<PAGE>
As filed with the Securities and Exchange Commission on October 10, 1997
Registration Nos. 33-36528;
811-6161
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [_]
Post-Effective Amendment No. 27 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 29 [X]
PIMCO FUNDS: MULTI-MANAGER SERIES
(Exact Name of Registrant as Specified in Charter)
840 Newport Center Drive, Newport Beach, CA 92660
(Address of principal executive offices) (Zip code)
(714) 760-4867
(Registrant's telephone number, including area code)
Name and address
of agent for service: Copies to:
- --------------------- ----------
Stephen J. Treadway Newton B. Schott, Jr., Joseph B. Kittredge, Esq.
c/o PIMCO Advisors L.P. Esq. Ropes & Gray
2187 Atlantic Street c/o PIMCO Advisors L.P. One International Place
Stamford, Connecticut 2187 Atlantic Street Boston, Massachusetts
06902 Stamford, Connecticut 02110
06902
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on [date] pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on [date] pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[_] on [date] pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its shares of
beneficial interest under the Securities Act of 1933. The Registrant filed a
Rule 24f-2 Notice with respect to the Registrant's fiscal year ended June 30,
1997 on August 29, 1997.
THIS POST-EFFECTIVE AMENDMENT RELATES SOLELY TO PIMCO ACTIVE SHORT-TERM FUND, A
SERIES OF SHARES OF THE REGISTRANT. NO INFORMATION RELATING TO ANY OTHER SERIES
OF PIMCO FUNDS: MULTI-MANAGER SERIES IS AMENDED OR SUPERSEDED HEREBY.
<PAGE>
PIMCO FUNDS: MULTI-MANAGER SERIES
CROSS-REFERENCE SHEET
Required by Rule 404 Under the Securities Act of 1933
Prospectus for the Institutional Class and Administrative Class Shares
of PIMCO Columbus Circle Active Short-Term Fund
-----------------------------------------------
Part A
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Item Heading
---- -------
1. Cover Page Cover Page
2. Synopsis Expense Information
3 Condensed Financial Not Applicable
Information
4. General Description of Investment Objective and Policies;
Registrant General Policies; Characteristics and
Risks of Securities and Investment
Techniques
5. Management of the Fund Management of the Trust
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and Other Other Information; Dividends; Taxes
Securities
7. Purchase of Securities Management of the Trust; How to Buy
Being Offered Shares; Net Asset Value
8. Redemption or Repurchase How to Redeem
9. Pending Legal Proceedings Not Applicable
<PAGE>
PIMCO FUNDS: MULTI-MANAGER SERIES
CROSS-REFERENCE SHEET
Required by Rule 404 Under the Securities Act of 1933
Statement of Additional Information for
PIMCO Columbus Circle Active Short-Term Fund
--------------------------------------------
Part B
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Item Heading
---- -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12 General Information and Cover Page
History
13. Investment Objective and Investment Objective, Policies and
Policies Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Other Information
Principal Holders of
Securities
16. Investment Advisory and Management of the Trust;
Other Services Distribution of Trust Shares
17. Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices
18. Capital Stock and Other Other Information
Securities
19. Purchase, Redemption and Distribution of Trust Shares; Other
Pricing of Securities Being Information
Offered
20. Tax Status Taxes
21. Underwriters Distribution of Trust Shares
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<PAGE>
22. Calculation of Performance Other Information
Data
23. Financial Statements Not Applicable
-3-
<PAGE>
Part C
------
The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement
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<PAGE>
LOGO
PIMCO Funds
- -----------
Multi-Manager Series
Columbus Circle Investors
PIMCO Active Short-Term Fund
Prospectus
December __, 1997
PIMCO Funds: Multi-Manager Series
Prospectus
December __, 1997
<PAGE>
PIMCO Funds: Multi-Manager Series (the "Trust") is an open-end management
investment company ("mutual fund"). The Trust is designed to provide access to
the professional investment management services offered by PIMCO Advisors L.P.
("PIMCO Advisors") and the Fund's Portfolio Managers. The Active Short-Term
Fund (the "Fund") is a newly organized, open-end, diversified management
investment company organized as a series of the Trust. The Fund's investment
objective is current income to the extent consistent with preservation of
capital and liquidity. The Fund seeks to achieve its objective by investing in
a portfolio of short-term fixed income instruments. While the Fund intends to
invest in short-term securities, it is not a money market fund.
This Prospectus describes two classes of shares offered by the Fund: the
"Institutional Class" and the "Administrative Class." 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 Fund). Shares of the Administrative Class are offered
primarily through employee benefit plan alliances, broker-dealers and other
intermediaries, and the Fund's Administrative Class shares are subject to
service and/or distribution fees paid to such entities for services they provide
to shareholders of that class. Institutional Class and Administrative Class
shares of the Fund are offered for sale at the relevant next determined net
asset value for each class with no sales charge. Shares of the Fund are offered
without a sales charge at net asset value. The net asset value will be set
initially at $10 per share, and will thereafter vary with the value of the
Fund's investments. Although the Fund intends to manage its portfolio to
maintain relatively low volatility of principal, there can be no assurance that
this result can be achieved. Investments in the Fund are neither insured nor
guaranteed by the U.S. Government.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. It should be read and retained for
ready reference to information about the Fund.
Information about the investment objective of the Fund, along with a detailed
description of the types of securities in which the Fund may invest, and of
investment policies and restrictions applicable to the Fund, are set forth in
this Prospectus. There can be no assurance that the investment objective of the
Fund will be achieved. Because the market value of the Fund's investments will
change, the investment returns and net asset value per share of the Fund will
vary.
A Statement of Additional Information, dated December __, 1997 (the "SAI"), as
amended or supplemented from time to time, containing additional and more
detailed information about the Fund, has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference into this
Prospectus. It is available without charge and may be obtained by writing or
calling:
PIMCO Funds Distribution Company
2187 Atlantic Street
Stamford, CT 06902
Telephone: (203) 353-5393
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state
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<PAGE>
securities commission passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
-3-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION................................................ 5
INVESTMENT OBJECTIVE AND POLICIES.................................. 6
GENERAL POLICIES................................................... 8
CHARACTERISTICS AND RISKS OF SECURITIES
AND INVESTMENT TECHNIQUES..................................... 11
MANAGEMENT OF THE TRUST............................................ 25
HOW TO BUY SHARES.................................................. 28
CONVERSION OF CAT ACTIVE SHORT-TERM FUND........................... 29
HOW TO REDEEM...................................................... 29
NET ASSET VALUE.................................................... 32
DIVIDENDS.......................................................... 32
TAXES.............................................................. 32
OTHER INFORMATION.................................................. 33
APPENDIX ADESCRIPTION OF DURATION............................. 1
</TABLE>
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<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses (Institutional and Administrative Class):
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Advisory Administrative Service/ Total
Fee Fee 12b-1 Fee Expenses
--- --- --------- --------
<S> <C> <C> <C> <C>
Institutional Class Shares 0.20% 0.20% 0.0% 0.40%
Administrative Class Shares 0.20% 0.20% 0.25% 0.65%
</TABLE>
For a more detailed discussion of the Fund's fees and expenses, see "Fund
Administrator," "Advisory and Administrative Fees," and "Service Fees" under the
caption "Management of the Trust."
Example of Fund Expenses:
An investor would pay the following expenses on a $1,000 investment
assuming (1) a hypothetical 5% annual return and (2) redemption at the end of
each time period:
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Institutional Class Shares $4 $13
Administrative Class Shares [to come] [to come]
</TABLE>
The above tables are provided to assist investors in understanding the
various expenses which may be borne directly or indirectly in connection with an
investment in the Fund. This Example should not be considered a representation
of past or future expenses or performance. Actual expenses may be higher or
lower than those shown.
-5-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to achieve its objective of current income to the extent
consistent with preservation of capital and liquidity through investment in the
different types of securities described below. The Fund is designed to generate
returns equal to or better than that of the Merrill Lynch 91 Day Treasury Bill
Index over a full interest rate cycle.
The Fund invests in a variety of securities (including "money market"
instruments) rated B or better by at least one major rating agency or unrated
but considered by the Fund's adviser or portfolio manager to be a comparable
quality. Under normal conditions, no more than 15% of the assets of the Fund
will be invested in securities rated below investment grade or unrated and
determined by the Fund's adviser or portfolio manager to be of comparable
quality, and no more than 20% of the Fund's assets will be invested in
securities that do not carry a rating from at least one nationally recognized
statistical rating organization (NRSRO).
The instruments in which the Fund may invest include:
. Prime commercial paper and master demand notes.
. Short-term U.S. Government Securities. "U.S. Government Securities"
are securities that are issued or guaranteed by the United States
Government or its agencies, authorities or instrumentalities. Some are
backed by the full faith and credit of the U.S. Treasury (e.g.,
Treasury Bills and obligations of the Government National Mortgage
Association (GNMA) and obligations of the Small Business
Administration) while others are not backed by the full faith and
credit of the U.S. Government, but instead are backed only by the
credit instrumentality, or by the discretionary authority of the U.S.
Government to purchase the issuing entity's obligations. Agencies or
instrumentalities whose obligations are not backed by the full faith
and credit of the U.S. Government include, among others, the Federal
Home Loan Mortgage Corporation (FHLMC), Federal Home Loan Banks, the
Federal National Mortgage Association (FNMA), the Tennessee Valley
Authority and the Bank for Cooperatives.
. Short-term securities issued or guaranteed by any state or political
subdivision thereof within the United States, or any agency, authority
or instrumentality of the foregoing.
. Short-term corporate debt securities.
. Short-term debt securities that are backed by pools of commercial or
consumer finance loans, residential loans or commercial property
loans.
. Certificates of deposit, bankers' acceptances and other bank
obligations (when and if such other bank obligations become available
in the future) issued by a bank having total assets of at least $2
billion as of the date of the bank's most recently published financial
statements. In addition to the foregoing, the Fund may also invest in
certificates of deposit of $100,000 or less of domestic banks and
savings and loan
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<PAGE>
associations, regardless of total assets, if the certificates of
deposit are fully insured as to principal by the Federal Deposit
Insurance Corporation. If the principal amount of a certificate of
deposit plus accrued interest exceeds $100,000, then the excess will
not be so insured.
The Fund may invest up to 25% of its assets in obligations issued by
banks. If the bank is a domestic bank, it must be a member of the Federal
Deposit Insurance Corporation. This does not prevent the Fund from
investing in obligations issued by foreign branches of domestic banks. If
the bank is foreign, the obligation must be issued by a domestic branch or
domestic subsidiary and the obligation must, in the opinion of the Fund's
adviser or portfolio manager, be of a quality comparable to the other debt
securities which may be purchased by the Fund. There are special risks
associated with investments in such foreign bank obligations, including the
risks associated with foreign political, economic and legal developments
(see below) and the fact that foreign banks may not be subject to
regulatory requirements the same as or similar to those that apply to
domestic banks.
. Short-term fixed income securities issued or guaranteed by foreign
governments and their agencies, including governments of developing
countries.
. Short-term fixed income securities issued or guaranteed by
supranational entities such as The Industrial Bank for Reconstruction
and Development, the Asian Development Bank, and others.
. Structured variable rate notes which provide for full payment at
maturity.
. Other fixed income and money market instruments.
The Fund may invest some or all of its assets in any of the foregoing
instruments, depending upon its adviser or portfolio manager's view of market
and broader economic conditions.
Firm Commitments
The Fund may purchase any of the foregoing instruments through firm
commitment arrangements with domestic commercial banks and registered broker-
dealers and may enter into repurchase agreements with domestic commercial banks
and registered broker-dealers with respect to any securities that are
permissible investments for the Fund. The Fund will enter into firm commitment
arrangements and repurchase agreements only with banks and broker-dealers which
the Fund's adviser or portfolio manager determines present minimal credit risks.
Rule 144A Securities
The Fund may invest in Rule 144A securities. These are privately offered
securities that can be resold only to certain qualified institutional buyers.
Rule 144A securities are treated as illiquid, unless the Fund's adviser or
portfolio manager has determined, under guidelines established by the Fund's
trustees, that the particular issue of Rule 144A securities is liquid.
-7-
<PAGE>
Loan Participations
The Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a borrower and one or more financial
institutions ("Lenders"). The Fund may invest in such Loans in the form of
participations in Loans ("Participations"). Participations typically will
result in the Fund having a contractual relationship only with the Lender, not
with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund will be subject to credit risk relating to both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of the
Lender selling a Participation, the Fund may be treated as a general creditor of
the Lender and may not benefit from any set-off between the Lender and the
borrower. The Fund may have difficulty disposing of Participations. Because
the market for such instruments is not highly liquid, the Fund anticipates that
such instruments could be sold only to a limited number of institutional
investors. The lack of a highly liquid secondary market may have an adverse
impact on the value of such instruments and will have an adverse impact on the
Fund's ability to dispose of particular Participations in response to a specific
economic event, such as deterioration in the creditworthiness of the borrower.
Foreign Securities
The Fund may invest in foreign securities, whether traded on U.S. or
foreign exchanges, which may be subject to risks of foreign political, economic
and legal developments. These investments are also considered to be riskier
than U.S. investments because there may not be as much publicly available
information about the issuers. Those issuers may also have different auditing
and financial reporting standards and their securities may be less liquid and
more volatile than comparable U.S. securities. The Fund will invest in these
securities only when the Fund's adviser or portfolio manager believes the risks
are minimal.
GENERAL POLICIES
Repurchase Agreements
The Fund may enter into repurchase agreements with banks and broker-dealers
for the purpose of achieving income. These are agreements by which the Fund
acquires a portfolio eligible security (such as a U.S. Government Security) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed upon price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market interest rate unrelated to
the coupon rate on the purchased security. Repurchase agreements will provide
that the value of the underlying security will always be greater than or equal
to the repurchase price. Such transactions afford an opportunity for the Fund
to earn a return on temporarily available cash at no market risk, although there
is a risk that the seller may default on its obligation to pay the agreed-upon
sum on the redelivery date. Such a default
-8-
<PAGE>
may subject the Fund to expenses, delays and risks of loss. While the
underlying security in a repurchase agreement transaction may have a much longer
maturity, the repurchase agreements themselves usually run for less than 7 days,
and the Fund will not enter into a repurchase agreement if as a result more than
15% of the Fund's net assets would be invested in "illiquid securities." The
staff of the Securities and Exchange Commission is currently of the view that
repurchase agreements maturing in 7 days or more are illiquid securities. If
the counterparty agreeing to a repurchase agreement should default, as a result
of bankruptcy or otherwise, the Fund will seek to sell the securities which it
holds, which action could involve procedural costs or delays in addition to a
loss on the securities if their value should fall below their repurchase price.
Loans of Portfolio Securities
For the purposes of achieving income, the Fund may lend its portfolio
securities to broker-dealers and other financial institutions under contracts
calling for collateral in U.S. Government Securities, cash or cash equivalents
(negotiable certificates of deposit, bankers' acceptances or letters of credit)
at all times equal to at least the market value of the securities lent. The
Fund will continue to benefit from interest on the securities lent and will also
receive either interest, through investment of cash collateral in the Fund's
permissible investments, or lending fees, if the collateral is U.S. Government
Securities. The Fund may pay fees to the party arranging the loan. Any voting
rights, or rights to consent, relating to securities lent pass to the borrower.
However, if a material event affecting the investment occurs, such loans will be
called so that the securities may be voted by the Fund.
Maturities of Portfolio Securities
The Fund will be managed so that the dollar-weighted average maturity of
its portfolio will at no time exceed 3 years. All of the Fund's investments in
fixed rate securities and structured variable rate notes will, at the time of
investment, have remaining maturities of 3 years or less. Floating rate
instruments (for which the coupon resets every 6 months or less, off of a
standard short term rate benchmark) will individually have a maximum maturity of
5 years. Floating rate instruments that do not meet these criteria will be
treated similarly to fixed rate instruments above. Amortizing instruments will
be treated for these purposes as having a maturity equal to the average weighted
life of the investment. If as a result of changes in market conditions (such as
prepayments) the weighted average life of a security held by the Fund extends
beyond allowable limitations, the security will be sold within a reasonable time
period in consideration of general market conditions. When the Fund has
purchased a security subject to a repurchase agreement, the amount and maturity
of the investment will be determined by reference to the amount and term of the
repurchase agreement rather than those of the underlying security. In the case
of certain variable or floating rate instruments or instruments subject to
certain demand or put arrangements, the maturity of the instrument will be
determined by reference to the time remaining until the next readjustment of the
interest rate or until the principal amount can be recovered through exercise of
the demand or put right. The stated maturity of such securities may be greater
than 5 years.
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<PAGE>
Duration
Individual securities will be purchased with a maximum parallel effective
duration of 3 years from settlement date. Any holding that extends beyond this
limitation subsequent to purchase will be sold within a reasonable time period
in consideration of market conditions. The Fund will be managed so that the
average parallel effective duration of its portfolio will not exceed 1.5 years.
The Fund expects the average duration of its portfolio, over time, to be
approximately 0.75 years. Please refer to Appendix A to this Prospectus for
more information regarding duration.
The Fund also intends to maintain a "credit spread duration" not greater
than 3 years. Credit spread duration measures the portfolio's sensitivity to
changes in credit spreads, i.e., the differences in yields between issues of
different credit quality, in contrast to effective parallel duration, which
measures the portfolio's sensitivity for changes in the absolute levels of
interest rates. Credit spreads are typically much less volatile than absolute
levels of interest rates; thus, such a longer credit spread duration is
tolerable.
The Fund also intends to maintain a "mortgage spread duration" not greater
than 3 years. Mortgage spread duration is a similar concept to credit spread
duration, except that it applies to mortgage instruments: Mortgage spread
duration measures the portfolio's sensitivity to changes in mortgage spread,
i.e., the difference in yields between mortgage instruments of different credit
quality.
Diversification
With the exception of U.S. Government and agency securities, and repurchase
agreements thereon, 75% of the assets of the Fund will be invested such that no
single issuer's securities, or repurchase agreements collateralized thereby,
will account for more than 5% of the Fund's assets. The remaining 25% may be
invested in the securities of as few as one issuer. However, the Fund does not
foresee having more than 10% of its assets invested in any single issuer, other
than U.S. Government and agency securities and repurchase agreements thereon.
Liquidity
To maintain the Fund's liquidity, at least 20% of the Fund's assets will at
all times be maintained in securities maturing within 2 weeks. The Fund's
adviser or portfolio manager will continually monitor the Fund's net inflows and
outflows to determine whether a higher percentage is appropriate at any time.
Credit Risk
All investments of the Fund will be instruments that are rated at least B
or, if unrated, determined by the Fund's adviser or portfolio manager to be of
comparable quality. No more than 15% of the Fund's assets will be invested in
below investment grade securities (rated below Baa by Moody's Investors Service,
Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P")), and no more
than 20% of the Fund's assets will be invested in unrated securities.
Securities rated below investment grade may be referred to colloquially as "junk
bonds." Neither the adviser or portfolio manager's determination nor the
ratings assigned by rating agencies constitute an assurance
-10-
<PAGE>
against default by the issuers of instruments held by the Fund. For a
description of rating agency rating categories, see the SAI.
In determining whether a security is a suitable investment for the Fund,
reference will be made to the quality of the security, including its rating, at
the time of purchase. The Fund may or may not dispose of a portfolio security
as a result of a change in the security's rating, depending on an evaluation of
the security in light of the Fund's investment objective and policies.
Fundamental Policies
Except for any policy explicitly identified as "fundamental," the
investment objective and policies of the Fund described in this Prospectus may
be changed without shareholder approval. If there is a change in the Fund's
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
CHARACTERISTICS AND RISKS OF SECURITIES
AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities and
investment techniques used by the Fund, and discusses certain concepts relevant
to the investment policies of the Fund. Additional information about the Fund's
investments and investment practices may be found in the SAI.
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 Fund's shares. Some U.S. Government
Securities, such as Treasury bills, notes and bonds, and securities guaranteed
by 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 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 bonds, represented by such
receipts are debt obligations of the U.S. Treasury. Other zero coupon Treasury
securities (i.e., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
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<PAGE>
Bank Obligations
Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. The Fund will not invest
in fixed time deposits which (1) are not subject to prepayment or (2) provide
for withdrawal penalties upon prepayment (other than overnight deposits) if, in
the aggregate, more than 15% of its net assets would be invested in such
deposits, repurchase agreements maturing in more than seven days and other
illiquid assets. The Fund may also hold funds on deposit with its sub-custodian
bank in an interest-bearing account for temporary purposes.
The Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $2 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. The
Fund also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) regardless of total assets.
Obligations of foreign banks involve certain risks associated with
investing in foreign securities described under "Foreign Securities" below,
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.
Inflation-Indexed Bonds
The 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.
-12-
<PAGE>
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure. For further information, see the SAI.
Corporate Debt Securities
Corporate debt securities include corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate income-
producing securities may also include forms of preferred or preference stock.
