of the author(s) regarding the skills of personnel and employees of the Adviser
or the Portfolio Managers who have portfolio management responsibility. From
time to time, the Trust may include references to or reprints of such
publications or reports in its advertisements and other information relating to
the Funds.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Funds over a specified period of time and may use charts and
graphs to display that growth.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
Funds and relevant benchmark market indexes in a variety of market conditions.
Based on its independent research and analysis, Ibbotson may
76
<PAGE>
develop, from time to time, model portfolios of the Funds and series of PIMCO
Funds: Pacific Investment Management Series ("PIMS") which indicate how, in
Ibbotson's opinion, a hypothetical investor with a 5+ year investment horizon
might allocate his or her assets among the Funds and series of PIMS. Ibbotson
bases its model portfolios on five levels of investor risk tolerance which it
developed and defines as ranging from "Very Conservative" (low volatility;
emphasis on capital preservation, with some growth potential) to "Very
Aggressive" (high volatility; emphasis on long-term growth potential). However,
neither Ibbotson nor the Trust offers Ibbotson's model portfolios as
investments. Moreover, neither the Trust, the Adviser, the Portfolio Managers
nor Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. Shareholders may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. 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.
All classes of shares of the Funds have identical voting rights except that
each class of shares has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class. These shares are entitled to vote
at meetings of shareholders. Matters submitted to shareholder vote must be
approved by each Fund separately except (i) when required by the 1940 Act shares
shall be voted together and (ii) when the Trustees have determined that the
matter does not affect all Funds, then only shareholders of the Fund or Funds
affected shall be entitled to vote on the matter. All classes of shares of a
Fund will vote together, except with respect to the Distribution and Servicing
Plan applicable to Class A, Class B or Class C shares, to the Distribution or
Administrative Services Plans applicable to Administrative Class shares or when
a class vote is required as specified above or otherwise by the 1940 Act.
The Trust's shares do not have cumulative voting rights. Therefore, the
holders 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.
Certain Ownership of Trust Shares
As of October 6, 1997, the Trust believes that the Trustees and officers of
the Trust, as a group, owned less than one percent of each class of each Fund
and of the Trust as a whole. As of October 6, 1997, the following persons owned
of record or beneficially 5% or more of the noted class of shares of the
following Funds:
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
PIMCO Equity Income Fund
Institutional
-------------
Bank of New York Western Trust Co. 1,660,754.835 20.77%
as Trustee for
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Pacific Life Insurance Company
R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
Northern Trust Company as Trustee for 1,604,341.821 20.06%
AM Castle & Company
P.O. Box 92956
Chicago, Illinois 60675-2956
Santa Barbara Foundation 650,348.222 8.13%
15 East Carrillo Street
Santa Barbara, California 93101-2780
Northern Trust Company as Trustee for 549,916.210 6.88%
Brush Wellman Inc.
P.O. Box 92956
Chicago, Illinois 60675-0001
Bank of America NT & SA as Trustee for 470,348.174 5.88%
Mazda Motor of America
P.O. Box 3577, Terminal Annex
Los Angeles, California 90051-1577
Administrative
- --------------
First Union National Bank 556,306.865 96.22%*
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Class A
- -------
Khosrow B. Semnani 48,965.796 19.51%
P.O. Box 3508
Salt Lake City, Utah 84110-3508
PaineWebber FBO 29,696.897 11.83%
Little Sisters of the Poor Inc.
