<PAGE>
CLASS A, B AND C SHARES
OCTOBER 1, 1998
PIMCO FUNDS ASSET ALLOCATION SERIES
PROSPECTUS
Actively managed portfolios of select PIMCO Funds
PIMCO Funds Asset Allocation Series consists of three actively managed mutual
funds that invest in a diversified portfolio of PIMCO Funds. In addition to a
broadly diversified portfolio, each Portfolio provides access to the extensive
asset allocation and investment management capabilities of PIMCO Advisors L.P.
and its affiliates.
<TABLE>
<CAPTION>
90/10 Portfolio 60/40 Portfolio 30/70 Portfolio
<S> <C> <C>
Seeks long-term capital Seeks long-term capital Seeks current income, with
appreciation. The Portfolio appreciation and current long-term capital
normally invests approximately income. The portfolio appreciation as a secondary
90% of its assets normally invests objective. The Portfolio
in PIMCO Stock Funds approximately 60% of its normally invests
and 10% in PIMCO assets in PIMCO Stock approximately 30% of its
Bond Funds. Funds and 40% in PIMCO assets in PIMCO Stock
Bond Funds. Funds and 70% in PIMCO
Bond Funds.
</TABLE>
PIMCO
-----
FUNDS
<PAGE>
PIMCO Funds: Multi-Manager Series
Prospectus
October 1, 1998
PIMCO Funds Asset Allocation Series
90/10 PIMCO Funds: Multi-Manager Series (the "Trust") is an open-end
PORTFOLIO series management investment company offering three diversified
60/40 investment portfolios (each a "Portfolio") in this Prospectus,
PORTFOLIO each with different investment objectives and strategies. The
30/70 Portfolios are professionally-managed series of the Trust
PORTFOLIO designed to take advantage of the benefits of asset allocation.
Each Portfolio seeks to achieve its particular investment objective
by investing within specified equity and fixed income ranges among a
number of other mutual funds in the PIMCO Funds family ("Underlying
Funds" or "Funds"). The address of PIMCO Funds: Multi-Manager Series
is 840 Newport Center Drive, Suite 300, Newport Beach, CA 92660.
PIMCO Advisors L.P. ("PIMCO Advisors" or the "Adviser") serves as
investment adviser to the Portfolios and determines how the assets of
each Portfolio are allocated among the Underlying Funds. PIMCO
Advisors and its affiliates also provide advisory services to the
Underlying Funds. See "Management of the Portfolios."
Each Portfolio offers three classes of shares in this Prospectus:
Class A shares (generally sold subject to an initial sales charge),
Class B shares (sold subject to a contingent deferred sales charge)
and Class C shares (sold subject to an asset based sales charge).
This Prospectus concisely describes the information investors should
know before investing in Class A, Class B and Class C shares of the
Portfolios. Please read this Prospectus carefully and keep it for
further reference.
Information about the investment objective of each Portfolio and of
the investment policies and restrictions applicable to each Portfolio
are set forth in this Prospectus. There can be no assurance that the
investment objective of any Portfolio will be achieved. Because the
market value of each Portfolio's investments will change, the
investment returns and net asset value per share of each Portfolio
will vary.
A Statement of Additional Information, dated October 1, 1998, as
amended or supplemented from time to time, is available free of
charge by writing to PIMCO Funds Distributors LLC (the
"Distributor"), 2187 Atlantic Street, Stamford, Connecticut 06902, or
by telephoning 1-800-426-0107. In addition, a Trust Prospectus dated
July 13, 1998 and a Prospectus of PIMCO Funds: Pacific Investment
Management Series dated September 25, 1998, each as amended or
supplemented from time to time (together, the "Underlying Fund
Prospectuses"), relating to Institutional Class shares of the
Underlying Funds, are available free of charge from the Distributor.
The Statement of Additional Information and the Underlying Fund
Prospectuses, which contain more detailed information about the
Trust, the Portfolios and/or the Underlying Funds, have each been
filed with the Securities and Exchange Commission and are
incorporated by reference in this Prospectus. The Securities and
Exchange Commission maintains an Internet World Wide Web site (at
www.sec.gov) which contains the Statement of Additional Information
and materials that are incorporated by reference into this Prospectus
and the Statement of Additional Information, the Underlying Fund
Prospectuses, and other information about the Trust, the Portfolios
and the Underlying Funds.
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 SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE PORTFOLIOS 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, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
TABLE OF CONTENTS
Overview..............................3 How to Redeem........................29
Schedule of Fees......................4 Distributor and Distribution and
Investment Objectives and Policies....6 Servicing Plans......................33
Underlying Funds.....................10 How Net Asset Value Is Determined....35
Performance Information..............16 Distributions........................36
How to Buy Shares....................17 Taxes................................36
Alternative Purchase Arrangements....21 Management of the Portfolios.........37
Exchange Privilege...................28 Description of the Trust.............42
Mailings to Shareholders.............43
2 PIMCO Funds Asset Allocation Series
<PAGE>
Overview
PIMCO Funds: Multi-Manager Series (the "Trust") is an open-end se-
ries management investment company organized as a Massachusetts
business trust on August 24, 1990. This Prospectus describes three
separate diversified investment portfolios (the "Portfolios") of-
fered by the Trust, PIMCO Funds Asset Allocation Series--90/10
Portfolio (the "90/10 Portfolio"), PIMCO Funds Asset Allocation
Series--60/40 Portfolio (the "60/40 Portfolio") and PIMCO Funds
Asset Allocation Series--30/70 Portfolio (the "30/70 Portfolio").