The rate of interest on a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a reference rate. See
"Variable and Floating Rate Securities" below. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are rated below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Such securities are sometimes referred to as "junk
bonds," and may be subject to greater market fluctuations, less liquidity and
greater risk of loss of income or principal, including a greater possibility of
default or bankruptcy of the issuer of such securities, than are more highly
rated debt securities. Moody's also describes securities rated Baa as having
speculative characteristics. The Fund's adviser or portfolio manager seeks to
minimize these risks through diversification, in-depth credit analysis and
attention to current development in interest rates and market conditions.
Investments in high yield securities are discussed separately below; see "High
Yield Securities ("Junk Bonds")."
Preferred Stock
The Fund 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,
the Fund can receive a steady stream of dividends and still have the option to
convert it to common stock.
Convertible Securities
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature,
an opportunity to participate in capital appreciation resulting from a market
price advance in a convertible security's underlying common stock. The price of
a convertible security is influenced by the market value of the underlying
common stock and tends to increase as the market value of the underlying stock
rises, whereas it tends to decrease as the market value of the underlying stock
declines.
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Warrants to Purchase Securities
The Fund 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 the Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value.
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.
Unlike fixed income securities that pay a fixed rate of interest, variable
rate securities may allow the Fund to participate in increases in interest rates
through periodic adjustments of the rate payable on the securities. However, the
Fund will not benefit from increases in interest rates to the extent that market
rates of interest rise to the point where they cause the current interest rate
on the variable rate security to exceed the maximum allowable annual or lifetime
reset limits (or "cap rates") for the security. In this event, the value of the
variable rate securities held by the Fund will likely decrease. Also, the value
of variable rate securities held by the Fund could vary due to market interest
rate changes during interim periods between coupon reset dates for the variable
rate securities. During periods of falling market rates of interest, the coupon
rate on variable rate securities will also fall. As a result, variable rate
securities ordinarily offer significantly less potential for capital
appreciation than do securities that pay fixed rates of interest. Variable rate
securities that are collateralized by mortgages or other types of debt
obligations involve the risk of loss of principal if the obligors of the
underlying obligations default in payment of the obligations. Historically,
variable rate mortgages have had a higher default rate than fixed rate
mortgages.
The Fund 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 Treasury bill rate. The interest rate on a
floater resets periodically, typically every 6 months. While, because of the
interest rate reset feature, floaters provide the Fund with a certain degree of
protection against rises in interest rates, the Fund will participate in any
declines in interest rates as well.
The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security will generally exhibit greater
price volatility than a fixed rate obligation of similar credit quality.
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Mortgage-Related and Other Asset-Backed Securities
The Fund may invest up to all of its assets in mortgage- or asset-backed
securities. The value of some mortgage- or asset-backed securities in which the
Fund invest may be particularly sensitive to changes in prevailing interest
rates, and, like other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Fund's adviser or portfolio manager to forecast interest rates and other
economic factors correctly.
Asset-backed securities are certain pooled assets of an issuer which are
repackaged or "securitized" into collateralized securities and sold to
investors. The maturing asset-backed market, coupled with investors' search for
specific maturities and higher yields, has created a demand for increasing
complex securities. The types of asset-backed securities in which the Fund may
invest include credit card receivable securities, automobile loan securities and
collateralized mortgage obligations ("CMOs"). The Fund will not purchase so-
called "interest only" securities or CMOs backed by such securities. However,
the Fund may purchase "principal only" securities or CMOs backed by such
securities.
Mortgage Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property in
which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on some mortgage-related securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose the Fund to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, the value of the premium would be
lost in the event of prepayment. Like other fixed income securities, when
interest rates rise, the value of a mortgage-related security generally will
decline; however, when interest rates are declining, the value of mortgage-
related securities with prepayment features may not increase as much as other
fixed income securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage-related securities created by non-
governmental issuers (such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit, which may be issued by governmental entities, private insurers or the
mortgage poolers.
Collateralized Mortgage Obligations are hybrid mortgage-related
instruments. Similar to a bond, interest and pre-paid principal on a CMO are
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. CMOs are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including
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prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the preceding classes have been retired. CMOs that are issued or
guaranteed by the U.S. Government or by any of its agencies or instrumentalities
will be considered U.S. Government Securities by the Fund, while other CMOs,
even if collateralized by U.S. Government Securities, will have the same status
as other privately issued securities for purposes of applying the Fund's
diversification tests. The Fund may invest in subordinated CMO classes, which
are riskier than other CMOs.
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.
Reverse Repurchase Agreements, Dollar Rolls, and Other Borrowings
A reverse repurchase agreement is a form of leverage that involves the sale
of a security by the Fund and its agreement to repurchase the instrument at a
specified time and price. The Fund will maintain a segregated account consisting
of liquid assets, such as cash, U.S. Government Securities or other debt
obligations eligible for purchase by the Fund, to cover its obligations under
reverse repurchase agreements.
The Fund may enter into dollar rolls, in which the Fund sells mortgage-
backed or other securities for delivery in the current month and simultaneously
contracts to purchase substantially similar securities on a specified future
date. In the case of dollar rolls involving mortgage-backed securities, the
mortgage-backed securities that are purchased will be of the same type and will
have the same interest rate as those sold, but will be supported by different
pools of mortgages. The Fund forgoes principal and interest paid during the
roll period on the securities sold in a dollar roll, but the Fund is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Fund also could be compensated through the receipt of fee
income equivalent to a lower forward price. The Fund will maintain a segregated
account consisting of liquid assets, such as cash, U.S. Government Securities or
other debt obligations eligible for purchase by the Fund, to cover its
obligations under dollar rolls.
Dollar rolls and reverse repurchase agreements will be subject to the
Fund's limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings), to 33 1/3% of the Fund's total assets.
Apart from transactions involving reverse repurchase agreements, dollar rolls
and securities lending, the Fund will not borrow money, except for temporary
administrative or emergency purposes.
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Delayed Delivery, When-Issued, and Forward Commitment Transactions
The Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment 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 7 days in the future, or after
a period longer than the customary settlement period for that type of security.
When such purchases are outstanding, the Fund will set aside and maintain until
the settlement date in a segregated account liquid assets, such as cash, U.S.
Government Securities or other debt obligations eligible for purchase by the
Fund, in an amount sufficient to meet its settlement obligations. Typically, no
income accrues on securities the Fund has committed to purchase prior to the
time delivery of the securities is made, although the Fund may earn income on
securities it has deposited in a segregated account. When purchasing a security
on a when-issued, delayed delivery or forward commitment basis, the Fund assumes
the rights and risks of ownership of the security, including the risk of price
and yield fluctuations, and takes such fluctuations into account when
determining its net asset value. Because the Fund is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Fund's other investments. If the Fund remains substantially
fully invested at a time when delayed delivery, when-issued or forward
commitment purchases are outstanding, the purchases may result in a form of
leverage. When the Fund has sold a security on a delayed delivery, when-issued
or forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to a deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or could suffer a loss. The Fund may dispose of or renegotiate
a transaction after it is entered into, and may sell when-issued or forward
commitment securities before they are delivered, which may result in a capital
gain or loss. There is no percentage limitation on the extent to which the Fund
may purchase or sell securities on a delayed delivery, when-issued or forward
commitment basis.
Foreign Securities
The Fund may invest directly in fixed income securities of non-U.S.
issuers, including foreign governments. These issuers may be located in
developing countries, or they may be governments of developing countries. They
may be traded on U.S. exchanges or foreign exchanges. Investing in the
securities of issuers in any foreign country involves special risks and
considerations not typically associated with investing in U.S. companies.
Shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
These risks include: differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio transactions;
the possibility of nationalization, 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); and political
instability which could affect U.S. investments in foreign countries.
Additionally, 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. Additional risks associated with an investment in foreign securities
may include higher custodial fees than apply to domestic custodial arrangements
and transaction costs of foreign currency conversions. Changes in foreign
exchange rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
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The Fund may invest in Brady Bonds. Brady Bonds are securities created
through the exchange of existing commercial bank loans to sovereign entities for
new obligations in connection with debt restructurings under a debt
restructuring plan introduced by former U.S. Secretary of the Treasury Nicholas
F. Brady. This plan was developed in large part to avoid potential defaults and
cure actual defaults on indebtedness by a number of the sovereign entities
participating in the plan. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Fund will not be subject to restructuring arrangements or to
requests for a new credit, which may cause the Fund to suffer a loss of interest
or principal on any of its holdings. For further information, see the SAI.
Foreign Currency Transactions
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, by currency controls
or by political developments in the U.S. or abroad. Currencies in which the
Fund's assets are denominated may be devalued against the U.S. dollar, resulting
in a loss to the Fund.
The Fund may buy and sell foreign currencies on a spot and forward basis 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 contract, the Fund
"locks in" the exchange rate between the currency it will deliver and the
currency it will receive from the duration of the contract. As a result, the
Fund reduces its exposure to changes in the value of the currency it will
deliver and increases its exposure to changes in the value of the currency it
will exchange into. The effect on the value of the Fund is similar to selling
securities denominated in one currency and purchasing securities denominated in
another. Contracts to sell foreign currency would limit any potential gain
which might be realized by a Fund if the value of the hedged currency increases.
The Fund may enter into these contracts only for the purpose of hedging against
foreign exchange risk arising from the Fund's investment or anticipated
investment in securities denominated on foreign currencies. The Fund may use
one currency (or a basket of currencies) to hedge against adverse changes in the
value of another currency (or a basket of currencies) when exchange rates
between the two currencies are positively correlated.
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The Fund may invest for hedging purposes in options on foreign currencies
and foreign currency futures and options thereon. The Fund also may invest in
foreign currency exchange-related securities, such as foreign currency warrants
or other instruments whose return is linked to foreign currency exchange rates.
The Fund will hedge at least 75% of its exposure to foreign currency. For a
description of these instruments, see "Derivative Instruments" below and the
SAI.
High Yield Securities ("Junk Bonds")
The Fund may invest up to 15% of its assets in fixed income securities
rated lower than Baa by Moody's or lower than BBB by S&P but rated at least B by
Moody's or S&P (or, if not rated, determined by the Fund's adviser or portfolio
manager to be of comparable quality). Securities rated lower than Baa by
Moody's or lower than BBB by S&P are sometimes referred to as "junk bonds."
Securities rated Baa are considered by Moody's to have some speculative
characteristics. Investors should consider the following risks associated with
high yield securities before investing in the Fund.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Fund to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield
securities defaults, the Fund may incur additional expenses to seek recovery.
In the case of high yield securities structured as zero coupon or payment-in-
kind securities, the market prices of such securities are affected to a greater
extent by interest rate changes, and therefore tend to be more volatile than
securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause larger fluctuations
in the daily net asset value of the Fund's shares. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last rated.
The Fund's adviser or portfolio manager does not rely solely on credit ratings
when selecting securities for the Fund, and
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develops its own independent analysis of issuer credit quality. If a credit
rating agency changes the rating of a portfolio security held by the Fund, the
Fund may retain the portfolio security if the Fund's adviser or portfolio
manager deems it in the best interest of shareholders.
Short Sales
The Fund may from time to time effect short sales as part of its overall
portfolio management strategies, including the use of derivative instruments, or
to offset potential declines in value of long positions in similar securities as
those sold short. A short sale (other than a short sale against the box) is a
transaction in which the Fund sells a security it does not own at the time of
the sale in anticipation that the market price of that security will decline.
To the extent that the Fund engages in short sales, it must (except in the case
of short sales "against the box") maintain asset coverage in the form of assets
determined to be liquid by the Fund's adviser or portfolio manager, in
accordance with procedures established by the Trustees, in a segregated account,
or otherwise cover its position in a permissible manner. A short sale is
"against the box" to the extent that the Fund contemporaneously owns, or has the
right to obtain at no added cost, securities identical to those sold short.
Derivative Instruments
The Fund may purchase and write call and put options on securities,
securities indexes and foreign currencies, and enter into futures contracts and
use options on futures contracts, as further described below. The Fund also may
enter into swap agreements with respect to foreign currencies, interest rates
and securities indexes. The Fund may use these techniques only to hedge against
changes in interest rates, foreign currency exchange rates or securities prices.
The Fund will maintain segregated accounts consisting of liquid assets, such as
cash, U.S. Government Securities or other debt obligations eligible for purchase
by the Fund (or, as permitted by applicable regulation, enter into certain
offsetting positions), to cover its obligations under options, futures and swaps
to avoid leveraging of the Fund.
The Fund considers derivative instruments to consist of securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, and not to include those securities whose payment of
principal and/or interest depend upon cash flows from underlying assets, such as
mortgage- or asset-backed securities. The Fund may invest up to all of its
assets in derivative instruments, subject only to the Fund's investment
objective and policies. The value of some derivative instruments in which the
Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Fund's adviser or portfolio manager to forecast interest rates and other
economic factors correctly. If the Fund's adviser or portfolio manager
incorrectly forecasts such factors and has taken positions in derivative
instruments contrary to prevailing market trends, the Fund could be exposed to
the risk of loss.
The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If the Fund's
adviser or portfolio manager incorrectly forecasts interest rates, market values
or other economic factors in utilizing a derivatives strategy for the Fund, the
Fund might have been in a better position if it had not entered into the
transaction at all. The use of these strategies involves certain special risks,
including a possible imperfect correlation, or
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even no correlation, between price movements of derivative instruments and price
movements of related investments. While some strategies involving derivative
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain or even result in losses by offsetting favorable price movements in
related investments, or due to the possible inability of the Fund to purchase or
sell a portfolio security at a time that otherwise would be favorable for it to
do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, because the Fund is required to maintain asset coverage or
offsetting positions in connection with transactions in derivative instruments,
and the possible inability of the Fund to close out or to liquidate its
derivatives positions.
Options on Securities, Securities and Commodities Indexes, and Currencies.
The Fund may purchase put options on securities and indexes. One purpose of
purchasing put options is to protect holdings in an underlying or related
security against a substantial decline in market value. The Fund may also
purchase call options on securities and indexes. One purpose of purchasing call
options is to protect against substantial increases in prices of securities the
Fund intends to purchase pending its ability to invest in such securities in an
orderly manner. An option on a security (or index) is a contract that gives the
holder of the option, in return for a premium, the right to buy from (in the
case of a call) or sell to (in the case of a put) the writer of the option the
security underlying the 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 specified
facets of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.
The Fund may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. The Fund may write a call or put option
only if the option is "covered" by the Fund's holding a position in the
underlying securities or by other means which would permit immediate
satisfaction of the Fund's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series.
The Fund may write covered straddles consisting of a combination of a call
and a put written on the same underlying security. A straddle will be covered
when sufficient assets are deposited to meet the Fund's immediate obligations.
The Fund may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise price
of the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing
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purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Fund is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price (in the case of a put), or remains less than or equal to the
exercise price (in the case of a call), the Fund will lose its entire investment
in the option. Also, where a put or call option on a particular security is
purchased to hedge against price movements in a related security, the price of
the put or call option may move more or less than the price of the related
security. There can be no assurance that a liquid market will exist when the
Fund seeks to close out an option position. Furthermore, if trading restrictions
or suspensions are imposed on the option markets, the Fund may be unable to
close out a position.
The Fund may buy or sell put and call options on foreign currencies.
Currency options traded on U.S. or other exchanges may be subject to position
limits, which may limit the ability of the Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller and generally do not have as much market liquidity as exchange-traded
options. The Fund may be required to treat as illiquid over-the-counter options
purchased and securities being used to cover certain written over-the-counter
options.
Swap Agreements. The Fund may enter into interest rate, index and currency
exchange rate swap agreements. These transactions would be entered into in an
attempt to obtain a particular return when it is considered desirable to do so,
possibly at a lower cost to the Fund than if the Fund had invested directly in
the asset that yielded the desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Forms
of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or "floor"; and
interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). The Fund's current obligations under a swap agreement will be
accrued daily (offset against amounts owed to the Fund), and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of liquid assets such as cash,
U.S. Government Securities or other debt obligations eligible for purchase by
the Fund, to avoid any potential leveraging of the Fund's portfolio.
Obligations under swap agreements so covered will not be
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construed to be "senior securities" for purposes of the Fund's investment
restriction concerning senior securities. The Fund will not enter into a swap
agreement with any single party if the net amount owed or to be received under
existing contracts with that party would exceed 5% of the Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Fund's adviser or 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 7 days, swap
agreements may be considered to be illiquid investments. Moreover, the Fund
bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Fund will enter into swap agreements only with counterparties
that meet certain standards for creditworthiness (generally, such counterparties
would have to be eligible counterparties under the terms of the Fund's
repurchase agreement guidelines). Certain restrictions imposed on the Fund by
the Internal Revenue Code may limit the Fund's ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Fund may invest in
interest rate futures contracts and options thereon ("futures options"), and may
also invest in foreign currency futures contracts and options thereon.
There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on
both the hedged securities in the Fund and the hedging vehicle, so that the
portfolio return might have been greater had hedging not been attempted. There
can be no assurance that a liquid market will exist at a time when the Fund
seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position, and the Fund would remain obligated to meet margin
requirements until the position is closed.
The Fund may write covered straddles consisting of a call and a put written
on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Fund's immediate obligations. The
Fund may use the same liquid assets to cover both the call and put options where
the exercise price of the call and put are the same, or the exercise price of
the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."
The Fund will only enter into futures contracts or futures options which
are standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated
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quotation system. The Fund will use financial futures contracts and related
options only for "bona fide hedging" purposes, as such term is defined in
applicable regulations of the Commodity Futures Trading Commission, or, with
respect to positions in financial futures and related options that do not
qualify as "bona fide hedging" positions, will enter such positions only to the
extent that aggregate initial margin deposits plus premiums paid by it for open
futures option positions, less the amount by which any such positions are "in-
the-money," would not exceed 5% of the Fund's net assets.
Index Futures. The Fund may purchase futures contracts on various
securities indices ("Index Futures"). Index Futures may include futures on the
S&P 500 ("S&P 500 Index Futures") and on such other domestic stock indices and
foreign stock indices as the Fund's adviser or portfolio manager may deem
appropriate. The Fund may also purchase Index Futures on domestic and foreign
fixed income securities indices, including those which may trade outside the
United States.
An Index Future may call for "physical delivery" or be "cash settled". An
Index Future that calls for physical delivery is a contract to buy an integral
number of units of the particular securities index at a specified future date at
a price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While the Fund, when it purchases an Index Future
that calls for physical delivery, is obligated to pay the face amount on the
stated date, such an Index Future may be closed out on that date or any earlier
date by selling an Index Future with the same face amount and contract date.
This will terminate the Fund's position and the Fund will realize a profit or a
loss based on the difference between the cost of purchasing the original Index
Future and the price obtained from selling the closing Index Future. The amount
of the profit or loss is determined by the change in the value of the relevant
index while the Index Future was held.
Index Futures that are "cash settled" provide by their terms for settlement
on a net basis reflecting changes in the value of the underlying index. Thus,
the purchaser of such an Index Future is never obligated to pay the face amount
of the contract. The net payment obligation may in fact be very small in
relation to the face amount.
The use of Index Futures involves risk. See the SAI for a more detailed
discussion of the risks of the Fund's investment in futures and futures options.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within 7 days in the ordinary course of business at approximately
the amount at which the Fund has valued the securities. Illiquid securities are
considered to include, among other things, written over-the-counter options,
securities or other liquid assets being used as cover for such options,
repurchase agreements with maturities in excess of 7 days, certain loan
participation interests, fixed time deposits which are not subject to prepayment
or provide for withdrawal penalties upon prepayment (other than overnight
deposits), securities that are subject to legal or contractual restrictions on
resale (such as privately placed debt securities) and other securities whose
disposition is restricted under the federal securities laws (other than
securities issued pursuant to Rule 144A under the Securities Act of 1933 and
certain commercial paper that the Fund's adviser or portfolio manager has
determined to be liquid under procedures
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approved by the Trust's Board of Trustees). Transactions in illiquid securities
may involve relatively higher transaction costs.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are managed under the direction of the
Board of Trustees. Information about the Trustees and the Trust's executive
officers may be found in the Statement of Additional Information under the
heading "Management of the Trust."
Investment Adviser
PIMCO Advisors serves as investment adviser to the Fund pursuant to an
investment advisory agreement with the Trust. PIMCO Advisors is a Delaware
limited partnership organized in 1987. PIMCO Advisors provides investment
management and advisory services to private accounts of institutional and
individual clients and to mutual funds. Total assets under management by PIMCO
Advisors and its subsidiary partnerships as of ____________, 1997 were
approximately $____ billion. A portion of the units of the limited partner
interest in PIMCO Advisors is traded publicly on the New York Stock Exchange.
The general partner of PIMCO Advisors is PIMCO Partners, G.P. Pacific Mutual
Life Insurance Company and its affiliates hold a substantial interest in PIMCO
Advisors through direct or indirect ownership of units of PIMCO Advisors, and
indirectly hold a majority interest in PIMCO Partners, G.P., with the remainder
held indirectly by a group composed of the Managing Directors of Pacific
Investment Management. PIMCO Advisors is governed by an Operating Board and an
Equity Board, which exercise substantially all of the governance powers of the
general partner and serve as the functional equivalent of a board of directors.