601 Maiden Choice Lane
Baltimore, Maryland 21228-3630
Merrill Lynch Pierce Fenner & Smith Inc. ** 22,300.343 8.88%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 37,087.241 12.71%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 41,915.647 7.11%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Value Fund
Institutional
-------------
Pacific Life Insurance Company 1,947,549.538 40.66%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
The Northern Trust Company as Trustee for 883,124.965 18.44%
Great Lakes Chemical Corporation
P.O. Box 92956
Chicago, Illinois 00006-0690
Pacific Life Insurance Company FBO 497,301.019 10.38%
CMTA-GMPP & Allied Workers Pension
700 Newport Center Drive
Newport Beach, California 92660
Pacific Life Foundation 320,413.478 6.69%
700 Newport Center Drive
Newport Beach, California 92660
BAC Local 19 Pension Trust Fund 294,119.248 6.14%
777 Davis Street
San Francisco, California 94126-2500
Administrative
--------------
Monte E. Golditch 14,538.148 7.20%
533 Vista Grande Drive
Colorado Springs, Colorado 80906
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 149,306.664 13.74%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 409,102.876 22.55%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 477,081.456 10.50%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Small Cap Value Fund
Institutional
-------------
Pacific Life Insurance Company 437,434.847 18.44%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Sheet Metal Workers' Local Unions 357,378.308 15.07%
and Council's Pension Fund
601 N. Fairfax Street, Suite 500
Alexandria, Virginia 22314-2054
FTC & Co.** 265,325.436 11.19%
P.O. Box 173736
Denver, Colorado 80217
Lucile Packard Foundation for Children 209,497.207 8.83%
725 Welch Road
Palo Alto, California 94304
Administrative
--------------
First Union National Bank 396,630.594 85.40%*
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 171,126.499 15.45%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Khosrow B. Semnani 90,260.494 8.15%
P.O. Box 3508
Salt Lake City, Utah 84110-3508
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 811,380.878 37.78%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 884,581.302 28.15%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Capital Appreciation Fund
Institutional
-------------
Donaldson Lufkin & Jenrette** 5,680,618.677 22.00%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Wendel & Co.** 3,258,632.044 12.62%
c/o Bank of New York
P.O. Box 1066
New York, New York 10268
Pacific Life Insurance Company 1,325,355.723 5.13%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Administrative
--------------
FIIOC as Agent for 230,008.304 42.13%*
Certain Employee Benefits Plan
100 Magetian KWIC
Covington, Kentucky 41015
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
First Union National Bank 134,175.411 24.58%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Crippled Children's Foundation 53,566.498 9.81%
2501 West 26th Street
Sioux Falls, South Dakota 57105
Class A
-------
FTC & Co.** 150,808.057 38.01%*
Datalynx House Acct
P.O. Box 1731736
Denver, Colorado 80217-3736
Donaldson Lufkin Jenrette Securities Corp., Inc.** 23,110.223 5.82%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
PaineWebber FBO 20,920.502 5.27%
Little Sisters of the Poor Inc.
601 Maiden Choice Lane
Baltimore, Maryland 21228-3630
Donaldson Lufkin Jenrette Securities Corp., Inc.** 19,924.702 5.02%
P.O. Box 2052
Jersey City, New Jersey 07303-9998
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 39,390.322 13.60%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
------- 106,782.110 10.33%
Merrill Lynch Pierce Fenner & Smith Inc. **
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Mid Cap Growth Fund
Institutional
-------------
State Street Bank & Trust Co. as Trustee for 3,140,398.359 20.80%
Dayton Hudson Retirement Savings Plan
One Enterprise Drive
North Quincy, Massachusetts 02171
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
State Street Bank & Trust Company 1,551,923.292 10.28%
Caremark International, Inc.