The Portfolios are intended for investors who prefer to have
their asset allocation decisions made by professional money manag-
ers. Each Portfolio has a distinct investment objective which it
seeks to achieve by investing within specified equity and fixed
income ranges among certain series ("Underlying Funds" or "Funds")
of the Trust and PIMCO Funds: Pacific Investment Management Se-
ries. PIMCO Advisors serves as investment adviser for each Fund of
the Trust and its affiliate, Pacific Investment Management Company
("Pacific Investment Management"), serves as investment adviser
for each Fund of PIMCO Funds: Pacific Investment Management Se-
ries. Some of the Underlying Funds invest primarily in equity se-
curities ("Underlying Stock Funds"); other Funds invest primarily
in fixed income securities, including money market instruments
("Underlying Bond Funds"). The Portfolios are named in accordance
with their equity/fixed income allocation targets. For instance,
the 90/10 Portfolio will normally invest approximately 90% of its
assets in Underlying Stock Funds and 10% of its assets in Under-
lying Bond Funds. The following summarizes certain key information
relating to the Portfolios and is qualified in its entirety by the
more detailed information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PIMCO FUNDS
ASSET ALLOCATION SERIES INVESTMENT OBJECTIVE ALLOCATION STRATEGY
-----------------------------------------------------------------------------------------------
<C> <C> <S>
PORTFOLIO 90/10 PORTFOLIO Long-term capital appreciation Under normal conditions,
PROFILES approximately 90% of the
Portfolio's assets will
be allocated among
Underlying Stock Funds
and 10% among Underlying
Bond Funds.
-----------------------------------------------------------------------------------------------
60/40 PORTFOLIO Long-term capital appreciation and current income Under normal conditions,
approximately 60% of the
Portfolio's assets will
be allocated among
Underlying Stock Funds
and 40% among Underlying
Bond Funds.
-----------------------------------------------------------------------------------------------
30/70 PORTFOLIO Current income, with long-term Under normal conditions,
capital appreciation as a secondary objective approximately 30% of the
Portfolio's assets will
be allocated among
Underlying Stock Funds
and 70% among Underlying
Bond Funds.
</TABLE>
The Underlying Funds have different investment objectives and
policies and different degrees of potential investment risk and
reward. Based on the allocation strategies listed above, an in-
vestor should choose among the Portfolios based on personal objec-
tives, investment time horizon, tolerance for risk and personal
financial circumstances. For example, because the 90/10 Portfolio
will normally invest approximately 90% of its assets in Underlying
Stock Funds, this Portfolio might be suitable for an investor with
a relatively long time horizon who seeks long-term capital appre-
ciation potential and has a fairly high tolerance for risk and
volatility. An investor with a shorter time horizon who seeks a
balance of income and long-term capital appreciation and has less
tolerance for risk and volatility might choose the 60/40 Portfo-
lio, which invests in a fairly balanced portfolio of Underlying
Stock and Bond Funds. An investor who seeks a higher level of cur-
rent income combined with some potential for long-term capital ap-
preciation and has a lower tolerance for risk and volatility might
choose the 30/70 Portfolio, which will normally invest approxi-
mately 70% of its assets in Underlying Bond Funds. While each
Portfolio provides a relatively high level of diversification in
comparison to most mutual funds, a single Portfolio may not be
suitable as a complete investment program. For a more complete de-
scription of the investment objectives and policies of the Portfo-
lios, please see "Investment Objectives and Policies."
Because each Portfolio will invest all of its assets in the Un-
derlying Funds, each Portfolio's investment performance is di-
rectly related to the investment performance of the Underlying
Funds in which it invests. The ability of a Portfolio to realize
its investment objective will depend upon the extent to which the
Underlying Funds realize their objectives. The value of the Under-
lying Funds' investments, and the net asset values of the shares
of both the Underlying Funds and the Portfolios, will fluctuate in
response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers in which the Un-
derlying Funds invest.
October 1, 1998 Prospectus 3
<PAGE>
The use of certain investment techniques by an Underlying Fund,
including various derivative instruments such as futures con-
tracts, options and swap agreements, will subject the Fund to
greater risk than Funds that do not employ such techniques. In ad-
dition, investments by certain Underlying Funds in small market
capitalization companies, foreign issuers (including emerging mar-
ket issuers) and foreign currencies, illiquid securities and other
instruments will expose those Funds to a higher degree of risk and
price volatility. Some Underlying Funds may also invest in fixed
income securities rated below investment grade (commonly referred
to as "high yield" securities or "junk" bonds), which are consid-
ered to be speculative by traditional investment standards. Each
Portfolio may be subject to these and other risks associated with
investments in the Underlying Funds depending upon the Portfolio's
asset allocation strategy. For a description of the various risks
associated with the Portfolios and the Underlying Funds, see "In-
vestment Objectives and Policies" and "Underlying Funds" in this
Prospectus, "Investment Objectives and Policies" in the Statement
of Additional Information and "Characteristics and Risks of Secu-
rities and Investment Techniques" in the Underlying Fund Prospec-
tuses, which are incorporated herein by reference and are avail-
able free of charge by telephoning the Distributor at 1-800-426-
0107.