Pacific Investment Management and the Managing Directors, because of their
ability to designate a majority of the Members of the Operating Board, could be
said to control PIMCO Advisors, although they disclaim such authority. PIMCO
Advisors' address is 800 Newport Center Drive, Suite 100, Newport Beach,
California 92660. PIMCO Advisors is registered as an investment adviser with the
SEC. PIMCO Advisors currently has six subsidiary partnerships: Blairlogie
Capital Management, Cadence Capital Management, Columbus Circle Investors, NFJ
Investment Group, Pacific Investment Management Company, and Parametric
Portfolio Associates.
Under the investment advisory agreement, PIMCO Advisors, subject to the
supervision of the Board of Trustees, is responsible for providing advice and
guidance with respect to the Fund and for managing, either directly or through
others selected by the Adviser, the investment of the Fund. PIMCO Advisors also
furnishes to the Board of Trustees periodic reports on the investment
performance of the Fund.
Portfolio Manager
Pursuant to a portfolio management agreement, PIMCO Advisors employs a
Portfolio Manager for the Fund. The Portfolio Manager is an affiliate of PIMCO
Advisors. PIMCO Advisors compensates the Portfolio Manager from its advisory fee
(not from the Trust). Under this agreement, the Portfolio Manager has full
investment discretion and makes all determinations with respect to the
investment of the Fund's assets and makes all determinations respecting the
purchase and sale of the Fund's securities and other investments.
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Columbus Circle Investors ("Columbus Circle") manages the Active Short-Term
Fund. Columbus Circle is an investment management firm organized as a general
partnership. Columbus Circle has two partners: PIMCO Advisors as the supervisory
partner, and Columbus Circle Investors Management, Inc. as the managing partner.
Columbus Circle Investors Division of Thomson Advisory Group L.P. ("TAG"), the
predecessor investment adviser to Columbus Circle, commenced operations in 1975.
Accounts managed by Columbus Circle had combined assets as of ___________, 1997
of approximately $____ billion. Columbus Circle's address is Metro Center, One
Station Place, 8th Floor, Stamford, Connecticut 06902. Columbus Circle is
registered as an investment adviser with the SEC. Investment decisions made by
Columbus Circle with respect to the Fund are generally made by a committee,
although Jacob Navon is primarily responsible for the day-to-day management of
the Fund. Mr. Navon, a Senior Vice President of Columbus Circle, has 13 years
of investment management experience. He received his bachelor's degree and MA
from Cambridge University and MBA from Harvard Business School.
Registration as an investment adviser with the SEC does not involve
supervision by the SEC over investment advice. The portfolio management
agreement is not exclusive, and Columbus Circle may provide, and currently is
providing, investment management services to other clients, including other
investment companies.
Fund Administrator
PIMCO Advisors also serves as administrator (the "Administrator") to the
Fund pursuant to an administration agreement with the Trust. The Administrator
provides or procures administrative services for the Fund, which include
clerical help and accounting, bookkeeping, internal audit services and certain
other services required by the Fund, and preparation of reports to the Fund's
shareholders and regulatory filings. The Administrator has retained Pacific
Investment Management Company, a sub-partnership of PIMCO Advisors, to provide
such services as sub-administrator. The Administrator and/or the sub-
administrator may also retain other affiliates to provide certain of these
services. In addition, the Administrator, at its own expense, arranges for the
provision of legal, audit, custody, transfer agency (including sub-transfer
agency and other administrative services) and other services necessary for the
ordinary operation of the Fund, and is responsible for the costs of registration
of the Trust's shares and the printing of prospectuses and shareholder reports
for current shareholders.
The Fund (and not the Administrator) are 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 Company, or their
subsidiaries or affiliates; (ii) taxes and governmental fees; (iii) brokerage
fees and commissions and other portfolio transaction expenses; (iv) the costs of
borrowing money, including interest expenses; (v) fees and expenses of the
Trustees who are not "interested persons" of the Adviser, 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 principles; and (viii) any expenses allocated or allocable
to a specific class of shares, which include service fees payable with respect
to the Administrative Class shares, and may include certain other expenses as
permitted by the Trust's Multiple Class Plan adopted pursuant to Rule 18f-3
under the Investment Company Act of 1940 (the "1940 Act"), subject to review and
approval by the Trustees.
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Advisory and Administrative Fees
The Fund features fixed advisory and administrative fees. Under an
Investment Advisory Contract between the Trust and Columbus Circle, the Fund
pays Columbus Circle a monthly advisory fee at an annual rate of 0.20% of its
average daily net asset value attributable to each class. For providing or
procuring administrative services to the Fund as described above, the
Administrator receives monthly fees from the Fund at an annual rate of 0.20% of
the average daily net assets of each class of the Fund.
The investment advisory, administration, and sub-administration agreements
for the Fund may be terminated by the Trustees, PIMCO Advisors or Pacific
Investment Management Company (as the case may be) on 60 days' written notice.
Following their initial terms, the agreements will continue from year to year if
approved by the Trustees.
Pursuant to a portfolio management agreement between the Adviser and the
Portfolio Manager, PIMCO Advisors (not the Trust) pays the Portfolio Manager a
fee of 0.10% of the average daily net assets of each class of the Fund.
Service and Distribution Fees
The Trust has adopted an Administrative Services Plan and a Distribution
Plan (the "Plan") with respect to the Administrative Class shares of the Fund.
Under the terms of each Plan, the Trust is permitted to reimburse, out of the
Administrative Class assets of the 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 services in connection with the distribution of shares or
administration of plans or programs that use Fund shares as their funding
medium, and to reimburse certain other distribution-related expenses. Total
reimbursements under the Plans may be paid in an amount up to 0.25% on an annual
basis of the average daily net assets attributable to the Administrative Class
shares of the Fund. The same entity may not receive both distribution and
administrative services fees with respect to the same assets but may with
respect to separate assets receive fees under each Plan. Fees paid pursuant to
either Plan may be paid for shareholder services and the maintenance of
accounts, and therefore may constitute "service fees" for purposes of applicable
rules of the National Association of Securities Dealers, Inc. Each Plan has been
adopted in accordance with the requirements of Rule 12b-1 under the 1940 Act and
will be administered in accordance with the provisions of that rule, except that
shareholders will not have the voting rights set forth in Rule 12b-1 with
respect to the Administrative Services Plan that they will have with respect to
the Distribution Plan. For more complete disclosure regarding the Plans and its
terms, see the Statement of Additional Information.
Institutional Class shares of the Trust may also be offered through certain
brokers and financial intermediaries ("service agents") that have established a
shareholder servicing relationship with the Trust on behalf of their customers.
The Trust pays no compensation to such entities. Service agents may impose
additional or different conditions on the purchase or redemption of Fund shares
by their customers and may charge their customers transaction or other account
fees on the purchase and redemption of Fund shares. Each service agent is
responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding purchases
and redemptions. Shareholders who are customers of service agents should consult
their service agent for information regarding these fees and conditions. The
adviser may pay up to [$___] or [__%] to brokers and other
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financial intermediaries in connection with sales of shares of the Fund to third
parties. Any such amounts paid will be paid by the adviser and not by the Fund.
Distributor
Shares of the Fund are distributed through PIMCO Funds Distribution Company
(the "Distributor"), a wholly owned subsidiary of PIMCO Advisors. The
Distributor, which is located at 2187 Atlantic Street, Stamford, Connecticut
06902, is a broker-dealer registered with the SEC.
HOW TO BUY SHARES
Shares of the Fund are continuously offered through PIMCO Funds
Distribution Company (the "Distributor"), the Fund's principal underwriter.
Shares of the Fund are offered for sale at the net asset value next determined
after receipt by the Fund of an order in proper form. There is no sales charge
to the investor. You may purchase shares by mailing an Account Application with
payment, as described below, to the Distributor.
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 their customers' investments in the Fund). Shares of the
Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers, and other intermediaries, and the Fund pays service
and/or distribution fees to such entities for services they provide to
shareholders of that class.
The minimum initial investment is $100,000 and the minimum additional
investment is $10,000. To open an account, an investor should complete the
Account Application, which can be obtained by calling (203) 353-5393 or by
writing to PIMCO Funds Distribution Company at 2187 Atlantic Street, Stamford,
CT 06902, Attn.: Active Short-Term Fund. All shareholders will receive from
the Distributor individual confirmations of each purchase, redemption, dividend
reinvestment or transfer of Fund shares, including the total number of Fund
shares owned as of the confirmation date. Information regarding investment or
any other features offered by the Fund may be obtained by calling (203) 353-
5393.
Purchases by Mail. Investors may send a check payable to Active Short-Term Fund
along with a completed Account Application to:
PIMCO Funds Distribution Company
2187 Atlantic Street
Stamford, CT 06902
Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any bank that is a
member of the Federal Reserve System can normally be converted into federal
funds within two business days after receipt of the check. Checks drawn on a
non-member bank may take up to 15 days to convert into federal funds.
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Subsequent Purchases by Mail. Subsequent purchases can be made as indicated
above by mailing a check with a letter specifying the amount of the investment
and the shareholder's name and account number. All payments should be made
payable to Active Short-Term Fund. Checks should be mailed to the address above
under "Purchases by Mail."
Changes in Account Registration. Changes in registration information or account
privileges may be made by writing to the Fund's transfer agent, Shareholder
Services, Inc. (the "Transfer Agent"), at P.O. Box 5866, Denver, CO 80217, or by
use of forms which are available from the Distributor. A signature guarantee is
required. See "Signature Guarantee" under "How to Redeem."
All Purchases
A purchase order does not become effective until the custodian has federal
funds immediately available to it, whether by direct wire or conversion of other
forms of payment, prior to the close of regular trading on the New York Stock
Exchange on days the Exchange is open (generally, weekdays other than normal
holidays). Orders received in good order by the Fund or its agents prior to the
close of regular trading on the Exchange (normally 4:00 p.m.) Eastern time) will
be executed at the net asset value calculated at the close of regular trading on
that day and begin to earn dividends on the next day. The Distributor will
promptly forward orders received by it for shares of the Fund. The Fund and the
Distributor reserve the right to reject any purchase order for any reason.
The Adviser may pay up to [$___] or [__%] to brokers and other financial
intermediaries in connection with sales of shares of the Fund to third parties.
Any such amounts paid will be paid by the Adviser and not by the Fund.
CONVERSION OF CAT ACTIVE SHORT-TERM FUND
It is expected that on or about the date of this Prospectus, pursuant to an
Agreement and Plan of Reorganization (the"Plan"), all of the assets and
liabilities of the Active Short-Term Fund of the Cash Accumulation Trust ("CAT
Active Short-Term Fund") will be transferred to the Fund. Shareholders of the
CAT Active Short-Term Fund will receive the same number of Institutional shares
in the Fund as they hold shares in the CAT Active Short-Term Fund at the time of
the reorganization.
HOW TO REDEEM
Shareholders may withdraw all or any portion of their investments in the
Fund by redeeming shares at the Fund's net asset value next determined after the
withdrawal order is received. Shareholders may redeem shares of the Fund, with
24 hours advance notice, on any day that the New York Stock Exchange is open for
business.
You may redeem shares from your account (1) by submitting a written
redemption request directly to the Fund, or (2) by telephone redemption (unless
you have elected in writing not to utilize this option). Your original Account
Application permits you to redeem by written request and to elect or reject
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telephone redemption procedures. You may change the instructions indicated on
your original Account Application, or may request additional redemption options,
only by transmitting written directions to the Fund. Requests to institute or
change any of the additional redemption procedures will require a signature
guarantee. Redemption proceeds will normally be mailed to the redeeming
shareholder within one business day after receipt by the Fund of the redemption
request in good order, except where those shares have recently been purchased by
personal check.
Written Requests. To redeem shares in writing, send the following items to
PIMCO Funds Distribution Company, 2187 Atlantic Street, Stamford, CT 06902,
Attn.: Active Short-Term Fund: (1) a written request for redemption signed by
all registered owners exactly as the account is registered on the Transfer
Agent's records, including fiduciary titles, if any, and specifying the account
number, the dollar amount or number of shares to be redeemed and the name of the
Fund; and (2) any additional documents which may be required by the Fund for
redemption by corporations, partnerships or other organizations, executors,
administrators, trustees, custodians or guardians, or if the redemption is
requested by anyone other than the shareholder(s) of record. Transfers of
shares are subject to the same requirements. A signature guarantee is not
required for redemptions requested by and payable to all shareholders of record
for the account, to be sent to the address of record for that account. To avoid
delay in redemption or transfer, shareholders having any questions about these
requirements should call (203) 353-5393 or contact the Fund in writing or before
submitting a request. Redemption or transfer requests will not be honored until
all required documents in the proper form have been received by the Fund.
Telephone Redemptions. The Fund accepts telephone requests for redemption
from shareholders. The proceeds of a telephone redemption will be sent to the
shareholder at his address as set forth in the Account Application or in a
subsequent written authorization with a signature guarantee. By completing an
Account Application, an investor agrees that the Fund shall not be liable for
any loss incurred by the investor by reason of the Fund accepting unauthorized
telephone redemption requests for his account if the Fund reasonably believes
the request is genuine, unless the investor has specifically elected in writing
not to utilize the telephone redemption service. Thus, shareholders risk
possible losses in the event of a telephone redemption not authorized by them.
The Fund will employ reasonably procedures to confirm that shareholders'
telephone instructions are genuine, and, if it does not, it may be liable for
any losses due to unauthorized or fraudulent instructions. The Fund will
require a form of personal identification prior to acting upon telephone
instructions, will provide written confirmations of such transactions and will
record shareholders' instructions.
A shareholder making a telephone redemption should call (203) 353-5393 and
state (i) the name of the shareholder as it appears on the Transfer Agent's
records, (ii) his account number with the Fund, (iii) the amount to be withdrawn
and (iv) the name of the person requesting the redemption. Usually the proceeds
are sent to the investor on the next Fund business day after the redemption is
effected. If the redemption request is received after the closing of the
Exchange, the redemption is effected on the following Fund business day at that
day's net asset value and the proceeds are usually sent to the investor on the
second Fund business day following receipt of the request. The Fund reserves
the right to terminate or modify the telephone redemption service at any time.
During times of severe disruptions in the securities markets, the volume of
calls may make it difficult to redeem by telephone, in which case a shareholder
may wish to send a written request for redemption as described under "Written
Requests" above. Telephone communications may be recorded by the Distributor or
the Transfer Agent.
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Expedited Wire Transfer Redemptions. If the shareholder has given
authorization for expedited wire redemptions, shares can be redeemed and the
proceeds sent by wire transfer to a single previously designated bank account.
Requests received by the Fund prior to the close of regular trading on the New
York Stock Exchange will result in shares being redeemed that day at the net
asset value next determined and normally the proceeds being sent to the
designated bank account the following business day. The bank must be a member
of the Federal Reserve wire system. Delivery of the proceeds of a wire
redemption request may be delayed by the Fund for up to 7 days if the
Distributor deems it appropriate under then current market conditions. Once
authorization is on file, the Fund will honor requests by any person by
telephone at (203) 353-5393 or by written instructions. The Fund cannot be
responsible for the efficiency of the Federal Reserve wire system or the
shareholder's bank. The Fund does not currently charge for wire transfers. The
shareholder is responsible for any charges imposed by the shareholder's bank.
The minimum amount that may be wired is $25,000. The Fund reserves the right to
change this minimum or to terminate the wire redemption privilege at any time.
Shares purchased by check may not be redeemed by wire transfer until such shares
have been owned (i.e., paid for) for at least 15 days. Expedited wire transfer
redemptions may be authorized by completing a form available from the
Distributor. To change the name of the single designated bank account to
receive wire redemption proceeds, it is necessary to send a written request with
signature(s) guaranteed to Shareholder Services, Inc., P.O. Box 5866, Denver, CO
80217.
All Redemptions
If investors purchase shares with a check, the Fund may withhold redemption
proceeds until it can be reasonably assured that payment has been collected on
the check, which may take 15 or more days. To avoid such withholding, investors
should purchase shares by certified or official bank check or by wire transfer.
Dividends are paid through the day on which the shares are redeemed.
There is no charge by the Distributor with respect to redemptions.
Requests for redemption received by the Distributor by the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) on a
regular business day, will be effected at the net asset value effective at the
close of regular trading on the Exchange on that day. Requests received by the
Distributor after the close of regular trading on the Exchange will be confirmed
at the net asset value effective at the close of regular trading on the next
business day.
Signature Guarantee
When a signature guarantee is called for, the shareholder should have
"Signature Guaranteed" stamped under his signature and guaranteed by any of the
following entities: U.S. banks, foreign banks having U.S. correspondent banks,
credit unions, savings associations, U.S. registered dealers and brokers,
municipal securities dealers and brokers, Government Securities dealers and
brokers, national securities exchanges, registered securities associations and
clearing agencies (each an "Eligible Guarantor Institution"). The Transfer
Agent reserves the right to reject any signature guarantee pursuant to its
written signature guarantee standards or procedures, which may be revised in the
future to permit it to reject signature guarantees from Eligible Guarantor
Institutions that do not, based on credit guidelines, satisfy such written
standards or procedures.
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If the proceeds of the redemption (i) are to be paid to a person other than
the record owner(s), (ii) are to be sent other than to the account record
owner's address as listed in the Transfer Agent's records, the signature(s) on
the redemption request must be guaranteed as described above. The Fund may
change the signature guarantee requirements from time to time upon notice to
shareholders, which may be given by means of a new Prospectus or prospectus
supplement.
Small Accounts
The Fund reserves the right to redeem involuntarily any shares in a
shareholder's account in excess of an amount set from time to time by the
Trustees of the Trust and to redeem involuntarily all shares in a shareholder's
account if the dollar value of such account is less than a minimum amount (not
to exceed $50,000) set from time to time by the Trustees. Shareholders will be
notified before any such redemptions are made and will have at least 30 days to
purchase shares in order to bring their account up to the required minimum.
NET ASSET VALUE
Normally, the Fund will value its portfolio securities which mature in 60
days or less by using the "amortized cost" method of valuation, whereas other
portfolio securities will be valued based on current market quotations or, in
the absence of market quotations, by other means approved by the trustees of the
Trust. The use of amortized cost means that the net asset value of the Fund's
shares will be less affected by minor shifts in the market value of its shorter
term portfolio securities, even though the market value of such securities may
change as a result of variations in the level of prevailing interest rates and
yield relationships. The Fund will value its shares once on each day the New
York Stock Exchange is open, as of the close of regular trading on the Exchange.
DIVIDENDS
The Fund declares daily dividends of all of the net investment income of
the Fund and expects to pay shareholders on the third Thursday of the month such
dividends as are declared through the date of payment. If all of an investor's
shares of the Fund are redeemed at any time during a month, all dividends
accrued to date for the Fund will be paid together with the redemption proceeds.
Shareholders begin earning dividends on the day after the Fund receives federal
funds as payment for the shares and will continue to earn dividends through the
day on which shares are redeemed. Dividends of the Fund are paid in additional
shares of the Fund, based on its net asset value on the payment date.
TAXES
The Fund plans to distribute substantially all of its net investment income
and net short-term capital gains, if any, to its shareholders on a current basis
and substantially all of its net long-term capital gains, if any, at least
annually. So long as it does so and otherwise satisfies the requirements for
being taxed as a regulated investment company, the Fund itself does not pay
federal income tax on the amount distributed. Shareholders will receive an
annual statement detailing federal tax information about dividends and
distributions paid to shareholders during or with respect to the preceding
calendar year.
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Dividends of net interest or other ordinary income of the Fund and
distributions of its short-term capital gains, if any, are taxable to
shareholders as ordinary income for federal income tax purposes and will not
qualify for the dividends-received deduction. Distributions paid from long-term
capital gains, if any, are taxable to shareholders as long-term capital gains
regardless of how long the shareholders have held their shares and will not
qualify for the dividends-received deduction.
To avoid imposition of a non-deductible federal excise tax, the Fund will
distribute prior to calendar year-end substantially all of its ordinary income
on a calendar year basis, and substantially all of the capital gain net income
the Fund realizes in the one-year period ending October 31, that has not
previously been distributed.
Distributions will be taxable as described above whether received in cash
or in additional shares. A dividend paid to a shareholder by the Fund in
January of a year generally is deemed to have been paid by the Fund on December
31 of the preceding year, if the dividend was declared and payable to
shareholders of record on a date in October, November or December of that
preceding year.
The Fund does not expect distributions to be exempt generally from state
and local taxes, although in some states dividends attributable to interest paid
on U.S. Government Securities held by the Fund may be exempt from state and
local taxes. Shareholders should consult with their tax advisers about the
status of such dividends in their own states and localities.