One Enterprise Drive
Quincy, Massachusetts 02171-2126
Administrative
--------------
Wells Fargo as Trustee for 80,044.847 36.25%*
Choicemaster
P.O. Box 9800
Calabasas, California 91302-9800
FIIOC as Agent for 49,054.480 22.21%
Certain Employee Benefits Plan
100 Magetian KW1C
Covington, Kentucky 41015
New York Life Trust Company 23,391.462 10.59%
51 Madison Avenue, Room 117A
New York, New York 10010
First Union National Bank 19,345.814 8.76%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Susan Johnson 13,547.293 6.13%
490 Celtic Court
Colorado Springs, Colorado 80921
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 104,755.832 12.79%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 512,803.000 30.19%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc. ** 597,338.793 19.12%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
PIMCO Micro Cap Growth Fund
Institutional
-------------
Charles Schwab & Co., Inc.** 2,050,746.061 22.60%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Donald Lufkin & Jenrette** 1,285,990.109 14.17%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Bost & Co.** 954,701.588 10.52%
P.O. Box 9118
Boston, Massachusetts 02205-9118
University of Southern California 907,986.469 10.00%
Treasurer's Office
University Park, BKS 402
Los Angeles, California 90089
Mac & Co.** 606,761.440 6.69%
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
First Bank NA 539,102.914 5.94%
St. Paul Foundation
P.O. Box 64010
St. Paul, Minnesota 55164-0010
Administrative
--------------
Northern Trust as Trustee for 106,583.282 84.61%*
Baptist Sunday School Board
P.O. Box 92956
Chicago, Illinois 60675
New York Life Trust Company 16,404.265 13.02%
51 Madison Avenue, Room 117A
New York, New York 10010
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
PIMCO Small Cap Growth Fund
<S> <C> <C>
Institutional
-------------
The Jewish Federation of 852,226.776 34.61%*
Metropolitan Chicago
One South Franklin Street, Room 625
Chicago, Illinois 60606-4609
ESOR & Co. 397,527.447 16.15%
Associated Bank Green Bay
Trust Operations Department
P.O. Box 19006
Green Bay, Wisconsin 54307-9006
Auburn Theological Seminary 293,286.232 11.91%
3041 Broadway
New York, New York 10027-5710
Pacific Life Insurance Company 255,392.389 10.37%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Bessemer Trust Company for 184,340.789 7.49%
Naidot & Co.
100 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Administrative
--------------
PIMCO Advisors L.P. 88.810 100.00%*
800 Newport Center Drive, Suite 100
Newport Beach, California 92660
PIMCO Core Equity Fund
Institutional
-------------
Pacific Life Foundation 152,887.691 47.57%*
700 Newport Center Drive
Newport Beach, California 92660
Union Bank as Trustee for 94,873.085 29.52%*
Pacific Corinthian Life Insurance
P.O. Box 109
San Diego, California 92112-4103
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Mac & Co.** 18,379.330 5.72%
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Administrative
--------------
The Bank of New York as Trustee for 4,584,217.506 96.09%*
Melville Corporation
P.O. Box 1066, Wall Street Station
New York, New York 10286
PIMCO Mid Cap Equity Fund
Institutional
-------------
Pacific Life Insurance Company 361,856.905 71.42%*
700 Newport Center Drive
Newport Beach, California 92660
IFTC as Custodian for 59,999.929 11.84%
John W. Barnum
5175 Tilden Street, N.W.
Washington, D.C. 20016-1961
Pacific Life Foundation 39,736.188 7.84%
700 Newport Center Drive
Newport Beach, California 92660
Administrative
--------------
Monte E. Golditch 1,717.133 6.85%
533 Vista Grande Drive
Colorado Springs, Colorado 80906
PIMCO Enhanced Equity Fund
Institutional
-------------
Pacific Life Insurance Company 946,121.651 38.26%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Pacific Life Insurance Company FBO 603,805.302 24.42%
CMTA-GMPP & Allied Workers Pension
700 Newport Center Drive
Newport Beach, California 92660
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Bank of America as Trustee for 279,822.896 11.32%
Ameron, Inc.