Potential investors in the Portfolios should realize that they
may invest directly in the Underlying Funds and make their own as-
set allocation decisions. By investing in a Portfolio, an investor
will incur not only a proportionate share of the expenses of the
Portfolio but also a portion of the expenses of the Underlying
Funds in which the Portfolio invests (including investment advi-
sory and administrative fees charged at the Underlying Fund lev-
el). See "Schedule of Fees" and "Management of the Portfolios--
Underlying Fund Expenses."
Schedule of Fees
Expenses are one of several factors to consider when investing in
Class A, Class B or Class C shares of the Portfolios. The follow-
ing tables and Examples summarize the expenses of each Portfolio
that are borne by its Class A, Class B and Class C shareholders
based on estimated expenses for the Portfolio's current fiscal
year.
You should bear in mind that shareholders of each Portfolio
bear indirectly the expenses of the Underlying Funds in which the
Portfolio invests. The Portfolios will invest only in Institu-
tional Class shares of the Underlying Funds and will not pay any
sales charges or 12b-1 fees in connection with their investments
in the Underlying Funds. The Portfolios will, however, indirectly
bear their pro rata share of the fees and expenses (including ad-
visory and administrative fees) incurred by the Underlying Funds
that are borne by all Institutional Class shareholders. Because
the Underlying Funds have varied fee and expense levels and the
Portfolios will own different proportions of the Underlying Funds
at different times, the actual fees and expenses indirectly in-
curred by the Portfolios will vary.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER MAXIMUM INITIAL SALES CHARGE IM-
TRANSACTION POSED ON PURCHASES
EXPENSES (as a percentage of offering
price at time of purchase)
90/10 Portfolio and 60/40 Port-
folio 5.50% None None
30/70 Portfolio 4.50% None None
------------------------------------------------------------------
MAXIMUM SALES CHARGE IMPOSED ON
REINVESTED DIVIDENDS
(as a percentage of net asset
value at time of purchase) None None None
------------------------------------------------------------------
MAXIMUM CONTINGENT DEFERRED SALES
CHARGE ("CDSC")
(as a percentage of original
purchase price) 1%(/1/) 5%(/2/) 1%(/3/)
------------------------------------------------------------------
EXCHANGE FEE None None None
</TABLE>
1. Imposed only in certain circumstances where Class A shares are
purchased without a front-end sales charge at the time of pur-
chase. See "Alternative Purchase Arrangements."
2. The maximum CDSC is imposed on shares redeemed in the first
year. For shares held longer than one year, the CDSC declines ac-
cording to the schedule set forth under "Alternative Purchase Ar-
rangements--Deferred Sales Charge Alternative--Class B Shares."
3. The CDSC on Class C shares is imposed only on shares redeemed
in the first year.
4 PIMCO Funds Asset Allocation Series
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE: You EXAMPLE: You
would pay would pay
the the
following following
expenses on expenses on
a $1,000 a $1,000
investment investment
assuming assuming (1)
(1) 5% 5% annual
annual return and
return and (2) no
(2) redemption:
redemption
at the end
ANNUAL PORTFOLIO OPERATING EXPENSES of each time
(As a percentage of average net assets): period:
TOTAL
PIMCO FUNDS ADMINI- UNDERLYING PORTFOLIO
ASSET ALLOCATION ADVISORY STRATIVE 12B-1 FUND OPERATING ONE THREE ONE THREE
SERIES FEES FEES(/1/) FEES(/2/) EXPENSES(/3/) EXPENSES(/3/) YEAR YEARS YEAR YEARS
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A 90/10 PORTFOLIO None .40% .25% .79% 1.44% $ 69 $ 98 $ 69 $ 98
SHARES ----------------------------------------------------------------------------------------------------
60/40 PORTFOLIO None .40 .25 .67 1.32 68 95 68 95
----------------------------------------------------------------------------------------------------
30/70 PORTFOLIO None .40 .25 .55 1.20 57 81 57 81
CLASS B 90/10 PORTFOLIO None .40 1.00 .79 2.19 72 99 22 69
SHARES ----------------------------------------------------------------------------------------------------
60/40 PORTFOLIO None .40 1.00 .67 2.07 71 95 21 65
----------------------------------------------------------------------------------------------------
30/70 PORTFOLIO None .40 1.00 .55 1.95 70 91 20 61
CLASS C 90/10 PORTFOLIO None .40 1.00 .79 2.19 32 69 22 69
SHARES ----------------------------------------------------------------------------------------------------
60/40 PORTFOLIO None .40 1.00 .67 2.07 31 65 21 65
----------------------------------------------------------------------------------------------------
30/70 PORTFOLIO None .40 1.00 .55 1.95 30 61 20 61
</TABLE>
1. The Administrative Fees for each Portfolio are subject to re-
duction to the extent that the average net assets attributable in
the aggregate to the Portfolio's Class A, Class B and Class C
shares exceed $2.5 billion. See "Management of the Portfolios--Ad-
ministrative Fees."