The foregoing is only a general summary of the federal income tax
consequences of investing in the Fund. Shareholders should consult with their
own tax advisers to determine the specific tax consequences of investments in
the Fund in light of their particular situations.
OTHER INFORMATION
Capitalization
The Trust was organized as a Massachusetts business trust on August 24,
1990, and currently consists of __________ portfolios that are operational, one
of which is described in this Prospectus. The Fund was organized as a series of
the Trust on [October _, 1997.] Other portfolios may be offered by means of a
separate prospectus. The Board of Trustees may establish additional portfolios
in the future. The capitalization of the Trust consists of an unlimited number
of shares of beneficial interest. When issued, shares of the Trust are fully
paid, non-assessable and freely transferable.
Under Massachusetts law, shareholders could, under certain circumstances,
be held liable for the obligations of the Trust. However, the Second Amended and
Restated Agreement and Declaration of Trust (the "Declaration of Trust") of the
Trust disclaims shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Trust or the Trustees. The
Declaration of Trust also provides for indemnification out of the Fund's
property for all loss and expense of any shareholder of that Fund held liable on
account of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which such disclaimer is inoperative or the Fund of
-33-
<PAGE>
which he or she is or was a shareholder is unable to meet its obligations, and
thus should be considered remote.
Multiple Classes of Shares
Institutional and Administrative Class shares of the Fund represent
interests in the assets of the Fund, and each class has identical dividend,
liquidation and other rights and the same terms and conditions, except that
expenses related to the distribution and/or shareholder services of
Administrative Class shares are borne solely by such class, and each class may,
at the Trustees' discretion, also pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the management
of the Trust's assets, if these expenses are actually incurred in a different
amount by that class, or if the class receives services of a different kind or
to a different degree than the other classes. All other expenses are allocated
to each class on the basis of the net asset value of that class in relation to
the net asset value of the Fund.
Voting
Each class of shares of the Fund has 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. The Administrative Class shares
have exclusive voting rights with respect to matters pertaining to any
Distribution Plan applicable to that class. These shares are entitled to vote at
meetings of shareholders. Matters submitted to shareholder vote must be approved
by the 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 the Fund will vote
together, except with respect to a Distribution Plan applicable to a class of
shares or when a class vote is required as specified above or otherwise by the
1940 Act. Shares are freely transferable, are entitled to dividends as declared
by the Trustees and, in liquidation of the Trust, are entitled to receive the
net assets of their Fund, but not of the other Funds. The Trust does not
generally hold annual meetings of shareholders and will do so only when required
by law. Shareholders may remove Trustees from office by votes cast in person or
by proxy at a meeting of shareholders or by written consent. Such a meeting will
be called at the written request of the holders of 10% of the Trust's
outstanding shares.
As used in this Prospectus, the phrase "vote of a majority of the
outstanding shares" of the Fund (or the Trust) means the vote of the lesser of:
(1) 67% of the shares of the Fund (or the Trust) present at a meeting, if the
holders of more than 50% of the outstanding shares are present in person or by
proxy; or (2) more than 50% of the outstanding shares of the Fund (or the
Trust).
Performance Information
From time to time the Trust may make available certain information about
the performance of the Institutional Class and Administrative Class shares of
the Fund. Information about the Fund's performance is based on the Fund's record
to a recent date and is not intended to indicate future performance. Performance
information is computed separately for the Fund's Institutional Class and
Administrative Class shares in accordance with the formulas described below.
Because Administrative Class shares bear the
-34-
<PAGE>
expense of service and/or distribution fees, it is expected that, under normal
circumstances, the level of performance of the Fund's Administrative Class
shares will be lower than that of the Fund's Institutional Class shares.
The Fund may include the total return of Institutional Class and
Administrative Class shares in advertisements or other written material. When
the Fund advertises its total return with respect to its Institutional Class and
Administrative Class shares, it will be calculated for the past year, the past
five years, and the past ten years (or if the Fund has been offered for a period
shorter than one, five or ten years, that period will be substituted) since the
establishment of the Fund, as more fully described in the Statement of
Additional Information. Total return for each class is measured by comparing
the value of an investment in the Fund at the beginning of the relevant period
to the redemption value of the investment in the Fund at the end of the period
(assuming immediate reinvestment of any dividends or capital gains distributions
at net asset value). The Fund may advertise total return using alternative
methods that reflect all elements of return, but that may be adjusted to reflect
the cumulative impact of alternative fee and expense structures, such as the
currently effective advisory and administrative fees for the Fund.
Quotations of yield for the Fund or class will be based on the 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 will be computed by dividing net
investment income by the maximum public offering price per share on the last day
of the period.
The Trust also may provide current distribution information to its
shareholders in shareholder reports or other shareholder communications, or in
certain types of sales literature provided to prospective investors. Current
distribution information for a particular class of the Fund will be based on
distributions for a specified period (i.e., total dividends from net investment
income), divided by the relevant class net asset value per share on the last day
of the period and annualized. The rate of current distributions does not reflect
deductions for unrealized losses from transactions in derivative instruments
such as options and futures, which may reduce total return. Current distribution
rates differ from standardized yield rates in that they represent what a class
of the Fund has declared and paid to shareholders as of the end of a specified
period rather than the Fund's actual net investment income for that period.
The Adviser or the Portfolio Manager may also report to shareholders or to
the public in advertisements concerning its performance as adviser or manager to
clients other than the Fund, and on its comparative performance or standing 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 Fund, the Adviser or the
Portfolio Manager, should be considered in light of the Fund's investment
objectives and policies, characteristics and quality of the Fund, and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future.
Investment results of the Fund will fluctuate over time, and any
representation of the Fund's total return or yield for any prior period should
not be considered as a representation of what an investor's total return or
yield may be in any future period.
-35-
<PAGE>
APPENDIX A
DESCRIPTION OF DURATION
Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of "term to
maturity." Traditionally, a fixed income security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a fixed
income security provides its final payment, taking no account of the pattern of
the security's payments prior to maturity. In contrast, duration incorporates a
bond's yield, coupon interest payments, final maturity and call features into
one measure. Duration management is one of the fundamental tools used by the
Fund's adviser.
Duration is a measure of the expected life of a fixed income security
on a present value basis. Duration takes the length of the time intervals
between the present time and the time that the interest and principal payments
are scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being equal, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen a Fund's duration by
approximately the same amount that holding an equivalent amount of the
underlying securities would.
Short futures or put option positions have durations roughly equal to
the negative duration of the securities that underlie these positions, and have
the effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities of 10
or more years; however, their interest rate exposure corresponds to the
frequency of the coupon reset. Another example where the interest rate exposure
is not properly captured by duration is the case of mortgage pass-through
securities. The stated final maturity of such securities is generally 30 years,
but current prepayment rates are more critical in determining the securities'
interest rate exposure. Finally, the duration of a fixed income security may
vary over time in response to changes in interest rates and other market
factors. In these and other similar situations, the Fund's adviser or portfolio
manager will use more sophisticated analytical techniques that incorporate the
anticipated economic life of a security into the determination of its interest
rate exposure.
Credit spread duration is similar to duration, but measures price
sensitivity to a change in credit spreads, i.e. differences in yields between
issues of different credit quality. For example, a floating rate corporate
security with 10 years to maturity which resets every 90 days will have a
duration of 90 days, but a credit spread duration similar to a 10 year fixed
rate bond.
A-1
<PAGE>
Mortgage spread duration is similar to credit spread duration, except
that it applies to mortgage instruments: mortgage spread duration measures the
portfolio's sensitivity to mortgage spread changes, i.e. differences in yields
between mortgage instruments of different credit quality.
A-2
<PAGE>
LOGO
PIMCO Funds
- -----------
Multi-Manager Series
Investment Adviser
PIMCO Advisors L.P.
800 Newport Center Drive
Newport Beach, CA 92660
Administrator
PIMCO Advisors L.P.
800 Newport Center Drive
Newport Beach, CA 92660
Portfolio Manager
Columbus Circle Investors
One Station Place
Stamford, CT 06902
Distributor
PIMCO Funds Distribution Company
2187 Atlantic Street
Stamford, CT 06902
Transfer Agent
Shareholder Services, Inc.
P.O. Box 5866
Denver, CO 80217
Custodian
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
Accountants
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110
Prospectus
December __, 1997
<PAGE>
PIMCO ACTIVE SHORT-TERM FUND
STATEMENT OF ADDITIONAL INFORMATION
December __, 1997
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated December __,
1997 of the PIMCO Active Short-Term Fund, a series of PIMCO Funds: Multi-Manager
Series, as supplemented from time to time, and should be read in conjunction
therewith. A copy of the Prospectus may be obtained from PIMCO Funds, 840
Newport Center Drive, Suite 360, Newport Beach, California 92660.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.............................. 4
Repurchase Agreements.................................................... 4
Firm Commitments......................................................... 5
U.S. Government Securities............................................... 5
Inflation-Indexed Bonds.................................................. 5
Borrowing................................................................ 6
Preferred Stock.......................................................... 8
Corporate Debt Securities................................................ 8
High Yield Securities ("Junk Bonds")..................................... 9
Participation on Creditors Committees.................................... 10
Variable and Floating Rate Securities.................................... 10
Mortgage-Related and Asset-Backed Securities............................. 11
Foreign Securities....................................................... 17
High Yield/High Risk Foreign Sovereign Debt Securities................... 18
Commercial Paper......................................................... 19
Derivative Instruments................................................... 19
Forward Commitments, When-Issued and Delayed Delivery Transactions....... 25
Note on Shareholder Approval............................................. 26
Investment Restrictions.................................................. 26
CREDIT AND MARKET RISK....................................................... 28
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................... 29
MANAGEMENT OF THE TRUST...................................................... 30
Trustees................................................................. 30
Officers................................................................. 31
Trustees' Compensation................................................... 34
Investment Adviser....................................................... 34
Portfolio Management Agreement........................................... 35
Fund Administrator....................................................... 35
Custodial Arrangements................................................... 36
Accounting Services...................................................... 37
Independent Auditors..................................................... 37
DISTRIBUTION OF TRUST SHARES................................................. 37
Distributor and Multi-Class Plan......................................... 37
Distribution and Administrative Services Plans for Administrative Class
Shares.................................................................. 38
Purchases, Exchanges and Redemptions..................................... 39
</TABLE>
<PAGE>
<TABLE>
<S> <C>
OTHER INFORMATION............................................................ 40
Capitalization........................................................... 40
Performance Information.................................................. 40
Calculation of Yield..................................................... 40
Calculation of Total Return.............................................. 41
Determination of Net Income.............................................. 41
Valuing the Fund's Portfolio Investments................................. 41
TAXES........................................................................ 42
Distributions............................................................ 43
Sales of Shares.......................................................... 44
Backup Withholding....................................................... 44
Options, Futures, Forward Contracts and Swap Agreements.................. 44
Passive Foreign Investment Companies..................................... 45
Foreign Currency Transactions............................................ 46
Foreign Taxation......................................................... 46
Original Issue Discount.................................................. 47
Other Taxation........................................................... 48
REDEMPTIONS.................................................................. 49
DESCRIPTION OF INVESTMENTS................................................... 50
U.S. Government Securities............................................... 50
Obligations Backed by Full Faith and Credit of the U.S. Government.... 50
Other U.S. Government Securities...................................... 50
Money Market Instruments................................................. 50
Certificates of Deposit............................................... 50
Bankers' Acceptances.................................................. 50
Eurodollar Obligations................................................ 50
Yankeedollar Obligations.............................................. 50
Commercial Paper...................................................... 50
Master Demand Notes................................................... 50
Corporate Obligations................................................. 50
Repurchase Agreements................................................. 50
APPENDIX A................................................................. A-1
Long-Term Debt Ratings................................................. A-1
Short-Term Debt Ratings................................................ A-2
Short-Term Loan/Municipal Note Ratings................................. A-4
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The investment objective and policies of the PIMCO Active Short-Term Fund
(the "Fund") of PIMCO Funds: Multi-Manager Series (the "Trust") are summarized
on the front page of the Prospectus and in the text of the Prospectus following
the captions "Investment Objective and Policies" and "General Policies." For a
description of the investments which the Fund may make, see "Description of
Investments." For a description of the relevant rating categories established by
five major rating agencies, see Appendix A.
Columbus Circle Investors, the manager of the Fund ("CCI" or the
"Manager"), will monitor the Fund's investments in light of general economic and
market conditions and the creditworthiness of the issuers of the Fund's
portfolio securities, including the creditworthiness of issuers of master demand
notes insofar as it relates to the ability of the issuer to make payments on
demand. The Fund does not expect to invest more than 5% of its total assets in
master demand notes in the foreseeable future. As described in the Prospectus,
after purchase by the Fund, a security may cease to be rated, its rating may be
reduced below the minimum required for purchase by the Fund, or the security may
otherwise cease to be eligible for purchase by the Fund. No such event will
require the sale of such security by the Fund. However, the Manager or the
Trust's Trustees will consider any such event in determining whether the Fund
should continue to hold the security.
The Fund, consistent with its investment objective, attempts to maximize
yields by engaging in portfolio trading and by buying and selling portfolio
investments in anticipation of or in response to changing economic and money
market conditions and trends. The Fund also invests to take advantage of what
are believed to be temporary disparities in the yields of the different segments
of the high-grade money market or among particular instruments within the same
segment of the market. These policies may result in frequent changes in the
Fund's portfolio. See "Portfolio Transactions and Brokerage."
Repurchase Agreements
- ---------------------
As is disclosed in the text of the Prospectus following the caption
"General Policies -Repurchase Agreements," there is a risk that in a repurchase
agreement the seller may fail to repurchase the underlying security. In such
event, the Fund would attempt to dispose of the underlying security in the
market or would hold the underlying security until maturity. However, the Fund
may be subject to various delays and risks of loss in attempting to dispose of
the underlying security, including (a) possible declines in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto, (b) possible reduced levels of income and lack of access to income
during this period and (c) expenses involved in the enforcement of the Fund's
rights.
4
<PAGE>
Firm Commitments
- ----------------
As described in the text of the Prospectus following the caption
"Investment Objective and Policies," the Fund may enter into firm commitment
agreements with banks or broker-dealers for the purchase of securities at an
agreed-upon price on a specified future date. Such agreements might be entered
into, for example, when the Fund anticipates a decline in the yield of
securities of a given issuer and is able to obtain a more advantageous yield by
committing currently to purchase securities to be issued later.
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 Fund's 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 Bank, those of the Federal National Mortgage Association ("FNMA"), and
those of the Student Loan Marketing Association are not supported by the full
faith and credit of the U.S. Government, but 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 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 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%).
5
<PAGE>
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Fund may
also invest in other inflation-related bonds which may or may not provide a
similar guarantee. If 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 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. Lack of a
liquid market may impose the risk of higher transaction costs and the
possibility the Fund may be forced to liquidate positions when it would not be
advantageous to do so. There also can be no assurance that the U.S. Treasury
will issue any particular amount of 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,
the Fund may be permitted to borrow for temporary purposes and/or for investment
purposes. Such a practice will result in leveraging of the Fund's assets and
may cause the Fund to liquidate portfolio positions when it would not be
advantageous to do so. This borrowing may be unsecured. Provisions of the
Investment
6
<PAGE>
Company Act of 1940 (the "1940 Act") require the Fund to maintain continuous
asset coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) of 300% of the amount borrowed, with an exception for
borrowings not in excess of 5% of the Fund's total assets made for temporary
administrative purposes. Any borrowings for temporary administrative purposes
in excess of 5% of the Fund's total assets must maintain continuous asset
coverage. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing will tend to exaggerate
the effect on net asset value of any increase or decrease in the market value of
the Fund's portfolio. Money borrowed will be subject to interest costs which
may or may not be recovered by appreciation of the securities purchased. The
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
In addition to borrowing for temporary purposes, the Fund may enter into
reverse repurchase agreements if permitted to do so under its specific
limitations on borrowings. A reverse repurchase agreement involves the sale of
a portfolio-eligible security by the Fund, coupled with its agreement to
repurchase the instrument at a specified time and price. 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 Fund's limitations on borrowings as specified under "Investment
Restrictions" below.
7
<PAGE>
Preferred Stock
- ---------------
The Fund 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,
the Fund can receive a steady stream of dividends and still have the option to
convert it to common stock.
Corporate Debt Securities
- -------------------------
The Fund may invest in 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.
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 the Fund's
portfolio may be varied 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 security may be
sold and another of comparable quality and maturity (usually, but not always, of
a different issuer) purchased at approximately the same time to take advantage
of what are believed to be short-term differentials in values or yields.
The 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 Fund 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 the Fund is
called for redemption, the Fund
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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. The Fund generally would invest in convertible securities for their
favorable price characteristics and total return potential and would normally
not exercise an option to convert.
High Yield Securities ("Junk Bonds")
- ------------------------------------
The Fund may invest in debt/fixed income securities of domestic or foreign
issuers that meet minimum ratings criteria set forth for the Fund, or if
unrated, are of comparable quality in the opinion of the Fund's Manager. A
description of the ratings categories used is set forth in Appendix A to this
Statement of Additional Information.
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
Manager to be of comparable quality to obligations so rated.
The Fund may purchase high yield securities (as defined in the Prospectus).
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 and
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. The Fund may
continue to hold such securities following a decline in their rating if in the
opinion of the Manager it would be advantageous to do so. Investments in high
yield securities that are eligible for purchase by the Fund 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 the Fund's investment objective may,
to the extent of its investments in high yield securities, depend more heavily
on the 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
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<PAGE>
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
Fund 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 Fund 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 Fund. 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. 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.
See Appendix A to this Statement of Additional Information for further
information regarding high yield/high risk securities.
Participation on Creditors Committees
- -------------------------------------
The Fund may from time to time participate on committees formed by
creditors to negotiate with the management of financially troubled issuers of
securities held by the Fund. Such participation may subject the Fund to
expenses such as legal fees and may make the Fund an "insider" of the issuer for
purposes of the federal securities laws, and therefore may restrict 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 the Fund on such
committees also may expose the Fund to potential liabilities under the federal
bankruptcy laws or other laws governing the rights of creditors and debtors.
The Fund would participate on such committees only when the Manager believes
that such participation is necessary or desirable to enforce the Fund's rights
as a creditor or to protect the value of securities held by the Fund.
Variable and Floating Rate Securities
- -------------------------------------
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters"). 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.
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Because of the interest rate reset feature, floaters provide the Fund with a
certain degree of protection against rises in interest rates. However, the Fund
would generally participate less in appreciation resulting from any general
decline in interest rates.
The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security will generally exhibit greater
price volatility than a fixed rate obligation of similar credit quality.
The values of inverse floating obligations are generally more volatile, and
the market for inverse floating obligations is generally more illiquid, than
those of many other securities. In addition, because coupon rates of interest
on inverse floating obligations vary inversely with changes in market rates of
interest, interest income earned by the Fund and dividends paid by the Fund may
be more volatile than if the Fund invested solely in fixed-rate securities.
Because inverse floating obligations represent a relatively recent innovation in
the securities market, there is a lack of historical data concerning the
attributes of such securities under all market conditions. Often, inverse
floating obligations are created by selling two complementary interests in a
single, previously issued fixed-rate security: a floating rate obligation and
the inverse floating obligation. In other cases, the issuer will itself issue
directly the two complementary obligations. To seek to limit the interest rate
risk of these securities, the Fund may purchase inverse floating obligations
with shorter-term maturities or which contain limitations on the extent to which
the interest rate may vary.
Inverse floating obligations have the effect of providing a degree of
investment leverage since they will generally increase or decrease in value in
response to changes in market interest rates at a rate which is a multiple of
the rate at which fixed-rate securities of comparable maturity and credit
quality increase or decrease in response to such changes. The Manager believes
that inverse floating obligations represent flexible portfolio management
instruments for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market conditions.
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 GNMA)
are described as "modified pass-through."
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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 the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA, a wholly owned U.S. Government corporation within the Department of
Housing and Urban Development, 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 servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees, and the creditworthiness of the issuers thereof, will
be considered in determining whether a mortgage-related security meets the
Fund's investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Fund may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the originator/servicers and poolers, the 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.
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<PAGE>
The Fund will not purchase mortgage-related securities or any other assets which
in the Manager's opinion are illiquid if, as a result, more than 15% of the
value of the Fund's total assets will be illiquid.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Fund's
industry concentration restrictions, 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 Fund takes 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. 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 therefore partially guarded (but only partially) 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 begins to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal
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<PAGE>
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-Related Securities. The Fund may invest in commercial
mortgage-related securities. Commercial mortgage-related securities are
securities that represent an interest in, or are secured by, mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, and senior
living centers. The commercial mortgage-related securities market is newer and
in terms of total outstanding principal amount of issues is relatively small
compared to the total size of the market for residential mortgage-related
securities.
Commercial mortgage-related securities are generally structured similarly
to pass-through securities or to CMOs, although other structures are possible.