P.O. Box 513577
Los Angeles, California 90051-1577
Pacific Life Foundation 155,664.226 6.29%
700 Newport Center Drive
Newport Beach, California 92660
BAC Local 19 141,687.623 5.73%
777 Davis Street
San Francisco, California 84126-2500
Administrative
--------------
Susan Johnson 12,901.037 10.98%
490 Celtic Court
Colorado Springs, Colorado 80921
PIMCO Emerging Markets Fund
Institutional
-------------
Charles Schwab & Co., Inc.** 1,698,471.711 45.73%*
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Pacific Life Insurance Company 575,190.664 15.49%
700 Newport Center Drive
Newport Beach, California 92660
Pacific Life Insurance Company 434,344.899 11.69%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Donaldson Lufkin & Jenrette** 258,699.671 6.96%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Administrative
--------------
Susan Johnson 13,397.052 25.05%*
490 Celtic Court
Colorado Springs, Colorado 80921
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
FTC & Co.** 7,587.881 14.19%
P.O. Box 173736
Denver, Colorado 80217-3736
Class A
- -------
PaineWebber FBO 2,353.306 11.32%
Barry Michael Martin Trustee
Barry Michael Martin Trust
726 S. Tejon
Colorado Springs, Colorado 80903-4042
Smith Barney Inc.** 1,933.488 9.30%
388 Greenwich Street
New York, New York 10013
Lynn H. Eppey & Beverly J. Eppey 1,814.166 8.72%
2031 N. Euclid Avenue
Upland, California 91784-1408
Howard Nusbaum Trust 1,530.303 7.36%
Howard Nusbaum DDS PA
Profit Sharing Plan
1145 Bordentown Avenue
Parlin, New Jersey 08859-1851
Thomas F. Blueher Trust 1,061.773 5.10%
Oscar G. Blueher Credit Shelter Trust
6100 Uptown Boulevard N.E., Suite 500
Albuquerque, New Mexico 87110-4143
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 3,166.000 7.62%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PAF Sales Inc. 2,347.418 5.65%
Profit Sharing Plan
P.O. Box 307
Scarborough, New York 10510-0807
Carolyn Lecompte 2,180.233 5.25%
231 Lyles Street
Houma, Louisiana 70363-5443
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 28,680.549 21.98%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Raymond James & Assoc Inc. Custodian 24,940.178 19.12%
James F. Riopelle IRA
1 Foxhill Road
Englewood, Colorado 80110-4923
PIMCO International Developed Fund
Institutional
-------------
Charles Schwab & Co., Inc. ** 1,109,920.657 16.24%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Wachovia Bank NA as Trustee for 1,069,185.946 15.64%
Atlanta Gas Light Company
301 N. Main Street - MC NC 31057
Winston-Salem, North Carolina 27150
Pacific Life Insurance Company 930,797.270 13.62%
700 Newport Center Drive
Newport Beach, California 92660
Pacific Life Insurance Company 899,152.128 13.16%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
FTC & Co.** 374,180.125 5.74%
P.O. Box 173736
Denver, Colorado 80217-3736
Bank of New York Western Trust Co. 346,621.584 5.07%
as Trustee for
Pacific Life Insurance Company
R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Administrative
- --------------
FTC & Co.** 59,445.644 39.41%*
P.O. Box 173736
Denver, Colorado 80217-3736
Susan Johnson 21,348.269 14.15%
490 Celtic Court
Colorado Springs, Colorado 80921
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 5,074.000 11.65%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Smith Barney Inc.** 4,351.610 9.99%
388 Greenwich Street
New York, New York 10013
Tsighe Nemariam Trust 4,141.491 9.51%
Natural Resources Consulting Engineers Inc.
401K Profit Sharing Plan
131 East Lincoln Avenue, Suite 300
Fort Collins, Colorado 80524-2419
Columbus Circle Trust Company Trust 3,754.122 8.62%
Glen Manufacturing Key Comp Pl
FBO Key Comp Plan Participants
1 Station Place
Stamford, Connecticut 06902-6800
Smith Barney Inc.** 2,823.836 6.48%
388 Greenwich Street
New York, New York 10013
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 23,318.000 13.39%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 15,849.874 6.28%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Prudential Securities Inc. FBO 13,229.800 5.24%
Haroutune A. Mekhjian MD TF
TF Profit Sharing Plan & Trust
P.O. Box 355
Alpine, New Jersey 07620-0355
PIMCO Balanced Fund
Institutional
-------------
California Race Track Association 1,472,876.247 27.15%*
P.O. Box 60014
Arcadia, California 91006-6014
Bank of New York Western Trust Co. 1,157,229.319 21.33%
as Trustee for
Pacific Life Insurance Company
R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
Pacific Life Insurance Company FBO 764,750.000 14.10%
WESCOM Credit Union
700 Newport Center Drive
Newport Beach, California 92660
Trustees of the Redlands Community 715,746.151 13.19%
Hospital Retirement Plan
350 Terracina Blvd.
Redlands, California 92373-4850
Dominguez Services Corporation 558,927.632 10.30%
21718 South Alameda Street
Long Beach, California 90810
Bank of America as Trustee for 282,246.506 5.20%
Music Center Operating Co.