2. 12b-1 fees which are equal to .25% represent servicing fees
which are paid annually to the Distributor and repaid to partici-
pating brokers, certain banks and other financial intermediaries.
12b-1 fees which exceed .25% represent aggregate distribution and
servicing fees. See "Distributor and Distribution and Servicing
Plans."
3. Based on estimated expenses for the current fiscal year. Under-
lying Fund Expenses for each Portfolio are estimated based upon
the initial allocation of each Portfolio's assets among the Under-
lying Funds and upon the total annual operating expenses of each
Underlying Fund. For a listing of the expenses associated with
each Underlying Fund, please see "Management of the Portfolios--
Underlying Fund Expenses." Total Portfolio Operating Expenses and
the Examples set forth above are based on estimates of the Under-
lying Fund Expenses each Portfolio will incur. Actual Underlying
Fund Expenses for each Portfolio are expected to vary with changes
in the allocation of the Portfolio's assets, and may be higher or
lower than those shown above.
The purpose of the foregoing tables is to assist investors in un-
derstanding the various costs and expenses of the Trust that are
borne directly or indirectly by Class A, Class B and Class C
shareholders of the Portfolios. The Examples for Class A shares
assume payment of the current maximum applicable sales load. Due
to the 12b-1 distribution fee imposed on Class B and Class C
shares, a Class B or Class C shareholder of a Portfolio may, de-
pending on the length of time the shares are held, pay more than
the economic equivalent of the maximum front-end sales charges
permitted by relevant rules of the National Association of Securi-
ties Dealers, Inc.
NOTE: THE FIGURES SHOWN IN THE EXAMPLES ARE ENTIRELY HYPOTHETICAL.
THEY ARE NOT REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EX-
PENSES; ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS
THAN SHOWN.
October 1, 1998 Prospectus 5
<PAGE>
Investment Objectives and Policies
The investment objective and general investment policies of each
Portfolio are described below. There can be no assurance that the
investment objective of any Portfolio will be achieved. Because
the market value of each Portfolio's investments will change, the
net asset value per share of each Portfolio will also vary.
The Portfolios are intended for investors who prefer to have
their asset allocation decisions made by professional money manag-
ers. Each Portfolio seeks to achieve its investment objective by
investing within specified equity and fixed income ranges among
the Underlying Funds. Each Underlying Fund is a series of the
Trust or PIMCO Funds: Pacific Investment Management Series and is
managed by PIMCO Advisors and/or its affiliates. The Portfolios
have different investment objectives and policies and degrees of
potential investment risk and reward depending upon their alloca-
tion strategies. An investor should choose a Portfolio based on
personal objectives, investment time horizon, tolerance for risk
and personal financial circumstances.
PORTFOLIO 90/10 PORTFOLIO seeks long-term capital appreciation. Under normal
DESCRIP- conditions, approximately 90% of the Portfolio's assets will be
TIONS allocated among Underlying Stock Funds and 10% among Underlying
Bond Funds.
60/40 PORTFOLIO seeks long-term capital appreciation and current
income. Under normal conditions, approximately 60% of the Portfo-
lio's assets will be allocated among Underlying Stock Funds and
40% among Underlying Bond Funds.
30/70 PORTFOLIO seeks current income. Long-term capital apprecia-
tion is a secondary objective. Under normal conditions, approxi-
mately 30% of the Portfolio's assets will be allocated among Un-
derlying Stock Funds and 70% among Underlying Bond Funds.
Unless otherwise noted, each Portfolio's investment objective
and its restrictions and policies relating to the investment of
its assets are non-fundamental and may be changed without share-
holder approval.
PIMCO Advisors serves as the investment adviser to the Portfo-
lios and determines how each Portfolio's assets are allocated
among the Underlying Funds. Each Portfolio invests in particular
Underlying Funds (which may differ from time to time) based on
various criteria observed by PIMCO Advisors. Among other things,
PIMCO Advisors analyses the various investment objectives, poli-
cies and strategies of the Underlying Funds to determine which
Funds, in combination with others, are appropriate in light of a
Portfolio's investment objective. PIMCO Advisors then makes allo-
cation decisions among these Underlying Funds in an attempt to
achieve the Portfolio's objective. The table below illustrates the
initial equity and fixed income allocation targets and typical
ranges for each Portfolio under normal market conditions.
EQUITY AND FIXED INCOME RANGES
(as a percentage of each Portfolio's average net assets)
<TABLE>
<CAPTION>
TYPICAL
PIMCO FUNDS TARGET ALLOCATION
ASSET ALLOCATION SERIES ALLOCATION RANGE*
------------------------------------------------------------
<S> <C> <C>
90/10 PORTFOLIO
Equity 90% 80% - 100%
Fixed Income (including money market**) 10% 0% - 20%
------------------------------------------------------------
60/40 PORTFOLIO
Equity 60% 50% - 70%
Fixed Income (including money market**) 40% 30% - 50%
------------------------------------------------------------
30/70 PORTFOLIO
Equity 30% 25% - 35%
Fixed Income (including money market**) 70% 65% - 75%
</TABLE>
* Each Portfolio may temporarily deviate from its asset alloca-
tion range for defensive purposes.
** Each Portfolio may hold a portion of its assets in PIMCO Money
Market Fund, in part, so that it can readily sell the securities
and have cash available to pay Portfolio expenses without incur-
ring capital gains.