They may pay fixed or adjustable rates of interest. Commercial mortgage-related
securities have been issued in public or private transactions by a variety of
public and private issuers.
The commercial mortgage loans that underlie commercial mortgage-related
securities have certain distinct risk characteristics. Commercial mortgage
loans generally lack standardized terms, which may complicate their structure.
Commercial properties themselves tend to be unique and are more difficult to
value than single family residential properties. Commercial mortgage loans also
tend to have shorter maturities than residential mortgage loans, and may not be
fully amortizing, meaning that they may have a significant principal balance, or
"balloon" payments, due on maturity. Assets underlying commercial mortgage-
related securities may relate only to a few properties or a single property.
The risk involved in single property financings is highly concentrated. In
addition, commercial properties, particularly industrial and warehouse
properties, are subject to environmental risks and the burdens and costs of
compliance with environmental laws and regulations. At the same time,
commercial mortgage-related securities may have a lower prepayment risk than
residential mortgage-related securities, because commercial mortgage loans
generally prohibit or impose penalties on prepayments of principal. In
addition, commercial mortgage-related securities often are structured with some
form of credit enhancement to protect against potential losses on the underlying
mortgage loans. See "Credit Enhancement" below.
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<PAGE>
Credit Enhancement. Mortgage-related securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying mortgages to make
payments, such securities may contain elements of credit support. Such credit
support falls into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, designed to ensure that the receipt
of payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default is designed to ensure ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through subordination of other debt, guarantees,
insurance policies, or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information with respect to the level of
credit risk associated with the underlying assets. There can be no assurance
that credit support will be sufficient to ensure the timely payment of principal
and/or interest. Delinquencies or losses in excess of those anticipated could
adversely affect the return on investment in such security.
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
interest only class of stripped mortgage-backed securities. See "Other Mortgage-
Related Securities--Stripped Mortgage-Backed Securities." In addition, if a
series of a CMO includes a class that bears interest at an adjustable rate, the
yield to maturity on the related CMO residual will also be extremely sensitive
to changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances the Fund may fail to recoup some or all of its initial
investment in a CMO residual.
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<PAGE>
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to the Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. 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 the Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Fund's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Manager expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables/SM/
("CARS/SM/"). CARS/SM/ represent undivided fractional interests in a trust
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS/SM/ are passed through monthly to
certificate holders, and are generally 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
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<PAGE>
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with the Fund's investment objectives and policies, the Manager
also may invest in other types of asset-backed securities.
Foreign Securities
- ------------------
The Fund 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.
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 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 Fund 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.
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By entering into a forward foreign currency exchange contract, the fund "locks
in" the exchange rate between the currency it will deliver and the currency it
will receive for the duration of the contract. As a result, the Fund reduces
its exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will exchange
into. Contracts to sell foreign currencies would limit any potential gain which
might be realized by the Fund if the value of the hedged currency increases.
The Fund may enter into these contracts for the purpose of hedging against
foreign exchange risks arising from the Fund's investment or anticipated
investment in securities denominated in foreign currencies. Such hedging
transactions may not be successful and may eliminate any chance for the Fund to
benefit from favorable fluctuations in relevant foreign currencies. In addition,
the Fund may buy and sell foreign currency futures contracts and options on
foreign currencies and foreign currency futures.
The Fund 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 it does so, the Fund will be subject to the additional risk that the
relative value of currencies will be different than anticipated by the Fund's
Manager. The Fund may use one currency (or a basket of currencies) to hedge
against adverse changes in the value of another currency (or a basket of
currencies) when exchange rates between the two currencies are positively
correlated. The Fund may be required to segregate assets to cover forward
currency contracts entered into for non-hedging purposes. The Fund 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.
High Yield/High Risk Foreign Sovereign Debt Securities
- ------------------------------------------------------
The Fund may invest in the sovereign debt of foreign countries which have
issued or have announced plans to issue Brady Bonds, and expect that a
substantial portion of their investments in sovereign debt securities may
consist of Brady Bonds. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by then U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund (the "IMF"). The
Brady Plan framework, as it has developed, contemplates the exchange of
commercial bank debt for newly issued bonds (Brady Bonds). Brady Bonds may also
be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and/or the IMF support
the restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank or the IMF, debtor nations have been required to agree to
the implementation of certain domestic monetary and fiscal reforms. Such
reforms have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should recognize that the
Brady Plan only sets forth general guiding principles for economic reform and
debt reduction, emphasizing that solutions must be negotiated on a case-by-case
basis between debtor nations and their creditors. Investors should recognize
that Brady Bonds have been issued only recently, and accordingly do not have a
long payment history.
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Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt, which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the Fund may purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Brady Bonds issued to date have traded at a
deep discounts from their face value. Certain Brady Bonds have been
collateralized as to principal due at maturity (typically 30 years from the date
of issuance) by U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of such Brady Bonds, although the collateral is not available to
investors until the final maturity of such Brady Bonds, although the collateral
is not available to investors until the final maturity of the Brady Bonds.
Collateral purchases are financed by the IMF, the World Bank and the debtor
nations' reserves. In addition, interest payments on certain types of Brady
Bonds may be collateralized by cash or high-grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
The Fund may purchase Brady Bonds with no or limited collaterization, and will
be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the Brady Bonds issued to date are purchased and sold in secondary markets
through U.S. securities dealers and other financial institutions and are
generally maintained through European transnational securities depositories.
Commercial Paper
- ----------------
The Fund 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 Fund consists of U.S. dollar-denominated obligations of domestic issuers,
or, 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 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.
Derivative Instruments
- ----------------------
The following describes certain derivative instruments and products in
which the Fund may invest (to the extent described in the Prospectus) and the
risks associated therewith.
Options on Securities and Securities or Commodities Indexes. The Fund may,
to the extent specified in the Prospectus, 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,
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<PAGE>
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.)
The Fund will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or other liquid assets
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 liquid assets 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 liquid assets in a
segregated account with its custodian. A put option on a security or an index
is "covered" if the Fund maintains liquid assets 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 liquid assets in a segregated account with its
custodian.
If an option written by the Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the market
value of a put or a call option include supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or
index, and the time remaining until the expiration date.
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<PAGE>
The premium paid for a put or call option purchased by the Fund is an asset
of the Fund. The premium received for an option written by the Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
OTC Options. The Fund 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 Fund will at all times have the
right to repurchase the option written by it from the dealer at a specified
formula price. The Fund 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.
It is the present policy of the Fund not to enter into any OTC option
transaction if, as a result, more than 15% of the Fund's net assets would be
invested in (i) OTC options purchased by the Fund, (ii) the illiquid portion
(determined under the foregoing formula) of OTC options written by the Fund, and
(iii) other illiquid investments as set forth below under the heading
"Investment Restrictions."
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 the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security or other cover
unless the option expired without exercise. As the writer of a covered call
option, the Fund forgoes, during the option's life, the opportunity to profit
from increases in the market value of the security covering the call option
above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the Fund is
covered by an option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may be mitigated by
changes in the value of the Fund's securities during the period the option was
outstanding.
Foreign Currency Options. The Fund 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 the Fund to reduce
21
<PAGE>
foreign currency risk using such options. Over-the-counter options differ from
traded options in that they are two-party contracts with price and other terms
negotiated between buyer and seller, and generally do not have as much market
liquidity as exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectuses. An interest rate, foreign currency or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument, foreign
currency or the cash value of an index at a specified price and time. A futures
contract on an index is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the difference between the value
of the index at the close of the last trading day of the contract and the price
at which the index contract was originally written. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of these securities is made. A public market exists in
futures contracts covering a number of indexes as well as financial instruments
and foreign currencies, including: the S&P 500; the S&P Midcap 400; the Nikkei
225; the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA
Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank
certificates of deposit; Eurodollar certificates of deposit; the Australian
dollar; the Canadian dollar; the British pound; the German mark; the Japanese
yen; the French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the European Currency Unit ("ECU"). It is
expected that other futures contracts will be developed and traded in the
future.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
The Fund 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 opposite is true.
The Fund will only enter into futures contracts and futures options which
are standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or 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 the Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets ("initial margin"). The margin required for a
futures contract is set by the exchange on which the contract is traded and may
be modified during the term of the contract. Margin requirements on foreign
exchanges may be different than U.S. exchanges. The initial margin is in the
nature of a performance bond or good faith deposit on the futures contract which
is returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Fund expects to earn interest
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<PAGE>
income on its initial margin deposits. A futures contract held by the Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a borrowing
or loan by the Fund but is instead a settlement between the Fund and the broker
of the amount one would owe the other if the futures contract expired. In
computing daily net asset value, the Fund will mark to market its open futures
positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Limitations on Use of Futures and Futures Options. In general, the Fund
intends 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, the Fund
will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's net assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may
"cover" its position by purchasing a put option on the same futures contract
with a strike price as high or higher than the price of the contract held by the
Fund.
When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).
When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets 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, in the case of an index futures contract, 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.
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<PAGE>
When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets 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 the Fund may enter into futures, futures options
or forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. 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, the 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. To compensate for imperfect correlations, the 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, the 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.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or a futures option position, and the Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, 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
24
<PAGE>
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 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 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 the
relevant investments or instruments.
Most swap agreements entered into by the Fund calculate the obligations of
the parties to the agreement on a "net basis." Consequently, the Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid (or received) under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). The Fund's current obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Fund) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account. Obligations under swap agreements so covered will not be
construed to be "senior securities" for purposes of the Fund's investment
restriction concerning senior securities. The Fund will not enter into a swap
agreement with any single party if the net amount owed or to be received under
existing contracts with that party would exceed 5% of the Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the 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, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Fund will enter
into swap agreements only with counterparties that meet certain standards of
creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Fund by the Internal Revenue Code may limit
the Fund's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
the Fund's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Forward Commitments, When-Issued and Delayed Delivery Transactions
- ------------------------------------------------------------------
The 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
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<PAGE>
are outstanding, the Fund will set aside and maintain assets until the
settlement date in a segregated account, 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 the 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 the Fund is not required to pay for the security until the delivery
date, these risks are in addition to the risks associated with the Fund's other
investments. If the Fund remains substantially fully invested at a time when
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. The 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 Fund may purchase or sell securities on a delayed delivery basis.
The 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 segregated
account, assets 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. The Fund may also 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. The Fund may dispose
of a commitment prior to settlement and may realize short-term profits or losses
upon such disposition.
Note on Shareholder Approval
- ----------------------------
The Prospectus describes the investment objective of the Fund. The
Prospectus also identifies some of the policies of the Fund which are
fundamental and may be changed only with the approval of the shareholders.
Unless otherwise indicated, the objective and investment policies of the Fund
are not fundamental and may be changed without shareholder approval. Approval
by the shareholders of the Fund requires approval by the holders of a majority
of the outstanding shares of the Fund. As used in this Statement of Additional
Information, the term "majority of the outstanding shares" of the Fund means the
lesser of (i) 67% of the shares of the Fund represented at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the outstanding shares of the Fund.
Investment Restrictions
- -----------------------
The investment restrictions set forth below are fundamental policies of the
Fund and, accordingly, without the approval of the holders of a majority of the
outstanding shares of the Fund, the Fund will not:
26
<PAGE>
(1) With respect to 75% of its total assets, purchase any security if, as
a result, more than 5% of its total assets (based on current value) would then
be invested in the securities of a single issuer. This limitation does not apply
to Government securities (as defined in the 1940 Act).
(2) With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer.
(3) Invest more than 25% of its total assets in any one industry. This
restriction does not apply to U.S. Government Securities. For purposes of this
restriction, telephone, gas and electric public utilities are each regarded as
separate industries and finance companies whose financing activities are related
primarily to the activities of their parent companies are classified in the
industry of their parents. For purposes of this restriction with regard to bank
obligations, bank obligations are considered to be one industry, and asset-
backed securities are not considered to be bank obligations.
(4) Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Fund may obtain short-term credits as
necessary for the clearance of security transactions, and the Fund may make any
short sales or maintain any short positions where the short sales or short
positions would not constitute "senior securities" under the 1940 Act.
(5) Borrow money except for temporary or emergency purposes; provided,
however, that the Fund may loan its securities, engage in reverse repurchase
agreements and dollar rolls, in an amount not exceeding 33 1/3% of its total
assets taken at cost.
(6) Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies. This
restriction does not apply to repurchase agreements or loans of portfolio
securities.
(7) Act as an underwriter of securities of other issuers except that, in
the disposition of portfolio securities, it may be deemed to be an underwriter
under the federal securities laws.
(8) Purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, securities which are secured by interests in
real estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein.
(9) Purchase or sell commodities or commodity contracts, except that the
fund may purchase and sell financial futures contracts and options and may enter
into foreign exchange contracts and other financial transactions not involving
physical commodities.
(10) Issue senior securities, except for permitted borrowings or as
otherwise permitted under the 1940 Act.
The percentages and percentage limitations set forth above or in the
Prospectus, other than with respect to restriction (5) pertaining to borrowing,
will apply at the time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of a purchase of such security. Restrictions (4) and (10) shall be
interpreted based upon
27
<PAGE>
no-action letters and other pronouncements of the staff of the Securities and
Exchange Commission. Under current pronouncements, certain Fund positions are
excluded from the definition of "senior security" so long as the Fund maintains
adequate cover, segregation of assets or otherwise.
In addition, it is contrary to the Fund's present policy, which may be
changed without shareholder vote, to purchase any illiquid security, including
any securities whose disposition is restricted under federal securities laws and
securities that are not readily marketable, if, as a result, more than 15% of
the Fund's total assets (based on current value) would then be invested in such
securities. The staff of the Securities and Exchange Commission is presently of
the view that repurchase agreements maturing in more than seven days are subject
to this restriction. Until that position is revised, modified or rescinded, the
Fund will conduct its operations in a manner consistent with this view. This
limitation on investment in illiquid securities does not apply to certain
restricted securities, including securities issued pursuant to Rule 144A under
the Securities Act of 1933 and certain commercial paper, that the Manager has
determined to be liquid under procedures approved by the Board of Trustees.
CREDIT AND MARKET RISK
The portfolio securities of the Fund are subject to credit risk and market
risk. Credit risk relates to the ability of the issuer of an obligation to make
timely payments of principal and interest. In a repurchase agreement
transaction, credit risk relates to the performance by the other party of its
obligation to repurchase the underlying security from the Fund. Obligations of
issuers 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.
Market risk relates to changes in the market value of a security as a
result of variations in the level of prevailing interest rates and yield
relationships among particular segments of the fixed income market or the U.S.
Government Securities market. Generally, prices tend to fluctuate less for
higher quality issues than for lower quality issues, and, for any given change
in the level of interest rates, prices for shorter maturity issues tend to
fluctuate less than for longer maturity issues. By restricting the maturity of
its investments and purchasing only high-quality instruments, the Fund seeks
relatively smaller changes in the value of its portfolio securities resulting
from market factors than would be the case for a longer term or lower grade bond
fund.
The value of the securities (other than inverse floaters) in the Fund's
portfolio can be expected to vary inversely to the changes in prevailing
interest rates. Thus, if interest rates increase after a security is purchased,
that security, if sold, might be sold at less than cost. Conversely, if
interest rates decline after purchase, the security, if sold, might be sold at a
profit. In either instance, if the security were held to maturity, no gain or
loss would normally be realized as a result of these fluctuations. Substantial
redemptions of shares of the Fund could require the sale of portfolio
investments in the Fund at a time when a sale might not be desirable.
28
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
In general, the Fund will purchase securities with the expectation of
holding them to maturity. However, the Fund may engage in short-term trading to
attempt to take advantage of short-term market variations. The Fund may also
sell securities prior to maturity to meet redemptions or as a result of a
revised management evaluation of the issuer. The Fund will have a high
portfolio turnover due to the short maturities of the securities held in its
portfolio.
In placing orders for the purchase and sale of portfolio securities
for the Fund, the Manager will always seek the best price and execution. It is
expected that portfolio transactions will generally be with issuers or dealers
in money market instruments acting as principal. Purchases from underwriters
will include a commission or concession paid by the issuer to the underwriter,
and purchases from dealers will include the spread between the bid and asked
price. Accordingly, the Fund is not expected to pay significant brokerage
commissions.
Some of the Fund's portfolio transactions are placed with dealers who
provide the Manager with supplementary investment and statistical information or
furnish market quotations to the Fund or other advisory accounts or investment
companies advised by the Manager. The business would not be so placed if the
Fund would not thereby obtain the best price and execution. Although it is not
possible to assign an exact dollar value to these services, they may, to the
extent used, tend to reduce the expenses of the Manager. The services may also
be used by the Manager in connection with its other advisory accounts and in
some cases may not be used with respect to the Fund.
Certain officers of the Manager have responsibility for portfolio
management of certain other investment companies and investment accounts which
may invest in securities in which the Fund also invests. When one or more of
these other investment companies or accounts and the Fund desire to purchase or
sell the same security at or about the same time, purchase and sale orders will
ordinarily be placed and confirmed separately but may be combined to the extent
practicable on a pro rata basis in proportion to the amounts desired to be
purchased or sold for each. It is believed that the ability of the Fund to
participate in larger volume transactions will in some cases produce better
executions for the Fund. However, in some cases, these procedures could have a
detrimental effect on the price and amount of a security available to the Fund
or the price at which a security may be sold.
29
<PAGE>
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. Messrs.
Cannon, Carter, Childress, Light, Prindiville, Segall, Stooks and Thorne are
Trustees of PIMCO Advisors Funds ("PAF") as of the date of this Statement of
Additional Information. These Trustees were elected to the Board of Trustees of
the Trust at a Shareholders' meeting held on December 20, 1996 in connection
with the reorganization of certain series of PAF with Funds of the Trust in a
transaction which took place on January 17, 1997. 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, PAF and Cash Accumulation Trust ("CAT");
2401 Claremont Lane Headmaster, St. John's School, Houston, Texas.
Houston, TX 77019 Formerly, General Partner, J.B. Poindexter & Co.,
Age 56 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, PAF and CAT; Formerly, Chairman,
434 Stable Lane Executive Vice President and Director, Cunningham
Lake Forest, IL 60045 & Walsh, Inc., Chicago (advertising agency).
Age 69
- --------------------------------------------------------------------------------
Gary A. Childress Trustee, PAF and CAT; Chairman and Director,
11 Longview Terrace Bellefonte Lime Company, Inc.; Chief Executive
Madison, CT 06443 Officer, Woodings & Verona Toolworks Inc. Mr.
Age 62 Childress is a partner in GenLime, L.P., a private
limited partnership, which has filed a petition in
bankruptcy within the last five years.
- --------------------------------------------------------------------------------
(*) William D. Cvengros Trustee, PAF and CAT; Chairman of the Board of the
800 Newport Center Drive Trust; Chief Executive Officer, President, and
Newport Beach, CA 92660 member of the Operating Board, Operating
Age 48 Committee, and Equity Board, PIMCO Advisors;
Director, PIMCO Funds Distribution Company
("PFDCO"). Formerly, President of the Trust, and
Director, Vice Chairman, and Chief Investment
Officer, Pacific Mutual Life Insurance Company
("Pacific Mutual").
- --------------------------------------------------------------------------------
Gary L. Light Trustee, PAF and CAT; Partner, E.V.A. Investors
12220 N. Meridian Street, Inc. (private investments); Consultant to and,
#145 prior to March, 1987, Executive Vice President,
Carmel, IN 46032 Mayflower Corporation (trucking and
Age 59 transportation); Vice Chairman and Chief Executive
Officer, Sofamor Danek (medical devices).
- --------------------------------------------------------------------------------
Richard L. Nelson President, Nelson Financial Consultants; Director,
8 Cherry Hills Lane Wynn's International, Inc.; Trustee, Pacific
Newport Beach, CA 92660 Select Fund. Formerly, Partner, Ernst & Young.
Age 66
- --------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Lyman W. Porter Professor of Management at the University of
2639 Bamboo Street California, Irvine; Trustee, Pacific Select Fund.
Newport Beach, CA 92660
Age 66
- --------------------------------------------------------------------------------
(*) Robert A. Prindiville Trustee, PAF and CAT; Vice President, PIMCO
2187 Atlantic Street Advisors. Formerly, President and Director,
Stamford, CT 06903 Thomson Advisory Group, Inc.; Director and
Age 61 Chairman, PFDCO; Executive Vice President, PIMCO
Advisors.
- --------------------------------------------------------------------------------
Alan Richards President, Alan Richards Consulting, Inc.;
P.O. Box 675760 Trustee, Pacific Select Fund; Director, Western
18132 Camino de Estrellas National Corporation. Formerly, President, Chief
Rancho Santa Fe, CA 92067 Executive Officer and Director, E.F. Hutton
Age 66 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, PAF and CAT; Formerly, President and
11 Linden Shores University Professor, Bernard M. Baruch College,
Branford, CT 06405 The City University of New York; Deputy Under
Age 73 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, PAF and CAT; President, Bryant
1530 E. Montebello Investments, Ltd. Formerly, President, Senior Vice
Phoenix, AZ 85014 President, Director and Chief Executive Officer,
Age 56 Archirodon Group Inc.; Partner, Arthur Andersen &
Co.