P.O. Box 2788
Los Angeles, California 90051-0788
Class A
-------
Merrill Lynch Trust Co. TTE FBO 398,098.759 88.76%*
Qualified Retirement Plans
Attn: Jerry Stone
265 Davidson Avenue
Somerset, New Jersey 08873-4120
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 40,831.718 26.24%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Raymond James & Assoc Inc. Custodian 10,487.942 6.74%
Norman Wapnick IRA
7032 S.W. Brier Place
Portland, Oregon 97219-2260
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 26,846.521 15.83%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
NFSC FEBO 10,106.845 5.96%
Phillip R. Neally
Annice I. Neally
1556 Aberdeen Court
Naperville, Illinois 60564
Raymond James & Assoc Inc. Custodian 9,123.497 5.38%
James Sements IRA
4533 Middle Ridge Road
Perry, Ohio 44081-9796
A. Lilley & D.S. Richards TRS 9,044.513 5.33%
Tech Electronic Inc. 401K Plan
FBO Bryan Tomlison
P.O. Box 166
Harlowton, Montana 59036-0166
PIMCO Target Fund
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,594,915.452 17.01%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
J.C. Bradford & Company 498,303.457 5.31%
FBO RCIP Limited Partnership I
330 Commerce Street
Nashville, TN 37201-1899
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,478,071.849 35.27%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 16,163,170.782 28.23%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Precious Metals Fund
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 46,710.000 10.91%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 39,111.060 6.55%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 495,739.423 17.45%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Renaissance Fund
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 240,419.723 11.69%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 535,578.287 22.56%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 2,899,655.718 15.97%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Tax Exempt Fund
Class A
-------
BT Alex Brown Incorporated 159,994.490 33.38%*
P.O. Box 1346
Baltimore, Maryland 21203
Merrill Lynch Pierce Fenner & Smith Inc.** 137,835.000 28.76%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Joseph R. White 32,544.102 6.79%
P.O. Box 572
Waltham, Massachusetts 02254-0572
Class B
-------
Dain Bosworth, Inc. FBO 48,167.954 20.16%
Kermit K. Kinsey
2801 NE 14th Street
Fort Lauderdale, Florida 33304
Merrill Lynch Pierce Fenner & Smith Inc.** 35,358.000 14.80%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PaineWebber FBO 17,564.920 7.35%
William H. Hoehn
2906 S.W. 130th Terr.
Archer, Florida 32618-2124
Robert A. Fish & Susan Beville 17,437.165 7.29%
Fish Co-Trustees
The Fish Family Trust
300 Tolak Road
Aptos, California 95003-2737
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
Herman Wertz Trust 14,909.045 6.24%
Herman Wertz
239 Franklin Avenue
Palmerton, Pennsylvania 18071-1509
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 431,645.000 13.27%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Growth Fund
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 346,594.647 6.65%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 691,441.578 31.03%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 7,506,810.722 13.16%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Opportunity Fund
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,701,883.849 23.60%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 5,713,838.364 26.17%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
------------ -------------
<S> <C> <C>
PIMCO Innovation Fund
Class A
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 449,625.000 13.74%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 715,855.581 23.51%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,395,597.679 15.08%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO International Fund
Class A
-------
Society National Bank Trust 227,473.042 16.31%
FBO RPM Retirement Plan
P.O. Box 94870
Cleveland, Ohio 44101-4870
Merrill Lynch Pierce Fenner & Smith Inc.** 128,642.000 9.22%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
American National Bank Trust 105,348.303 7.55%
FBO Emerald Investments
707 Lake Cook Road, Suite 303
Deerfield, Illinois 60015-4933
ORP1 94,625.450 6.78%
A Partnership
P.O. Box 5430
Incline Village, New York 89450-5430
PaineWebber FBO 94,007.980 6.74%
Bakerrubine LLC
575 Madison Avenue, 10th Floor
New York, New York 10022-2511
</TABLE>
96
<PAGE>
<TABLE>
<S> <C> <C>
Class B
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 164,824.000 24.83%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
-------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,920,493.460 16.06%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
- ---------------
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Fund, and therefore may be presumed to "control" the Fund, as that term is
defined in the 1940 Act.