6 PIMCO Funds Asset Allocation Series
<PAGE>
Each Portfolio is authorized to invest in any or all of the Un-
derlying Funds. However, it is expected that a Portfolio will in-
vest in only some of the Underlying Funds at any particular time.
A Portfolio's investment in a particular Underlying Fund may and
in some cases is expected to exceed 25% of its total assets. To
the extent that a Portfolio invests a significant portion of its
assets in an Underlying Fund, it will be particularly sensitive to
the risks associated with that Fund. Please see "Underlying Funds"
and "Principal Risks of the Underlying Funds" below for a descrip-
tion of the Underlying Funds and their attendant risks. The par-
ticular Underlying Funds in which each Portfolio may invest, the
equity and fixed income allocation targets and ranges specified
above, and the percentage of each Portfolio's assets invested from
time to time in any Underlying Fund or combination of Funds may be
changed from time to time without the approval of the Portfolio's
shareholders.
Each Portfolio's net asset value will fluctuate in response to
changes in the net asset values of the Underlying Funds in which
it invests. Each Portfolio will invest all of its assets in Under-
lying Funds, and may invest up to 100% of its assets in PIMCO
Money Market Fund (and thereby deviate from its asset allocation
range) for temporary defensive purposes. A Portfolio may also bor-
row money for temporary or emergency purposes.
Each Portfolio is also subject to certain investment restric-
tions that are described under "Investment Restrictions" in the
Statement of Additional Information.
OVERVIEW OF PIMCO Advisors' Asset Allocation Committee determines how the
ASSET Portfolios' assets are allocated and reallocated from time to time
ALLOCATION among the Underlying Funds. The individuals who constitute the As-
set Allocation Committee and are primarily responsible for making
asset allocation and other investment decisions for the Portfolios
are William D. Cvengros, Timothy R. Clark, Robert S. Venable, Da-
vid Young and Edward P. Rennie. Please see "Management of the
Portfolios" for a description of PIMCO Advisors and the individu-
als on the Asset Allocation Committee.
PIMCO Advisors' approach to asset allocation encompasses both
quantitative and qualitative processes designed to allocate the
Portfolios' assets among multiple Underlying Funds in order to
achieve broadly diversified Portfolios. The Asset Allocation Com-
mittee meets regularly to analyze various economic and market da-
ta. The Committee also collects and synthesizes multiple proprie-
tary models maintained by the Portfolio Managers of the Underlying
Funds, each of which is an affiliate of PIMCO Advisors. See "Man-
agement of the Portfolios--Portfolio Managers for the Underlying
Funds." These models are quantitatively compiled by the Committee
to provide a framework for developing PIMCO Advisors' allocation
strategies with respect to the major asset classes and sub-classes
held by the Underlying Funds.
The resulting framework assists the Asset Allocation Committee
in the following ways: (1) it identifies the desired tactical al-
location ranges for the Portfolios around long-term strategic
broad asset class and sub-class targets, (2) it identifies indi-
vidual Funds among the Underlying Funds that are expected to pro-
vide consistent, quality performance in the various asset classes
and sub-classes identified for the Portfolios, and (3) it is used
by the Committee in its on-going evaluation of the equity and
fixed income markets in an attempt to identify and implement val-
ue-added tactical shifts for the Portfolios. These tactical shifts
and resulting reallocations of Portfolio assets are not expected
to be large or frequent in nature, and should result in modest
levels of portfolio turnover for the Portfolios. See "Portfolio
Turnover."
EQUITY
PORTION OF The equity portion of each Portfolio will be allocated among a
THE number of Underlying Stock Funds which provide a broad range of
PORTFOLIOS equity-based investment objectives and strategies. By allocating
assets among these Funds, the equity portions of the Portfolios
can be diversified in multiple ways, including the following:
BY REGION
[_] U.S. Equities
[_] International Developed Markets Equities
[_] International Emerging Markets Equities
October 1, 1998 Prospectus 7
<PAGE>
BY INVESTMENT STYLE
[_] Blend (Broad Market)
[_] Value
[_] Growth
BY SIZE
[_] Large-Cap
[_] Mid-Cap
[_] Small-Cap
For a description of the Underlying Stock Funds and their in-
vestment objectives and strategies, please see "Underlying Funds."
The Portfolio Managers for the Underlying Stock Funds each have
different investment philosophies and processes which are re-
flected in the Funds they manage. Through asset allocation, PIMCO
Advisors can take advantage of the expertise of each Portfolio
Manager and combine the investment styles set forth above in pro-
viding broadly diversified Portfolios. For a description of each
Portfolio Manager and its particular investment philosophy and
process, please see "Management of the Portfolios--Portfolio Man-
agers for the Underlying Funds."
FIXED The fixed income portion of each Portfolio will be allocated among
INCOME a number of Underlying Bond Funds which provide a broad range of
PORTION OF fixed income-based investment objectives and strategies. By allo-
THE cating assets among these Funds, the fixed income portions of the
PORTFOLIOS Portfolios can be diversified in multiple ways, including the fol-
lowing:
BY REGION
[_] U.S. Fixed Income
[_] Foreign Fixed Income
BY SECTOR/INVESTMENT SPECIALTY
[_] Governments
[_] Mortgages
[_] Corporate
[_] Tax Exempt
[_] Inflation Indexed
BY CREDIT QUALITY
[_] Investment Grade/Money Market
[_] Medium Grade
[_] High Yield
BY DURATION
[_] Long-Term
[_] Intermediate-Term
[_] Short-Term
For a description of the Underlying Bond Funds and their in-
vestment objectives and strategies, please see "Underlying Funds."