- --------------------------------------------------------------------------------
Gerald M. Thorne Trustee, PAF and CAT; Formerly, President and
5 Leatherwood Lane Director, Firstar National Bank of Milwaukee;
Savannah, GA 31414 Chairman, President and Director, Firstar National
Age 58 Bank of Sheboygan; Director, Bando-McGlocklin.
- --------------------------------------------------------------------------------
Stephen J. Treadway President, CAT; Executive Vice President, PIMCO
2187 Atlantic Street Advisors; Director and Chairman, PFDCO. Formerly,
Stamford, CT 06902 Executive Vice President, Smith Barney Inc.
Age 49
- --------------------------------------------------------------------------------
</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 Principal Occupation(s)
the Trust During the Past Five Years
- --------------------------------------------------------------------------------
<S> <C> <C>
Stephen J. Treadway President and Chief President, CAT; Executive
2187 Atlantic Street Executive Officer Vice President, PIMCO
Stamford, CT 06902 Advisors; Director and
Age 49 Chairman, PFDCO. Formerly,
Executive Vice President,
Smith Barney Inc.
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
R. Wesley Burns Executive Vice Vice President of PAF and
Age 37 President CAT; President, PIMCO Funds:
Pacific Investment
Management Series; Executive
Vice President, Pacific
Investment Management
Company ("Pacific Investment
Management"). Formerly, Vice
President, Pacific
Investment Management.
- --------------------------------------------------------------------------------
Newton B. Schott, Jr. Vice President and Vice President and Clerk of
2187 Atlantic Street Secretary PAF and CAT; Senior Vice
Stamford, CT 06902 President-Legal and
Age 54 Secretary, PIMCO Advisors;
Director, Executive Vice
President and Secretary,
PFDCO. Formerly, Executive
Vice President, Secretary
and General Counsel, Thomson
Advisory Group and PIMCO
Advisors; Executive Vice
President, Secretary,
General Counsel and
Director, Thomson McKinnon
Inc.
- --------------------------------------------------------------------------------
Jeffrey M. Sargent Vice President Vice President and Manager
Age 34 of Fund Shareholder
Servicing, Pacific
Investment Management; Vice
President of PIMCO Funds:
Pacific Investment
Management Series.
Formerly, Project
Specialist, Pacific
Investment Management.
- --------------------------------------------------------------------------------
Richard M. Weil Vice President Senior Vice President -
Age 33 Legal, PIMCO Advisors.
Formerly, Vice President,
Bankers Trust Company;
Associate, Simpson, Thatcher
& Bartlett.
- --------------------------------------------------------------------------------
John P. Hardaway Treasurer Treasurer of PAF, CAT and
Age 39 PIMCO Funds: Pacific
Investment Management
Series; Vice President and
Manager of Fund Operations,
Pacific Investment
Management.
- --------------------------------------------------------------------------------
Joseph D. Hattesohl Assistant Treasurer Manager of Fund Taxation,
Age 33 Pacific Investment
Management; Assistant
Treasurer of PIMCO Funds:
Pacific Investment
Management Series. Formerly,
Director of Financial
Reporting, Carl I. Brown &
Co.; Tax Manager, Price
Waterhouse LLP.
- --------------------------------------------------------------------------------
Garlin G. Flynn Assistant Secretary Senior Fund Administrator,
Age 50 Pacific Investment
Management; Secretary of
PIMCO Funds: Pacific
Investment Management
Series. Formerly, Senior
Mutual Fund Analyst, PIMCO
Advisors Institutional
Services; Senior Mutual Fund
Analyst, PFAMCo.
- --------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Trustees' Compensation
[to be filed by amendment]
Investment Adviser
PIMCO Advisors serves as investment adviser to the Fund 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 Mutual 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 and Benjamin L. Trosky (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 $111.2 billion of
assets under management as of November 30, 1996.
PIMCO Advisors, subject to the supervision of the Board of Trustees,
is responsible for providing advice and guidance with respect to the Fund and
for managing, either directly or through others selected by the Adviser, the
investment of the Fund. PIMCO Advisors also furnishes to the Board of Trustees
periodic reports on the investment performance of each Fund. PIMCO Advisors has
engaged an affiliate to serve as Portfolio Manager for the Fund.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated
to manage the Fund 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. The Advisory Agreement was last
approved by the Board of Trustees, including 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 Shareholder Advisory Agreement
or a party thereto, at a meeting held on [December __, 1997].
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 disinterested Trustees defined above. 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.
The Adviser currently receives a monthly investment advisory fee from
each Fund at an annual rate of 0.20% based on average daily net assets of the
Fund.
The Adviser received a total of $34,021,817, $26,739,075 and $25,174,625
for advisory services rendered to PAF for the fiscal years ended September 30,
1996, 1995 and 1994, respectively. Amounts in addition to those listed above
were paid by other series of PAF which either merged into 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, 1996.
Portfolio Management Agreement
The Adviser employs a Portfolio Manager to provide investment advisory
services to the Fund pursuant to a portfolio management agreements (a "Portfolio
Management Agreement") between the Adviser and the Portfolio Manager. The
Portfolio Manager is an affiliate of the Adviser. Pursuant to a Portfolio
Management Agreement between the Adviser and Columbus Circle, Investory,
Columbus Circle Investors ("Columbus Circle") is the Portfolio Manager and
provides investment advisory services to the Fund. For the services provided,
the Adviser (not the Trust) pays Columbus Circle a fee at an annual rate based
on 0.10% of the average daily net assets of the Fund attributable to each class
of shares.
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 Investors Management, Inc. as the managing partner. Columbus
Circle Investors Division of TAG, 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, such as corporate, government and union
pension and profit-sharing plans, foundations and educational institutions, as
well as the National Money Market Fund of Cash Accumulation Trust. Accounts
managed by Columbus Circle had combined assets, as of November 30, 1996, of
$14.6 billion.
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 Fund pursuant to an administration agreement (the "Administration
Agreement") with the Trust. The Administrator provides or procures
administrative services to the Fund, which include clerical help and accounting,
bookkeeping, internal audit services and certain other services required by the
Fund, and preparation of reports to the Fund's 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").
34
<PAGE>
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 Fund, and is responsible for the costs of registration
of the Trust's shares and the printing of prospectuses and shareholder reports
for current shareholders. The Administrator will be compensated at an annual
rate of 0.20% of the Fund's average daily net assets.
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 the PIMCO Advisors, the 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 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 and Sub-Administration Agreement may be
terminated by the Trustees, PIMCO Advisors or Pacific Investment Management (as
the case may be) at any time on 60 days' written notice. Following their
initial term of two years, the Administration and Sub-Administration Agreements
would continue from year to year if approved by the Trustees.
The Administration Agreement is subject to annual approval by the Board of
Trustees, including a majority of the disinterested Trustees defined above. The
current Administration Agreement was last approved by the Board of Trustees,
including all of the disinterested Trustees, at a meeting held on [December __,
1997]. In approving the Administration Agreement, the Trustees determined that:
(1) the Administration Agreement is in the best interests of the Fund and its
shareholders; (2) the services to be performed under the Administration
Agreement are services required for the operation of the Fund; (3) the
Administrator is able to provide, or to procure, services for the Fund which are
at least equal in nature and quality to services that could be provided by
others; and (4) the fees to be charged pursuant to the Administration Agreement
are fair and reasonable in light of the usual and customary charges made by
others for services of the same nature and quality.
Custodial Arrangements
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, MO
64105 ("IFTC") is the Fund's custodian. As such, IFTC holds in safekeeping
certificated securities and cash belonging to the Fund and, in such capacity, is
the registered owner of securities in book-entry form belonging to the Fund.
Upon instruction, IFTC receives and delivers cash and securities of the Fund in
connection with the transactions of the Fund and collects all dividends and
other distributions made with respect to the portfolio securities of the Fund.
IFTC also maintains certain accounts and records of the Fund.
35
<PAGE>
Accounting Services
Pursuant to an agreement between PALP and IFTC, IFTC calculates the total
net asset value, total net income and net asset value per share of the Fund on a
daily basis (and as otherwise may be required by the Investment Company Act,
that is, when there is a sufficient degree of trading in the Fund's portfolio
securities to affect its net asset value) and performs certain accounting
services for the Fund.
Independent Auditors
Price Waterhouse LLP, 1055 Broadway, Kansas City, Missouri 64105, has been
selected to serve as the independent public accountants for the Fund. Price
Waterhouse LLP provides audit services, accounting assistance, and consultation
in connection with Securities and Exchange Commission filings.
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 ("Distribution Contract") with the Trust. The Distributor is a wholly
owned subsidiary of PIMCO Advisors. The Distribution Contract is terminable
with respect to any Fund of the Trust or any class of any Fund without penalty,
at any time, by the Fund or class by not more than 60 days' nor less than 30
days' written notice to the Distributor, or by the Distributor upon not more
than 60 days' nor less than 30 days' written notice to the Trust. The
Distributor is not obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect with respect to each Fund
and each class of shares thereof for successive one-year periods, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the Trustees who are not interested persons of the Trust (as defined in the 1940
Act) and who have no direct or indirect interest financial interest in the
Distribution Contract or the Distribution and/or Servicing Plans described below
and (ii) by the vote of a majority of the entire Board of Trustees cast in
person at a meeting called for that purpose. If the Distribution Contract is
terminated (or not renewed) with respect to one or more Funds or classes
thereof, it may continue in effect with respect to any class of any Fund as to
which it has not been terminated (or has been renewed).
The Trust offers two classes of shares of the Fund: Institutional Class
and Administrative Class shares. 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 Fund). 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 shareholders
of that class.
Under the Trust's Multi-Class Plan, shares of each class of each Fund
represent an equal pro rata interest in such Fund and, generally, have identical
voting, dividend, liquidation, and other rights preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that:
(a) each class has a different designation; (b) each class of shares bears any
class-specific expenses allocated to it;
36
<PAGE>
(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.
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 the Fund and a Distribution Plan (together with
the Administrative Services Plan, the "Administrative Plans") with respect to
the Administrative Class shares of the Fund. Under the terms of the
Administrative Plan, the Trust is permitted to reimburse, out of the assets
attributable to the Administrative Class shares of the 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 services in connection with the
distribution of Administrative Class shares or administration of plans or
programs that use Administrative Class shares of the Fund as their funding
medium, and to reimburse certain other distribution related expenses. Under the
terms of the Administrative Class Distribution Plan, these 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 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
Class Distribution Plan and the Administrative Services Plan, but may not
receive fees under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to materially
increase the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (ii) those Trustees ("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
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vote of a majority of the outstanding voting securities of the Administrative
Class. The Administrative Plans were approved by the Trustees, including the
disinterested Trustees, at a meeting held on [December __, 1997].
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 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.
The Administrative Plans were not in effect prior to the date of this
Statement of Additional Information and no payments were made thereunder in
prior fiscal periods.
Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of Institutional Class and
Administrative Class shares are discussed in the Prospectus under the headings
"How to Buy Shares," "How to Redeem," and "Net Asset Value," and that
information is incorporated herein by reference.
Certain clients of the Adviser or the Portfolio Manager whose assets would
be eligible for purchase by the Fund may purchase shares of the Trust with such
assets. Assets so purchased by the Fund will be valued in accordance with
procedures adopted by the Board of Trustees.
One or more classes of shares of the Fund 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.
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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 the Fund's
shares. The 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 the 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 Fund may from time to time include in advertisements the total return of
each class 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 Fund also may compute current
distribution rates and use this information in their prospectuses and statement
of additional information, in reports to current shareholders, or in certain
types of sales literature provided to prospective investors.
Calculation of Yield
Quotations of yield for the Funds will be based on all investment income
per share (as defined by the SEC) during a particular 30-day (or one month)
period (including dividends and interest), less expenses accrued during the
period ("net investment income"), and are computed by dividing net investment
income by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[(a-b + 1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
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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.
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
dividend and distributions are reinvested when paid. Quotations of total return
may also be shown for other periods. Funds also may, 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.
Determination of Net Income
The net income of the Fund is determined as of the close of regular trading
(ordinarily 4:00 p.m. (Eastern Time)) on the New York Stock Exchange (the
"Exchange") on each day that the Exchange is open for trading. Net income
includes (i) all interest accrued and discount earned on the portfolio
investments of the Fund, minus (ii) amortized premium on such investments, plus
or minus (iii) all realized gains and losses on such investments, and minus (iv)
all expenses of the Fund.
Valuing the Fund's Portfolio Investments
The total net asset value of the Fund (the excess of its assets over its
liabilities) is determined by SSI as of the close of regular trading on the
Exchange on each day the Exchange is open for trading. The Trust expects that
the days, other than weekend days, that the Exchange will not be open will be
New Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's securities which mature in 60 days or less are generally valued
using the amortized cost method of valuation. This involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During such periods the yield to
investors in the Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. This method will be used only when the amortized cost
value approximates the fair value of the securities.
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TAXES
The tax status of the Fund and the distributions which it may make are
summarized in the text of the Prospectus under the caption "Dividends,
Distributions and Taxes."
The 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 this special tax treatment accorded regulated investment companies,
the 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, the 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.
If the Fund qualifies for taxation as a regulated investment company, the
Fund will not be subject to federal income tax on income paid to its
shareholders in the form of dividends or capital gain distributions. Except
where specifically noted, the remainder of this section assumes that the Fund
will so qualify.
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If the Fund distributes amounts in excess of its current earnings and
profits, such distributions to shareholders would be treated as a return of
capital to the extent of a shareholder's basis in his or her shares, and
thereafter as capital gain. A return of capital is not taxable to a shareholder
and has the effect of reducing the shareholder's basis in the relevant shares.
Current federal tax law requires the holder of a Treasury or other fixed-
income zero-coupon security to accrue as income each year a portion of the
discount at which the security was purchased, even though the holder receives no
interest payment in cash on the security during the year. Accordingly, if the
Fund holds such securities, it may be required to pay out as an income
distribution each year an amount which is greater than the total amount of cash
interest actually received. Such distributions may be made from the cash assets
of the Fund or by liquidation of portfolio securities, if necessary. The Fund
may realize gains or losses from such liquidations. In the event the Fund
realized net capital gains from such transactions, its shareholders may receive
a larger capital gain distribution, if any, than they would in the absence of
such transactions.
The Trust under which the Fund is created is organized as a Massachusetts
business trust. Under current law, so long as the Fund qualifies for federal
income tax treatment as described above, it is believed that neither the Trust
nor the Fund should be liable for any income or franchise tax in The
Commonwealth of Massachusetts.
Distributions
As a regulated investment company, the Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders on a
timely basis. The Fund intends to 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 the Fund on a timely
basis in accordance with a calendar year distribution requirement are subject to
a nondeductible 4% excise tax. To avoid the tax, the Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the twelve month period
ending on October 31 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 the Fund in October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To avoid application of the
excise tax, each Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
The tax status of the Fund and the distributions which it may make are
summarized in the Prospectus under the caption "Dividends, Distributions and
Taxes." All dividends and distributions of the 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
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<PAGE>
distribution received after the purchase of the 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 received from investment in stock of U.S.
corporations may qualify for the deduction for dividends received by
corporations. Other dividends generally are not expected to qualify for the
deduction for dividends received by corporations. Distributions of net capital
gains, if any, designated as capital gain dividends, are taxable as long-term
capital gains, regardless of how long the shareholder has held the Fund's shares
and are not eligible for the dividends received deduction. Any distributions
that are not from the Fund's investment company taxable income or net capital
gains may be characterized as a return of capital to shareholders or, in some
cases, as capital gain. The tax treatment of dividends and distributions will
be the same whether a shareholder reinvests them in additional shares or elects
to receive them in cash.
Sales of Shares
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Any loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on
a disposition of shares held by the shareholder for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect to such shares.
Backup Withholding
The Fund may be required to withhold 31% of all taxable distributions payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
Options, Futures, Forward Contracts and Swap Agreements
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Fund may be "section 1256 contracts." Any gains or losses
on section 1256 contracts are generally considered 60% long-term and 40% short-
term capital gains or losses ("60/40") although certain foreign currency gains
and losses from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Fund at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized and the resulting gain or loss is
treated as ordinary or 60/40 gain or loss.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the Fund, may result in
"straddles" for U.S. federal income tax purposes. In
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<PAGE>
some cases, the straddle rules also could apply in connection with swap
agreements. The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by the Fund on positions that
are part of a straddle may be deferred under the straddle rules, rather than
being taken into account in calculating the taxable income for the taxable year
in which such losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences of transactions
in options, futures, forward contracts, and swap agreements to the Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing stage
and are not entirely clear in certain respects. Accordingly, while the Fund
intends to account for such transactions in a manner it deems to be appropriate,
the Internal Revenue Service might not accept such treatment. If it did not,
the status of the Fund as a regulated investment company might be affected. The
Trust intends to monitor developments in this area. Certain requirements that
must be met under the Code in order for the Fund to qualify as a regulated
investment company may limit the extent to which 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 the Fund's
assets may limit the extent to which the Fund will be able to engage in
transactions in options, futures contracts, forward contracts, and swap
agreements.
Passive Foreign Investment Companies
The Fund 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 the Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to stockholders.
In general, under the PFIC rules, an excess distribution is treated as having
been realized ratably over the period during which the Fund held the PFIC stock.
A Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior taxable years and an interest factor
will be added to the tax, as if the tax had been payable in such prior taxable
years. Certain distribu-
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tions from a PFIC as well as gain from the sale of PFIC stock are treated as
excess distributions. Excess distributions are characterized as ordinary income
even though, absent application of the PFIC rules, certain excess distributions
might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules discussed above relating to the taxation
of excess distributions would not apply. In addition, another election may be
available that would involve marking to market the 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. The 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 the 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 the 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 the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Foreign Taxation
Income received by the Fund 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 Portfolio Manager intends to manage the
Fund with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to elect to "pass-through" to the Fund's
shareholders the amount of foreign income and similar taxes paid by the Fund. If
this election is made, a shareholder generally subject to tax will be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by the Fund, and may be
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<PAGE>
entitled either to deduct (as an itemized deduction) his or her pro rata share
of foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his or her U.S. federal income tax
liability. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Each shareholder will be notified within 60 days
after the close of the Fund's taxable year whether the foreign taxes paid by the
Fund will "pass-through" for that year.
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 Fund's income will flow through to shareholders of the
Trust. With respect to such a Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency fluctuation gains,
including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income, and to certain other types of income.
Shareholders may be unable to claim a credit for the full amount of their
proportionate share of the foreign taxes paid by the Fund. The foreign tax
credit can be used to offset only 90% of the revised alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one year
from the date of issuance) that may be acquired by the Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one year
from the date of issuance) that may be acquired by the Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. The
Fund may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year or less from the
date of issuance) that may be acquired by the Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
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The Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
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. If the Fund were regarded as a nonpublicly offered regulated
investment company, shareholders of the Fund could be subject to income tax
adjustments.
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). The Fund will provide information
annually to shareholders indicating the amount and percentage of its 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 the Fund qualifies for the federal income
tax treatment described above, it is believed that neither the Trust nor the
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.
Shareholders are advised to consult their own tax advisers for more detailed
information concerning the federal taxation of the Fund and the income tax
consequences of an investment in the Fund to its shareholders.
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REDEMPTIONS
The procedures for redemptions and withdrawals are summarized in the
Prospectus following the caption "Redemption of Shares."
The Fund may suspend the right of redemption for the Fund and may postpone
payment when the Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the Securities and Exchange Commission during periods
when trading on the Exchange is restricted or during an emergency which makes it
impracticable for the Fund to dispose of its securities or fairly to determine
the value of the net assets of the Fund, or during any other period permitted by
the Securities and Exchange Commission for the protection of investors.
The Fund will normally redeem a shareholder's shares for cash. However, if in
any 90-day period a shareholder seeks to redeem shares totaling the lesser of
$250,000 or 1% of the Fund's total assets, the Fund may, in unusual
circumstances, redeem any additional shares by payment in kind of securities
held in the portfolio of the Fund.
48
<PAGE>
DESCRIPTION OF INVESTMENTS
1. U.S. Government Securities.
--------------------------
Obligations Backed by Full Faith and Credit of the U.S. Government -- are
------------------------------------------------------------------
bills, certificates of indebtedness, notes and bonds issued by (i) the U.S.
Treasury or (ii) agencies, authorities and instrumentalities of the U.S.
Government or other entities and backed by the full faith and credit of the U.S.
Government. Such obligations include, but are not limited to, obligations
issued by the Government National Mortgage Association, Farmers' Home
Administration and the Small Business Administration.
Other U.S. Government Securities -- are bills, certificates of indebtedness,
--------------------------------
notes, and bonds issued by agencies, authorities and instrumentalities of the
U.S. Government which are supported by the right of the issuer to borrow from
the U.S. Treasury or by the credit of the agency, authority or instrumentality
itself. Such obligations include, but are not limited to, obligations issued by
the Tennessee Valley Authority, the Bank for Cooperatives, Federal Home Loan
Banks, Federal Intermediate Credit Banks, Federal Land Banks, and the Federal
National Mortgage Association.