** Shares are believed to be held only as nominee.
Custodian
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street,
Kansas City, Missouri 64105, serves as custodian for assets of all Funds.
Pursuant to separate sub-custody agreements between IFTC and The Chase Manhattan
Bank, N.A. ("Chase") and IFTC and State Street Bank and Trust Company ("State
Street"), Chase and State Street serve as subcustodians of the Trust for the
custody of the foreign securities acquired by those Funds that invest in foreign
securities. Under the agreements, Chase and State Street may hold foreign
securities at their principal offices and their 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 or other exemptions 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 currently 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, although the
Trustees reserve the right to delegate their selection responsibilities in light
of recent amendments to Rule 17f-5 under the 1940 Act, in which case the factors
for consideration would differ from those referenced above. Currently, the
Board of Trustees reviews annually the continuance of foreign custodial
arrangements for the Trust, but reserves the right to discontinue this practice
as permitted by the recent amendments to Rule 17f-5. No assurance can be given
that the Trustees' appraisal of the risks in connection with foreign custodial
arrangements will always be correct or that expropriation, nationalization,
freezes, or confiscation of assets that would impact assets of the Funds will
not occur, and shareholders bear the risk of losses arising from these or other
events.
Independent Accountants
Price Waterhouse LLP, 1055 Broadway, Kansas City, Missouri 64105,
serves as the independent public accountants for the Funds. Price Waterhouse
LLP provides audit services, accounting assistance, and consultation in
connection with SEC filings. As noted under "Financial Highlights" in the
Retail Prospectus, the Renaissance, Growth, Target, Opportunity, International,
Innovation, Precious Metals and Tax Exempt Funds were reorganized as series of
the Trust on January 17, 1997, and certain financial information for these Funds
appearing in the Registration Statement for each of the five fiscal years ended
prior to October 1, 1996 was audited by Coopers & Lybrand L.L.P., the former
independent accountants for these Funds. Coopers & Lybrand L.L.P.'s opinion and
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consent to the use of such information in the Registration Statement is included
as an exhibit to the Registration Statement.
Registration Statement
This Statement of Additional Information and the Prospectuses do not
contain all of the information included in the Trust's registration statements
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statements, including the exhibits
filed therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the relevant registration statement, each such
statement being qualified in all respects by such reference.
Financial Statements
Financial statements for the Funds, as of June 30, 1997, for the
fiscal year then ended, including notes thereto, and the reports of Price
Waterhouse LLP thereon, each dated August 15, 1997, are incorporated by
reference from the Trust's two June 30, 1997 Annual Reports. One Annual Report
(the "Retail Report") corresponds to the Retail Prospectus and the other (the
"Institutional Report") corresponds to the Institutional Prospectus. The
Trust's 1997 Annual Reports are on file with the SEC (Retail Report - filed on
September 3, 1997, Accession No. 0001017062-97-001680; Institutional Report -
filed on September 3, 1997, Accession No. 0001017062-97-001678).
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Certain of the Funds make use of average portfolio credit quality
standards to assist institutional investors whose own investment guidelines
limit their investments accordingly. In determining a Fund's overall dollar-
weighted average quality, unrated securities are treated as if rated, based on
the Adviser's or Portfolio Manager's view of their comparability to rated
securities. A Fund's use of average quality criteria is intended to be a guide
for those investors whose investment guidelines require that assets be invested
according to comparable criteria. Reference to an overall average quality
rating for a Fund does not mean that all securities held by the Fund will be
rated in that category or higher. A Fund's investments may range in quality from
securities rated in the lowest category in which the Fund is permitted to invest
to securities rated in the highest category (as rated by Moody's or S&P or, if
unrated, determined by the Adviser or a Portfolio Manager to be of comparable
quality). The percentage of a Fund's assets invested in securities in a
particular rating category will vary. Following is a description of Moody's and
S&P's ratings applicable to fixed income securities.
Moody's Investors Service, Inc.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
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C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Corporation
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
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.
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A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
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,
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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
A Standard & Poor's 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:
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 Standard & Poor's by the issuer or obtained from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information.
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