Pacific Investment Management is the investment adviser and Port-
folio Manager for each Underlying Bond Fund. Through asset alloca-
tion, PIMCO Advisors can take advantage of the broad fixed income
expertise of Pacific Investment Management and combine the invest-
ment styles set forth above in providing broadly diversified Port-
folios. For a description of Pacific Investment Management and its
investment philosophy and process, please see "Management of the
Portfolios--Portfolio Managers for the Underlying Funds."
8 PIMCO Funds Asset Allocation Series
<PAGE>
POTENTIAL As described above, PIMCO Advisors has broad discretion to allo-
CONFLICTS cate and reallocate the Portfolios' assets among the Underlying
OF INTEREST Funds consistent with the Portfolios' investment objectives and
policies and the asset allocation ranges specified above. Although
PIMCO Advisors does not charge an investment advisory fee for its
asset allocation services, PIMCO Advisors and its affiliates indi-
rectly receive fees (including investment advisory and administra-
tive fees) from the Underlying Funds in which the Portfolios in-
vest. In this regard, PIMCO Advisors has a financial incentive to
invest a Portfolio's assets in Underlying Funds with higher fees
than other Funds, even if it believes that alternate investments
would better serve the Portfolio's investment program. PIMCO Advi-
sors is legally obligated to disregard that incentive in making
asset allocation decisions for the Portfolios. The Trustees and
officers of the Trust may also have conflicting interests in ful-
filling their fiduciary duties to both the Portfolios and the Un-
derlying Funds.
GENERAL Because the Portfolios invest all of their assets in the Under-
RISKS OF lying Funds, the risks associated with investing in the Portfolios
INVESTING are closely related to the risks associated with the securities
IN THE held by the Underlying Funds. The ability of a Portfolio to
PORTFOLIOS achieve its investment objective will depend upon the ability of
the Underlying Funds to achieve their objectives. Of course, the
extent to which the investment performance and risks associated
with a particular Portfolio correlate to those of a particular Un-
derlying Fund will depend upon the extent to which the Portfolio's
assets are allocated from time to time for investment in the Un-
derlying Fund. For a description of the principal risks associated
with investments in the Underlying Funds, please see "Underlying
Funds--Principal Risks of the Underlying Funds" in this Prospec-
tus, "Investment Objectives and Policies" in the Statement of Ad-
ditional Information and "Characteristics and Risks of Securities
and Investment Techniques" in the Underlying Fund Prospectuses,
which are incorporated herein by reference and are available free
of charge by telephoning the Distributor at 1-800-426-0107.
PORTFOLIO A change in the securities held by a Portfolio is known as "port-
TURNOVER folio turnover." Because PIMCO Advisors does not expect to reallo-
cate the Portfolios' assets among the Underlying Funds on a fre-
quent basis, the portfolio turnover rates for the Portfolios are
expected to be modest (i.e., less than 25%) in comparison to most
mutual funds. However, the Portfolios' indirectly bear the ex-
penses associated with portfolio turnover of the Underlying Funds,
a number of which have fairly high portfolio turnover rates (i.e.,
in excess of 100%). High portfolio turnover involves correspond-
ingly greater expenses to an Underlying Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestments in other securities. Share-
holders in the Portfolios may also bear expenses directly or indi-
rectly through sales of securities held by the Portfolios and the
Underlying Funds which result in realization of taxable capital
gains. See "Taxes."
SERVICE Many of the services provided to the Portfolios depend on the
SYSTEMS -- smooth functioning of computer systems. Many systems in use today
YEAR 2000 cannot distinguish between the year 1900 and the year 2000. Should
PROBLEM any of the service systems fail to process information properly,
that could have an adverse impact on the Portfolios' operations
and services provided to shareholders. The Adviser, Distributor,
Shareholder Servicing and Transfer Agent, Custodian, and certain
other service providers to the Portfolios have reported that each
is working toward mitigating the risks associated with the so-
called "year 2000 problem." However, there can be no assurance
that the problem will be corrected in all respects and that the
Portfolios' operations and services provided to shareholders will
not be adversely affected, nor can there be any assurance that the
year 2000 problem will not have an adverse effect on the entities
whose securities are held by the Underlying Funds or on domestic
or global equity markets or economies, generally.
"FUNDAMENTAL"
POLICIES
The investment objective of each Portfolio described in this Pro-
spectus may be changed by the Board of Trustees without share-
holder approval. If there is a change in a Portfolio's investment
objective, shareholders should consider whether the Portfolio re-
mains an appropriate investment in light of their then current fi-
nancial positions and needs.
October 1, 1998 Prospectus 9
<PAGE>
Underlying Funds
Each Portfolio invests all of its assets in Underlying Funds. Ac-
cordingly, each Portfolio's investment performance depends upon a
favorable allocation among the Underlying Funds as well as the
ability of the Underlying Funds to meet their objectives. There
can be no assurance that the investment objective of any Under-
lying Fund will be achieved. Shares of the Underlying Funds are
not offered in this Prospectus.