U.S. Government Securities do not include securities issued or guaranteed by
state governments or instrumentalities.
2. Money Market Instruments.
------------------------
Certificates of Deposit - certificates issued against funds deposited in a
-----------------------
bank, are for a definite period of time, earn a specified rate of return, and
are normally negotiable.
Bankers' Acceptances - short-term credit instruments used to finance the
--------------------
import, export, transfer or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
Eurodollar Obligations - obligations of foreign branches of U.S. banks.
----------------------
Yankeedollar Obligations - obligations of domestic branches or subsidiaries
------------------------
of foreign banks.
Commercial Paper - promissory notes issued by corporations (including banks
----------------
and bank holding companies), in order to finance their short-term credit needs.
Master Demand Notes - notes issued by corporations that are payable on demand
-------------------
by either the holder or the issuer.
Corporate Obligations - bonds and notes issued by corporations in order to
---------------------
finance longer term credit needs.
Repurchase Agreements - are agreements by which the Fund acquires a security
---------------------
(usually a U.S. Government Security) and a simultaneous commitment from the
seller (a member bank of the Federal Reserve System or, to the extent permitted
by the Investment Company Act, a recognized securities dealer) to repurchase the
security at an agreed upon price and date. The resale price is in excess of the
49
<PAGE>
purchase price and reflects an agreed upon market rate unrelated to the coupon
rate on the purchased security. Such transactions afford an opportunity for the
Fund to earn a return on temporarily available cash at no market risk, although
the Fund may be subject to various delays and risks of loss if the seller is
unable to meet its obligation to repurchase.
50
<PAGE>
APPENDIX A
----------
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized with regard to portfolio investments for the Fund
include Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc.
("Fitch"), IBCA Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and
Thomson BankWatch, Inc. ("Thomson"). Set forth below is a description of the
relevant ratings of each such NRSRO. The NRSROs that may be utilized by MERUS
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
- ----------------------
municipal bonds)
Description of the two highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2 and 3) in each rating category to indicate the
security's ranking within the category):
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 edged." 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 which make the long-term risk appear
somewhat larger than in Aaa securities.
Description of the two highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
Description of the two highest long-term debt ratings by Duff:
AAA Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality Protection factors are strong.
A-1
<PAGE>
AA Risk is modest but may vary slightly from time to time
AA- because of economic conditions.
Description of the two highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issues is
generally rated "[-]+."
IBCA's description of its two highest long-term debt ratings:
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
Thomson's description of its two highest long-term debt ratings:
A Company possesses an exceptionally strong balance sheet and earnings
record, translating into an excellent reputation and unquestioned access
to its natural money markets. If weakness or vulnerability exists in any
aspect of the company's business, it is entirely mitigated by the
strengths of the organization.
A/B Company is financially very solid with a favorable track record and no
readily apparent weakness. Its overall risk profile, while low, is not
quite as favorable as for companies in the highest rating category.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
- -----------------------
master demand notes, bank instruments, and letters of credit)
Moody's description of its two highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of
the following characteristics:
A-2
<PAGE>
-Leading market positions in well-established industries.
-High rates of return on funds employed.
-Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
-Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
-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
capacity 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.
S&P's description of its two highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).
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."
Duff's description of its two highest short-term debt ratings (Duff incorporates
gradations of "1+" (one plus) and "1-" (one minus) to assist investors in
recognizing quality differences within the highest rating category):
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-
free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
A-3
<PAGE>
Fitch's description of its two highest short-term debt ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned F-1+ or F-1 ratings.
IBCA's description of its two highest short-term debt ratings:
A+ Obligations supported by the highest capacity for timely repayment.
A1 Obligations supported by a very strong capacity for timely repayment.
Short-Term Loan/Municipal Note Ratings
- --------------------------------------
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Thomson's description of its two highest short-term ratings:
TBW-1 The highest category; indicates the degree of safety regarding timely
repayment of principal and interest is very strong.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
A-4
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
(1) Part A
Financial Highlights for the Trust through the fiscal year
ended June 30, 1997 will be included in a post-effective
amendment filed under Rule 485(b) prior to the effective date
of this amendment.
(2) Part B
Financial Statements for the Trust through the fiscal year
ended June 30, 1997 will be included in a post-effective
amendment filed under Rule 485(b) prior to the effective date
of this amendment.
(b) Exhibits (the number of each exhibit relates to the exhibit designation in
Form N-1A):
(1) Form of Second Amendment and Restated Agreement and Declaration of
Trust (6)
(2) Form of First Amended and Restated Bylaws (8)
(3) Not Applicable
(4) (a) Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Second Amended and Restated Agreement and
Declaration of Trust (6)
(b) Article 9 (Issuance of Shares Certificates) and Article 11
(Shareholders' Voting Powers and Meetings) of the First Amended and
Restated Bylaws (8)
(5) (a) (i) Form of Amended and Restated Investment Advisory Agreement (8)
(ii) Form of Addendum to Amended and Restated Investment Advisory
Agreement to add PIMCO Columbus Circle International Fund and
PIMCO Tax-Managed Structured
<PAGE>
Emerging Markets Fund to be filed by post-effective amendment
(iii) Form of Addendum to Amended and Restated Investment Advisory
Agreement to add PIMCO Active Short-Term Fund to be filed by
post-effective amendment
(b) (i) Form of Portfolio Management Agreement with Pacific Mutual
Life Insurance Company (3)
(ii) Form of Portfolio Management Agreement with Pacific Investment
Management Company (3)
(iii) Form of Portfolio Management Agreement, as amended, with NFJ
Investment Group (8)
(iv) Form of Portfolio Management Agreement, as amended, with
Cadence Capital Management (8)
(v) Form of Portfolio Management Agreement, as amended, with
Parametric Portfolio Associates (8)
(vi) Form of Addendum to Portfolio Management Agreement with
Parametric Portfolio Associates to add PIMCO Tax-Managed
Structured Emerging Markets Fund to be filed by post-effective
amendment
(vii) Form of Amended and Restated Portfolio Management Agreement
with Blairlogic Capital Management (8)
(viii) Form of Amended and Restated Portfolio Management Agreement
with Columbus Circle Investors (8)
(ix) Form of Addendum to Portfolio Management Agreement with
Columbus Circle Investors to add PIMCO Columbus Circle
International Fund to be filed by post-effective amendment
(x) Form of Addendum to Portfolio Management Agreement with
Columbus Circle Investors to add PIMCO Active Short-Term Fund,
to be filed by post-effective amendment
-2-
<PAGE>
(xi) Form of Portfolio Management Agreement with Van Eck Associates
Corporation (8)
(6) (a) Form of Amended Distribution Contract (8)
(b) Form of Addendum to Distribution Contract to add PIMCO Columbus
Circle International Fund and PIMCO Tax Managed Structured Emerging
Markets Fund to be filed by post-effective amendment
(c) Form of Addendum to Distribution Contract to add PIMCO Active
Short-Term Fund, to be filed by post-effective amendment
(7) Not Applicable
(8) (a) Form of Custody Agreement and Addenda (5)
(b) Form of Addendum to Custody Agreement (8)
(c) Form of Assignment of Custody Agreement (8)
(d) Form of Addendum to Custody Agreement, to be filed by post-
effective amendment
(9) (a) Form of Amended Administration Agreement between the Trust and
PIMCO Advisors L.P. (8)
(b) Form of Addendum to Amended Administration Agreement to add PIMCO
Columbus Circle International Fund and PIMCO Tax Managed Structured
Emerging Markets Fund to be filed by post-effective amendment
(c) Form of Addendum to Amended Administration Agreement to add PIMCO
Active Short-Term Fund to be filed by post-effective amendment
(d) Form of Administration Agreement between PIMCO Advisors L.P. and
Pacific Investment Management Company (8)
(e) Form of Agency Agreement and Addenda (5)
-3-
<PAGE>
(f) Form of Addendum to Agency Agreement (8)
(g) Form of Assignment of Agency Agreement (8)
(h) Form of Addendum to Agency Agreement to be filed by post-effective
amendment
(i) Form of Transfer Agency Agreement with Shareholder Services, Inc. (7)
(j) Form of Service Plan for Institutional Services Shares (2)
(k) Form of Administrative Services Plan for Administrative Class Shares
(8)
(10) Opinion and Consent of Counsel (1)
(11) Not Applicable
(12) Not Applicable
(13) Initial Capital Agreement (1)
(14) Not Applicable
(15) (a) Form of Distribution and Servicing Plan (Class A) (8)
(b) Form of Distribution and Servicing Plan (Class B) (8)
(c) Form of Distribution and Servicing Plan (Class C) (8)
(d) Form of Distribution Plan for Administrative Class Shares (8)
(16) Schedule of Computation of Performance (4)
(17) Financial Data Schedule to be filed via post-effective amendment under
Rule 485(b) prior to the effective date of this amendment
(18) Form of Amended and Restated Multi-Class Plan (8)
(19) (a) Powers of Attorney and Certificate of Secretary (5)
-4-
<PAGE>
(b) Power of Attorney for Robert A. Prindiville, E. Philip Cannon, Donald
P. Carter, Gary A. Childress, William D. Cvengros, John P. Hardaway,
Gary L. Light, Joel Segall, W. Bryant Stooks, Richard L. Nelson, Lyman
W. Porter, Alan Richards and Gerald M. Thorne filed herewith
- -----------------
1 Included in Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-36528), as filed on November 2, 1990.
2 Included in Post-Effective Amendment No. 13 to the Registration Statement on
Form N-1A (File No. 33-36528), as filed on April 12, 1994.
3 Included in Post-Effective Amendment No. 15 to the Registration Statement on
Form N-1A (File No. 33-36528), as filed on October 14, 1994.
4 Included in Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A (File No. 33-36528), as filed on December 28, 1994.
5 Included in Post-Effective Amendment No. 22 to the Registration Statement on
Form N-1A (File No. 33-36528), as filed on July 1, 1996.
6 Included in Definitive Proxy Statement (File No. 811-06161), as filed on
November 7, 1996.
7 Included in Post-Effective Amendment No. 33 to the Registration Statement on
Form N-1A of PIMCO Advisors Funds (File No. 2-87203), as filed on
November 30, 1995.
8. Included in Post-Effective Amendment No. 25 to the Registration Statement on
Form N-1A (File 33-36528), as filed on January 13, 1997.
9. Included in Post-Effective Amendment No. 26 to the Registration Statement on
Form N-1A (File 33-36528), as filed on August 15, 1997.
Item 25. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
-5-
<PAGE>
Item 26. Number of Holders of Securities.
As of July 31, 1997, the number of shareholders of each operational Fund was
as follows:
<TABLE>
<CAPTION>
Institutional Class Administrative Class Class A Class B Class C
Fund Number of Number of Number of Number of Number of
Record Holders Record Holders Record Holders Record Holders Record Holders
<S> <C> <C> <C> <C> <C>
Equity Income Fund......... 107 6 182 303 719
Value Fund................. 186 0 1,015 1,938 5,877
Small Cap Value Fund....... 221 2 655 1,321 2,554
Capital Appreciation Fund.. 288 9 238 394 1,309
Mid Cap Growth Fund........ 268 10 1,293 2,690 6,416
Micro Cap Growth Fund...... 85 5 0 0 0
Small Cap Growth Fund...... 36 2 0 0 0
Core Equity Fund........... 156 5 0 0 0
Mid Cap Equity Fund........ 157 0 0 0 0
Enhanced Equity Fund....... 170 0 0 0 0
Emerging Markets Fund...... 200 3 47 67 281
International Developed
Fund...................... 179 7 56 115 426
Balanced Fund.............. 22 0 36 76 126
Renaissance Fund........... 0 0 2,060 2,608 21,423
Growth Fund................ 0 0 9,195 4,662 101,527
Target Fund................ 0 0 10,935 6,666 80,318
Opportunity Fund........... 0 0 12,248 0 40,738
Innovation Fund............ 0 0 5,825 6,316 19,226
International Fund......... 0 0 1,701 896 21,077
Precious Metals Fund....... 0 0 643 568 4,367
Tax Exempt Fund............ 0 0 108 72 1,873
</TABLE>
Item 27. Indemnification.
Reference is made to Article VIII, Section 1 of the Registrant's Second
Amended and Restated Agreement and Declaration of Trust, which is incorporated
by reference herein.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to the Trust's
Second Amended and Restated Agreement and Declaration of Trust, its By-Laws or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or controlling
persons of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustees, officers or controlling persons in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
-6-
<PAGE>
Item 28. Business and Other Connections of Investment Advisor and Portfolio
Managers.
Unless otherwise stated, the principal business address of each organization
listed in 800 Newport Center Drive, Newport Beach, CA 92660.
PIMCO Advisors L.P.
Position
Name with Advisor Other Affiliations
Walter E. Auch, Sr. Member of Equity Management Consultant;
Board Director, Fort Dearborn
Fund, Shearson VIP fund,
Shearson Advisors Fund,
Shearson TRAK Fund, Banyan
land Trust, Banyan Land Fund
II, Banyan Mortgage Fund,
Allied Healthcare Products,
Inc., First Western Inc.,
DHR Group and Geotech
Industries.
David B. Breed Member of Operating Director, Managing Director
Board and Chief Executive Officer,
Cadence Capital Management,
Inc.; Managing Directors and
Chief Executive Officer,
Cadence Capital Management.
Donald A. Chiboucas Member of Operating Director and President,
Board Columbus Circle Investors
Management, Inc.; Managing
Director and President,
Columbus Circle Investors.
-7-
<PAGE>
William D. Cvengros Chief Executive Trustee and Chairman of the
Officer and Trust; Trustee, Cash
President, Member Accumulation Trust;
of Operating Board, Director, PIMCO Funds
Operating Distribution Company.
Committee, and
Equity Board
Walter B. Gerken Member of Equity Director, Mullin Consulting
Board Inc.; Director, Executive
Services Corps. of Southern
California.
William H. Gross Member of Operating Director and Managing
Board and Equity Director, PIMCO Management,
Board Inc.; Managing Director,
Pacific Investment
Management Company; Senior
Vice President, PIMCO Funds;
Director and Vice President,
StocksPLUS Management, Inc.;
Member of PIMCO Partners LLC.
Brent R. Harris Member of Operating Director and Managing
Board Director, PIMCO Management,
Inc.; Managing Director,
Pacific Investment
Management Company; Director
and Vice President,
StocksPLUS Management, Inc.;
Chairman of the Board and
Trustee, PIMCO Funds and
PIMCO Commercial Mortgage
Securities Trust, Inc.;
Member of PIMCO Partners LLC.
Amy M. Hogan Member of Operating Managing Director, Columbus
Board Circle Investors; Director,
Columbus Circle Investors
Management, Inc.
-8-
<PAGE>
Donald R. Kurtz Member of Equity Formerly, Vice President of
Board Internal Asset Management,
General Motors Investment
Management Corp. and
Director, Thomson Advisory
Group L.P.
James F. McIntosh Member of Equity Executive Director, Allen
Board Matkins, Leck, Gamble &
Malloy. Formerly, Director
of Pacific Investment
Management Company.
Dean S. Meiling Member of Operating Director and Managing
Board Director, PIMCO Management,
Inc.; Managing Director,
Pacific Investment
Management Company; Vice
President, PIMCO Funds and
PIMCO Commercial Mortgage
Securities Trust, Inc.
Donald K. Miller Member of Equity Chairman, Greylock Financial
Board Inc.; Director, Huffy
Corporation, RPM, Inc., and
Christensen Boyles
Corporation; Director,
President and Chief
Executive Officer, TAG Inc.;
Formerly, Director and Vice
Chairman, Thomson Advisory
Group L.P.
-9-
<PAGE>
James F. Muzzy Member of Operating Director and Managing
Board Director, PIMCO Management,
Inc.; Managing Director,
Pacific Investment
Management Company; Vice
President, PIMCO Funds;
Director and Vice President,
StocksPLUS Management, Inc.;
Member of PIMCO Partners LLC.
William F. Podlich, III Member of Operating Director and Managing
Board and Equity Director, PIMCO Management,
Board Inc.; Managing Director,
Pacific Investment
Management Company; Vice
President, PIMCO Commercial
Mortgage Securities Trust,
Inc.; Member of PIMCO
Partners LLC.
William C. Powers Member of Operating Director and Managing
Board Director, PIMCO Management,
Inc.; Managing Director,
Pacific Investment
Management Company; Senior
Vice President, PIMCO
Commercial Mortgage
Securities Trust, Inc.,
Member of PIMCO Partners LLC.
Glenn S. Schafer Member of Equity President and Director,
Board Pacific Mutual Life
Insurance Company; Chairman
and Director, Mutual Service
Corporation, United Planners
Group, Inc., Pacific
Equities Network and Pacific
Financial Holding Company.
-10-
<PAGE>
Irwin F. Smith Member of Operating Chairman and Managing
Board, Operating Director, Columbus Circle
Committee and Investors; Director and
Equity Board Chairman, Columbus Circle
Investors Management, Inc.
Thomas C. Sutton Member of Equity Chairman, Chief Executive
Board Officer and Director,
Pacific Mutual Life
Insurance Company; Chairman,
Trustee and President,
Pacific Select Fund;
Director, United Planner
Group, Inc., Pacific
Equities Network, Mutual
Services Corporation and
Pacific Financial Holding
Company.
William S. Thompson, Jr. Chairman and Member Director, Managing Director
of Operating Board, and Chief Executive Officer,
Member of Operating PIMCO Management, Inc.;
Committee and Chief Executive Officer and
Equity Board Managing Director, Pacific
Investment Management
Company; Director and
President StocksPLUS
Management, Inc.; Vice
President, PIMCO Funds and
PIMCO Commercial Mortgage
Securities Trust, Inc.
Sharon A. Cheever Vice President - Vice President and
Legal and Assistant Investment Counsel, Pacific
Secretary Mutual Life Insurance
Company. Formerly,
Assistant Vice President and
Associate Counsel, Pacific
Mutual Life Insurance Company
-11-
<PAGE>
Robert M. Fitzgerald Senior Vice Chief Financial Officer,
President -Finance, Senior Vice President
Chief Financial -Finance and Controller,
Officer and PIMCO Funds Distribution
Controller Company; Senior Vice
President, Finance and
Controller, Columbus Circle
Investors and Columbus
Circle Investors Management,
Inc.; Assistant Treasurer,
Cadence Capital Management;
Treasurer, Cadence Capital
Management, Inc., NFJ
Investment Group, NFJ
Management Inc., Parametric
Portfolio Associates,
Parametric Management Inc.,
PIMCO Management, Inc., and
StocksPLUS Management, Inc.
Kenneth M. Poovey General Counsel and Partner, Latham & Watkins.
Board Secretary
Robert A. Prindiville Vice President Trustee of the Trust.
Ernest L. Schmider Senior Vice Senior Vice President,
President - Legal Secretary, Chief
and Assistant Administrative and Legal
Secretary Officer, PIMCO Management,
Inc., Director and Assistant
Secretary/Assistant
Treasurer, StocksPLUS
Management, Inc., Vice
President - Legal and
Assistant Secretary, PIMCO
Advisors L.P.
-12-
<PAGE>
Newton B. Schott, Jr. Senior Vice Secretary, Columbus Circle
President - Legal Investors, Columbus Circle
and Secretary Investors Management, Inc.,
Cadence Capital Management,
Inc., NFJ Management, Inc.,
and Parametric Management,
Inc.; Director, Executive
Vice President/Secretary,
PIMCO Funds Distribution
Company, the Trust, and Cash
Accumulation Trust.
Stephen J. Treadway Executive Vice Director, Chairman, and
President President, PIMCO Funds
Distribution Company, and
Trustee, President and Chief
Executive Officer of the
Trust and Cash Accumulation
Trust.
Robert S. Venable Vice President None.
James Ward Senior Vice None
President
Richard M. Weil Senior Vice Assistant Secretary,
President and Columbus Circle Investors,
Legal Counsel Columbus Circle Investors,
Inc., Cadence Capital
Management, Cadence Capital
Management, Inc., NFJ
Management, Inc., Parametric
Management, Inc., PIMCO,
PIMCO Management, Inc. and
PIMCO Funds Distribution
Company; Secretary, NFJ
Investment Group, Parametric
Portfolio Associates, and
StocksPLUS Management
-13-
<PAGE>
Cadence Capital Management
Exchange Place, 53 State Street,
Boston, Massachusetts 02109
Position
Name with Portfolio Manager Other Affiliations
William B. Bannick Managing Director and Director and Managing
Executive Vice Director, Cadence Capital
President Management, Inc.
David B. Breed Managing Director and Member of Operating
Chief Executive Officer Board, PIMCO Advisors
L.P.; Director, Managing
Director and Chief
Executive Officer,
Cadence Capital
Management, Inc.