PORTFOLIO PIMCO Advisors serves as investment adviser for each of the Under-
MANAGERS lying Stock Funds and its affiliates serve as sub-advisers, except
that another affiliate, Pacific Investment Management, is the sole
investment adviser to PIMCO StocksPLUS Fund. Under these arrange-
ments, the sub-advisers and Pacific Investment Management (re-
ferred to collectively as "Portfolio Managers") have full invest-
ment discretion and make all determinations with respect to the
investment of the assets of these Funds. Pacific Investment Man-
agement is also the sole investment adviser to each Underlying
Bond Fund. The Portfolio Managers and their investment specialties
are listed below.
<TABLE>
<CAPTION>
PORTFOLIO MANAGER INVESTMENT SPECIALTY
--------------------------------------------------------------------
<C> <S>
PACIFIC INVESTMENT MANAGEMENT All sectors of the bond
market using its total
return philosophy--
seeking both yield and
capital appreciation
------------------------
COLUMBUS CIRCLE INVESTORS ("COLUMBUS CIRCLE") Stocks, using its
"Positive Momentum &
Positive Surprise"
discipline
------------------------
CADENCE CAPITAL MANAGEMENT ("CADENCE") Stocks of growth
companies that the
Portfolio Manager
believes are trading at
a reasonable price
------------------------
NFJ INVESTMENT GROUP ("NFJ") Value stocks that the
Portfolio Manager
believes are undervalued
and/or offer above-
average dividend yields
------------------------
BLAIRLOGIE CAPITAL MANAGEMENT ("BLAIRLOGIE") International stocks
using Scottish standards
of prudent investment
management with modern
quantitative analytical
tools
------------------------
PARAMETRIC PORTFOLIO ASSOCIATES ("PARAMETRIC") Stocks, using
quantitatively-driven
fundamental analysis and
economic methods, with
specialties in emerging
markets and tax-
efficient products
</TABLE>
10 PIMCO Funds Asset Allocation Series
<PAGE>
UNDERLYING The following provides a concise description of the investment ob-
STOCK FUNDS jective and primary investments of each Underlying Stock Fund and
lists the Fund's Portfolio Manager. For a complete description of
these Funds, please see the Underlying Fund Prospectuses, which
are incorporated herein by reference and are available free of
charge by telephoning the Distributor at 1-800-426-0107.
<TABLE>
<CAPTION>
PORTFOLIO
FUND NAME INVESTMENT OBJECTIVE PRIMARY INVESTMENTS MANAGER
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCK FUNDS PIMCO Equity Income Current income as a Common stocks with below- NFJ
primary objective; long- average price to earnings
term growth of capital ratios and higher dividend
as a secondary objective yields relative to their
industry groups
--------------------------------------------------------------------------------------------
PIMCO Renaissance Long-term growth of Common stocks with below- Columbus Circle
capital and income average valuations that
have improving business
fundamentals
--------------------------------------------------------------------------------------------
PIMCO Core Equity Long-term growth of Common stocks of companies Columbus Circle
capital; income as a with market
secondary objective capitalizations in excess
of $3 billion
--------------------------------------------------------------------------------------------
PIMCO Mid-Cap Equity Long-term growth of Common stocks of companies Columbus Circle
capital with market
capitalizations between
$800 million and $3
billion
--------------------------------------------------------------------------------------------
PIMCO Value Long-term growth of Common stocks with below- NFJ
capital and income average price to earnings
ratios relative to their
industry groups
--------------------------------------------------------------------------------------------
PIMCO Value 25 Long-term growth of Approximately 25 common NFJ
capital and income stocks of companies with
medium market
capitalizations and below-
average price to earnings
ratios relative to their
industry groups
--------------------------------------------------------------------------------------------
PIMCO Capital Growth of capital Common stocks of companies Cadence
Appreciation with market
capitalizations of at
least $1 billion that have
improving fundamentals and
whose stock is reasonably
valued by the market
--------------------------------------------------------------------------------------------
PIMCO Mid-Cap Growth Growth of capital Common stocks of companies Cadence
with market
capitalizations in excess
of $500 million that have
improving fundamentals and
whose stock is reasonably
valued by the market
--------------------------------------------------------------------------------------------
PIMCO Enhanced Equity Total return which Commons stocks represented Parametric
equals or exceeds the in the S&P 500
total return performance
of an index representing
the performance of a
reasonably broad
spectrum of common
stocks (currently the
Standard & Poor's 500
Composite Stock Price
Index (the "S&P 500"))
--------------------------------------------------------------------------------------------
PIMCO Tax-Efficient Maximum after-tax growth A broadly diversified Parametric
Equity of capital portfolio of at least 250
common stocks of companies
with larger
market capitalizations
-------------------------------------------------------------------------------------------------------
AGGRESSIVE PIMCO Small-Cap Value Long-term growth of Common stocks of companies NFJ
STOCK FUNDS capital and income with market
capitalizations between
$50 million and $1 billion
and below-average price to
earnings ratios relative
to their industry groups
--------------------------------------------------------------------------------------------
PIMCO Small-Cap Growth Growth of capital Common stocks of companies Cadence
with market
capitalizations between
$50 million and $1 billion
that have improving
fundamentals and whose
stock is reasonably valued
by the market