Katherine A. Burdon Managing Director None
Mary Ellen Malendez Secretary None
Barbara M. Green Treasurer None
Eric M. Wetlaufer Managing Director None
NFJ Investment Group
2121 San Jacinto, Suite 1440,
Dallas, Texas 75201
Position
Name with Portfolio Manager Other Affiliates
Benno J. Fischer Managing Director Director, Managing
Director, and Co-Chairman,
NFJ Management, Inc.
Robert M. Fitzgerald Treasurer and See PIMCO Advisors L.P.
Financial
Officer
-14-
<PAGE>
John L. Johnson Managing Director Director, and Co-Chairman
Managing Director, NFJ
Management, Inc.
Jack C. Najrok Managing Director Director, Managing
Director, Co-Chairman, NFJ
Management, Inc.
Parametric Portfolio Associates
7310 Columbia Center, 701 Fifth Avenue,
Seattle, Washington 98104-7090
Position
Name with Portfolio Manager Other Affiliations
William E. Cornelius, Jr. Managing Director Director and Managing
Director, Parametric
Management, Inc.
Mark W. England-Markun Managing Director Director, Managing
Director and Chief
Executive Officer,
Parametric Management,
Inc.
David M. Stein Managing Director and Director and Managing
Chief Financial Officer Director, Parametric
Management, Inc.
Pacific Investment Management Company ("PIMCO")
840 Newport Center Drive, Suite 360
Newport Beach, California 92660
Position
Name with Portfolio Manager Other Affiliations
George C. Allan Vice President Vice President, PIMCO
Management, Inc.
Tamara J. Arnold Vice President Vice President, PIMCO
Management, Inc.
-15-
<PAGE>
Leslie A. Barbi Vice President Vice President, PIMCO
Management, Inc.
William R. Benz II Executive Vice Executive Vice President,
President PIMCO Management, Inc.
John B. Brynjolfson Vice President Vice President, PIMCO
Management, Inc.
R. Welsley Burns Executive Vice Executive Vice President,
President PIMCO Management, Inc.;
President, PIMCO, PIMCO
Funds and PIMCO Commercial
Mortgage Securities Trust,
Inc.; Vice President, Cash
Accumulation Trust.
Wendy W. Cupps Vice President Vice President, PIMCO
Management, Inc.
Charles M. Daniels, III Executive Vice Executive Vice President,
President PIMCO Management, Inc.
Anita Dunn Vice President Vice President, PIMCO
Management, Inc.
David H. Edington Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Member
of PIMCO Partners, LLC.
A. Benjamin Ehlert Executive Vice Executive Vice President,
President PIMCO Management, Inc.
Robert A. Ettl Vice President Vice President, PIMCO
Management, Inc.
Robert M. Fitzgerald Treasurer See PIMCO Advisors, L.P.
-16-
<PAGE>
William H. Gross Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Director
and Vice President,
StocksPLUS Management,
Inc.; Senior Vice
President, PIMCO Funds;
Member of Equity and
Operating Boards, PIMCO
Advisors L.P.; Member of
PIMCO Partners LLC.
John L. Hague Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Member
of PIMCO Partners LLC.
Gordon C. Hally Executive Vice Executive Vice President,
President PIMCO Management, Inc.
Pasi M. Hamalainen Vice President Vice President, PIMCO
Management, Inc.
John P. Hardaway Vice President Vice President, PIMCO
Management, Inc.;
Treasurer of the Trust,
PIMCO Funds, PIMCO
Commercial Mortgage
Securities Trust, Inc.,
and Cash Accumulation
Trust.
-17-
<PAGE>
Brent R. Harris Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Director
and Vice President,
StocksPLUS Management,
Inc.; Trustee and
Chairman, PIMCO Funds and
PIMCO Commercial Mortgage
Securities Trust, Inc.;
Member of Operating Board,
PIMCO Advisors L.P.;
Member of PIMCO Partners
LLC.
Douglas M. Hodge Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Brent L. Holden Executive Vice Executive Vice President,
President PIMCO Management, Inc.
Dwight F. Holloway, Jr. Vice President Vice President, PIMCO
Management, Inc.
Jane T. Howe Vice President Vice President, PIMCO
Management, Inc.
Margaret E. Isberg Executive Vice Executive Vice President,
President PIMCO Management, Inc.;
Senior Vice President,
PIMCO Funds.
John S. Loftus Executive Vice Executive Vice President,
President PIMCO Management, Inc.;
Vice President and
Assistant Secretary,
StocksPLUS Management,
Inc.
-18-
<PAGE>
Dean S. Meiling Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Vice
President, PIMCO Funds and
PIMCO Commercial Mortgage
Securities Trust, Inc.;
Member of Operating Board,
PIMCO Advisors L.P.;
Member of PIMCO Partners
LLC.
James F. Muzzy Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Director
and Vice President,
StocksPLUS Management,
Inc.; Vice President,
PIMCO Funds; Member of
Operating Board, PIMCO
Advisors L.P.; Member of
PIMCO Partners LLC.
Thomas J. Otterbein Vice President Vice President, PIMCO
Management, Inc.
William F. Podlich, III Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Vice
President, PIMCO
Commercial Mortgage
Securities Trust, Inc.;
Member of Equity and
Operating Boards, PIMCO
Advisors L.P.; Member of
PIMCO Partners LLC.
-19-
<PAGE>
William C. Powers Managing Director Director and Managing
Director, PIMCO
Management, Inc.; Senior
Vice President PIMCO
Commercial Mortgage
Securities Trust, Inc.;
Member of Operating Board,
PIMCO Advisors L.P.;
Member of PIMCO Partners
LLC.
Frank B. Rabinovitch Managing Director Director and Managing
Director, PIMCO
Management, Inc., Member
of PIMCO Partners, LLC.
Edward P. Rennie Senior Vice President Senior Vice President,
PIMCO Management, Inc.
Scott L. Roney Vice President Vice President, PIMCO
Management, Inc.
Michael J. Rosborough Vice President Vice President, PIMCO
Management, Inc.
Jeffrey M. Sargent Vice President Vice President of the
Trust, PIMCO Management,
Inc., PIMCO Funds, and
PIMCO Commercial Mortgage
Securities Trust, Inc.
Ernest L. Schmider Senior Vice Senior Vice President,
President, Secretary, Secretary, Chief
Chief Administrative Administrative and Legal
and Legal Officer Officer, PIMCO Management,
Inc.; Director and
Assistant
Secretary/Assistant
Treasurer, StocksPLUS
Management, Inc.; Vice
President - Legal and
Assistant Secretary, PIMCO
Advisors L.P.
-20-
<PAGE>
<TABLE>
<S> <C> <C>
Leland T. Scholey Senior Vice President Senior Vice President,
PIMCO Management, Inc.,
and PIMCO Funds.
Denise C. Seliga Vice President Vice President, PIMCO
Management, Inc.
Rita J. Seymour Vice President Vice President, PIMCO
Management, Inc.
Lee R. Thomas Executive Vice Executive Vice President,
President PIMCO Management, Inc.
William S. Thompson, Jr. Chief Executive Director, Managing
Officer and Managing Director and Chief
Director Executive Officer, PIMCO
Management, Inc.; Director
and President, StocksPLUS
Management, Inc.; Vice
President of PIMCO Funds
and PIMCO Commercial
Mortgage Securities Trust,
Inc.; Member of Operating
Board, Operating Committee
and Equity Board of PIMCO
Advisors L.P.; Member of
PIMCO Partners LLC.
Benjamin L. Trosky Managing Director Managing Director, PIMCO
Management, Inc.; Senior
Vice President, PIMCO
Commercial Mortgage
Securities Trust, Inc.;
Member of PIMCO Partners
LLC.
Andrew C. Ward Vice President Vice President, PIMCO
Management, Inc.; Senior
Vice President, PIMCO
Funds.
Ram Willner Vice President Vice President, PIMCO
Management, Inc.
</TABLE>
-21-
<PAGE>
<TABLE>
<S> <C> <C>
Kristen M. Wilsey Vice President Vice President, PIMCO
Management, Inc. and PIMCO
Funds.
George H. Wood Vice President Vice President, PIMCO
Management Inc.
Michael A. Yetter Vice President Vice President, PIMCO
Management, Inc.
</TABLE>
Columbus Circle Investors
Metro Center
One Station Place, 8th Floor
Stamford, Connecticut 06902
<TABLE>
<CAPTION>
Position
Name with Portfolio Manager Other Affiliations
<S> <C> <C>
Irwin F. Smith Chairman and Managing Member of Equity and
Director Operating Boards and
Operating Committee,
PIMCO Advisors, L.P.;
Director and Chairman,
Columbus Circle Investors
Management, Inc.
Richard M. Weil Assistant Secretary See PIMCO Advisors L.P.
Louis P. Celentano Managing Director Director and Vice
President,
Columbus Circle Investors
Management, Inc.
Donald A. Chiboucas President and Managing Member of Operating Board,
Director PIMCO Advisors L.P.;
Director and President,
Columbus Circle Investors
Management, Inc.
Robert W. Fehrman Managing Director Director, Columbus Circle
Investors Management, Inc.
Marc Felman Managing Director None
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C> <C>
Mark Fishman Senior Vice President None
Robert M. Fitgerald Senior Vice President, See PIMCO Advisors L.P.
Finance and Controller
Clifford G. Fox Managing Director None
Winthrop S. Headley Vice President None
Amy M. Hogan Managing Director Member of Operating Board,
PIMCO Advisors L.P.;
Director of Columbus Circle
Investors Management, Inc.
Jashree B. Kemraj Assistant Vice Assistant Vice
President/Assistant President/Assistant
Controller Controller, Columbus Circle
Investors Management Inc.
and PIMCO Funds
Distribution Company.
Jacob Navon Senior Vice President None
Daniel S. Pickett Managing Director Director, Columbus Circle
Investors Management, Inc.
Anthony Rizza Managing Director None
Newton B. Schott, Jr. Secretary See PIMCO Advisors L.P.
C. Paul Tyborowski Managing Director None
Nathaniel J. Belknap Vice President None
Anne Maloney Vice President None
Paul Meeks Vice President None
Michele Montano Senior Vice President None
Paul A. Pantalena Vice President None
Cecelia Pastore Vice President None
</TABLE>
-23-
<PAGE>
<TABLE>
<S> <C> <C>
Harold R. Snedcof Vice President None
Sharon S. Weslow Vice President None
</TABLE>
Blairlogie Capital Management, Limited
4th Floor, 125 Princes Street
Edinburgh EH2 4AD, Scotland
<TABLE>
<CAPTION>
Position
Name with Portfolio Manager Other Affiliations
<S> <C> <C>
Gavin R. Dobson Chief Executive Officer Director and Chief
and Managing Director Executive Officer,
Blairlogie Holdings
Limited (U.K.)
James G. S. Smith Chief Investment Director and Chief
Officer and Managing Investment Officer,
Director Blairlogie Holdings
Limited (U.K.)
John R.W. Stevens Chief Financial Officer Director and Chief
and Managing Director Financial Officer
Blairlogie Holdings
Limited (U.K.)
</TABLE>
Van Eck Associate Corporation
99 Park Avenue
New York, New York 10016
<TABLE>
<CAPTION>
Position
Name with Portfolio Manager Other Affiliations
<S> <C> <C>
Philip DeFeo Director, President and Trustee, Van Eck Funds
Chief Executive Officer ("VEF") and Van Eck
Worldwide Insurance
Trust ("WWIT")
</TABLE>
-24-
<PAGE>
<TABLE>
<S> <C> <C>
John C. Van Eck Chairman of the Board Chairman of the Board
and President, VEF and
WWIT; Chairman of the
Board, Van Eck
Securities Corporation
("VESC"); Director,
Eclipse Financial Asset
Trust. Formerly,
Director Abex Inc.,
Director, The Henley
Group, Inc.
Fred M. Van Eck Director Trustee, VEF and WWIT;
Private Investor,
Director, VESC
Sigrid S. Van Eck Director, Vice Vice President,
President and Assistant Assistant Treasurer and
Treasurer Director of VESC
Jan Van Eck Director Director and Executive
Vice President of VESC
Derek M. Van Eck Director and Executive Director of VESC;
Vice President President Global Hard
Assets and World Trends
Series of the Van Eck
Funds
Michael G. Doorley Vice President, Vice President,
Treasurer, Controller Treasurer, Controller
and Chief Financial and Chief Financial
Officer Officer of VESC; Vice
President, VEF and WWIT
Taddeus M. Leszcynski Vice President, Vice President and
Secretary and General Secretary of VEF and
Counsel WWIT; Vice President,
Secretary and General
Counsel of VESC.
William A. Trebilcock Director, Mining Vice President of VEF;
Research Formerly, Director
Corner Bay Explorations
Ltd. Formerly, Director,
Precambrian Explorations
Inc.
</TABLE>
-25-
<PAGE>
Item 29. Principal Underwriters.
(a) PIMCO Funds Distribution Company (the "Distributor") serves as
Distributor of shares for the Registrant and also of PIMCO Funds: Pacific
Investment Management Series and Cash Accumulation Trust. The Distributor is a
wholly owned subsidiary of PIMCO Advisors L.P., the Registrant's Adviser.
(b)
<TABLE>
<CAPTION>
Positions and Positions
Name and Principal Offices with and Offices
Business Address* Underwriter with Registrant
<S> <C> <C>
Jeffrey L. Booth Vice President None
James D. Bosch Regional Vice President None
William D. Cvengros Director Trustee
Robert M. Fitzgerald Chief Financial Officer and None
Treasurer
Michael J. Gallagher Vice President None
David S. Goldsmith Vice President None
Ronald H. Gray Vice President None
John B. Hussey Vice President None
Edward W. Janeczek Senior Vice President None
Johnathan C. Jones Vice President None
Jaishree B. Kemraj Assistant Vice President None
and Assistant Controller
William E. Lynch Senior Vice President None
Jacqueline A. McCarthy Vice President None
Andrew J. Meyers Executive Vice President None
</TABLE>
-26-
<PAGE>
<TABLE>
<S> <C> <C>
Fioja Moyer Regional Vice President None
Philip J. Neugebauer Vice President None
Joffrey H. Pearlman Regional Vice President None
Glynne Pisapia Regional Vice President None
Matthew M. Russell Vice President None
Newton B. Schott, Jr. Director, Executive Vice Vice President; Clerk
President, Chief
Administrative Officer and
Secretary
Robert M. Smith Vice President None
David P. Stone Regional Vice President None
William H. Thomas, Jr. Regional Vice President None
Stephen J. Treadway Director, Chairman and President
President
Paul H. Troyer Senior Vice President None
Brian F. Trumbore Executive Vice President None
Timothy G. Uecker Vice President None
Richard M. Weil Assistant Secretary None
Glenn A. Zimmerman Vice President None
- -----------------
</TABLE>
Principal business address for all individuals listed is 2187 Atlantic
Street, Stamford, CT 06902.
(c) The Registrant has no principal underwriter that is not an affiliated
person of the Registrant or an affiliated person of such an affiliated
person.
-27-
<PAGE>
Item 30. Location of Accounts and Records.
The account books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of Investors Fiduciary
Trust Company, 21 West 10th Street, Kansas City, Missouri 64105, and Shareholder
Services, Inc., P.O. Box 5866, Denver, CO 80217.
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
(a) Not Applicable.
(b)(i) Registrant undertakes to file a post-effective amendment using
financial statements of PIMCO Columbus Circle International Fund,
which need not be certified, within four to six months from the
latter of the effective date of Post-Effective Amendment No. 26 or
the date on which shares of the Fund are first sold (other than
shares sold for seed money).
(b)(ii) Registrant undertakes to file a post-effective amendment using
financial statements of PIMCO Tax-Managed Structured Emerging
Markets Fund, which need not be certified, within four to six
months from the latter of the effective date of Post-Effective
Amendment No. 26 or the date on which shares of the Fund are first
sold (other than shares sold for seed money).
(b)(iii) Registrant undertakes to file a post-effective amendment using
financial statements of PIMCO Active Short-Term Fund, which need
not be certified, within four to six months from the latter of
the effective date of Post-Effective Amendment No. 27 or the
date on which shares of the Fund are first sold (other than
shares sold for seed money).
(c) Registrant, if requested to do so by the holders of at least 10%
of the Registrant's outstanding shares, will call a meeting of
shareholders for the purpose of voting upon the question of
removal of a trustee or trustees, and will assist communications
among shareholders as set forth within Section 16(c) of the 1940
Act.
-28-
<PAGE>
(d) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest report to
shareholders, upon request and without charge.
-29-
<PAGE>
NOTICE
------
A copy of the Agreement and Declaration of Trust of PIMCO Funds: Multi-
Manager Series (the "Trust"), together with all amendments thereto, is on file
with the Secretary of State of The Commonwealth of Massachusetts and notice is
hereby given that this instrument is executed on behalf of the Trust by an
officer of the Trust as an officer and not individually and that the obligations
of or arising out of this instrument are not binding upon any of the Trustees of
the Trust or shareholders of any series of the Trust individually but are
binding only upon the assets and property of the Trust or the respective series.
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 27 to this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Stamford, and
the State of Connecticut on the 9th day of October, 1997.
PIMCO FUNDS: MULTI-MANAGER SERIES
By: /s/ Stephen J. Treadway
---------------------------------
Stephen J. Treadway,
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 27 has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Stephen J. Treadway Trustee and President October 9, 1997
- ---------------------------------
Stephen J. Treadway
Robert A. Prindiville* Trustee
- ---------------------------------
Robert A. Prindiville
John P. Hardaway* Treasurer and Principal
- --------------------------------- Financial and Accounting
John P. Hardaway Officer
</TABLE>
<PAGE>
William D. Cvengros* Trustee
- ---------------------------------
William D. Cvengros
Gary L. Light* Trustee
- ---------------------------------
Gary L. Light
Joel Segall* Trustee
- ---------------------------------
Joel Segall
Donald P. Carter* Trustee
- ---------------------------------
Donald P. Carter
E. Philip Cannon* Trustee
- ---------------------------------
E. Philip Cannon
Gary A. Childress* Trustee
- ---------------------------------
Gary A. Childress
Richard L. Nelson* Trustee
- ---------------------------------
Richard L. Nelson
Lyman W. Porter* Trustee
- ---------------------------------
Lyman W. Porter
Alan Richards* Trustee
- ---------------------------------
Alan Richards
W. Bryant Stooks* Trustee
- ---------------------------------
W. Bryant Stooks
Gerald M. Thorne* Trustee
- ---------------------------------
Gerald M. Thorne
* By: /s/ Stephen J. Treadway
-----------------------------
Stephen J. Treadway,
Attorney-In-Fact
Date: October 9, 1997
---------------
-2-
<PAGE>
POWER OF ATTORNEY
-----------------
We, the undersigned Trustees and/or officers of PIMCO Funds: Multi-Manager
Series and Cash Accumulation Trust, hereby severally constitute and appoint
William D. Cvengros, Stephen J. Treadway, Newton B. Schott, Jr., R. Wesley
Burns, Henrik Larsen and Joseph B. Kittredge, Jr., our true and lawful
attorneys, with full power to each of them to sign for us, and in our name and
in the capacities indicated below, any and all amendments (including post-
effective amendments) to the Registration Statements of PIMCO Funds: Multi-
Manager Series and Cash Accumulation Trust on Form N-1A and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each of said attorneys full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney lawfully could do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Name: Capacity: Date:
- ---- -------- ----
<S> <C> <C>
/s/ Stephen J. Treadway Trustee, President 9/9/97
- ----------------------------
Stephen J. Treadway
/s/ E. Philip Cannon Trustee 9/9/97
- ----------------------------
E. Philip Cannon
/s/ Donald P. Carter Trustee 9/9/97
- ----------------------------
Donald P. Carter
/s/ Gary A. Childress Trustee 9/9/97
- ----------------------------
Gary A. Childress
/s/ William D. Cvengros Trustee 9/9/97
- ----------------------------
William D. Cvengros
/s/ Gary L. Light Trustee 9/9/97
- ----------------------------
Gary L. Light
/s/ Robert A. Prindiville Trustee 9/9/97
- ----------------------------
Robert A. Prindiville
/s/ Joel Segall Trustee 9/9/97
- ----------------------------
Joel Segall
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name: Capacity: Date:
- ---- -------- ----
<S> <C> <C>
/s/ W. Bryant Stooks Trustee 9/9/97
- ------------------------
W. Bryant Stooks
/s/ Gerald M. Thorne Trustee 9/9/97
- ------------------------
Gerald M. Thorne
/s/ Richard L. Nelson Trustee 9/9/97
- ------------------------
Richard L. Nelson
/s/ Lyman W. Porter Trustee 9/9/97
- ------------------------
Lyman W. Porter
/s/ Alan Richards Trustee 9/9/97
- ------------------------
Alan Richards
/s/ John P. Hardaway Treasurer 9/9/97
- ------------------------
John P. Hardaway
</TABLE>
-2-