--------------------------------------------------------------------------------------------
PIMCO Micro-Cap Growth Long-term growth of Common stocks of companies Cadence
capital with market
capitalizations of less
than $100 million that
have improving
fundamentals and whose
stock is reasonably valued
by the market
-------------------------------------------------------------------------------------------------------
INTERNATIONAL PIMCO International Capital appreciation; Non-U.S. stocks of Blairlogie
STOCK FUNDS income is incidental companies with small,
medium and large market
capitalizations (developed
and emerging markets)
--------------------------------------------------------------------------------------------
PIMCO International Long-term capital An international portfolio Columbus Circle
Growth appreciation of equity and equity-
related securities
--------------------------------------------------------------------------------------------
PIMCO Structured Long-term growth of Common stocks of companies Parametric
Emerging Markets capital located in emerging market
countries
--------------------------------------------------------------------------------------------
PIMCO Tax-Efficient Same as PIMCO Structured Common stocks of companies Parametric
Structured Emerging Markets Fund, located in emerging market
Emerging Markets except that the Fund countries
seeks to achieve
superior after-tax
returns by employing a
variety of tax-efficient
management strategies
-------------------------------------------------------------------------------------------------------
SPECIALIZED PIMCO Innovation Capital appreciation; no Common stocks of companies Columbus Circle
STOCK FUNDS consideration given to with small, medium and
income large market
capitalizations
(technology-related stocks)
--------------------------------------------------------------------------------------------
PIMCO StocksPLUS Total return which S&P 500 stock index Pacific
exceeds the total return derivatives backed by Investment
performance of the S&P a portfolio of fixed Management
500 income securities
</TABLE>
October 1, 1998 Prospectus 11
<PAGE>
UNDERLYING Pacific Investment Management has full investment discretion and
BOND FUNDS makes all determinations with respect to the investment of the as-
sets of each Underlying Bond Fund.
The investment objective of each Underlying Bond Fund (except
as provided below) is to seek to realize maximum total return,
consistent with preservation of capital and prudent investment
management. The "total return" sought by most of the Underlying
Bond Funds will consist of interest and dividends from underlying
securities and capital appreciation or depreciation reflected in
changes in the value of portfolio securities. The investment ob-
jective of PIMCO Real Return Bond Fund is to seek to realize maxi-
mum real return, consistent with preservation of real capital and
prudent investment management. "Real return" is total return ad-
justed for inflation. The investment objective of each of PIMCO
Money Market Fund and PIMCO Short-Term Fund is to seek to obtain
maximum current income consistent with preservation of capital and
daily liquidity. PIMCO Money Market Fund also attempts to maintain
a stable net asset value of $1.00 per share, although there can be
no assurance that it will be successful in doing so. The invest-
ment objective of PIMCO Municipal Bond Fund is to seek high cur-
rent income exempt from federal income tax, consistent with pres-
ervation of capital. Capital appreciation is a secondary objective
of PIMCO Municipal Bond Fund.
The following provides a concise description of the primary in-
vestments of and other information relating to each Underlying
Bond Fund. For a complete description of these Funds, please see
the Underlying Fund Prospectus for PIMCO Funds: Pacific Investment
Management Series, which is incorporated herein by reference and
is available free of charge by telephoning the Distributor at 1-
800-426-0107.
<TABLE>
<CAPTION>
FUND NAME PRIMARY INVESTMENTS DURATION CREDIT QUALITY(/1/)
---------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
(less than or
equal to)
SHORT-TERM PIMCO Money Market Money market instruments 90 days Min 95% Aaa or Prime 1;
BOND dollar-weighted (less than or equal to)
FUNDS average maturity 5% Aa or Prime 2
----------------------------------------------------------------------------------------------------------
PIMCO Short-Term Money market instruments 0-1 yr B to Aaa; max 10%
and short maturity below Baa
fixed
income securities
----------------------------------------------------------------------------------------------------------
PIMCO Low Duration Short and intermediate 1-3 yrs B to Aaa; max 10%
maturity fixed income below Baa
securities
---------------------------------------------------------------------------------------------------------------------
INTERMEDIATE- PIMCO Moderate Duration Short and intermediate 2-5 yrs B to Aaa; max 10%
TERM maturity fixed income below Baa
BOND FUNDS securities
----------------------------------------------------------------------------------------------------------
PIMCO Real Return Bond Inflation-indexed fixed N/A B to Aaa; max 10%
income securities below Baa
----------------------------------------------------------------------------------------------------------
PIMCO Total Return Intermediate maturity 3-6 yrs B to Aaa; max 10%
fixed income securities below Baa
----------------------------------------------------------------------------------------------------------
PIMCO Total Return II Same as PIMCO Total Return 3-6 yrs Baa to Aaa
Fund, except that the
Fund
is subject to credit quality and
foreign issuer
restrictions
--------------------------------------------------------------------------------------
PIMCO High Yield Higher yielding fixed 2-6 yrs B to Aaa; min 65%
income securities below Baa
--------------------------------------------------------------------------------------------------------
LONG-TERM PIMCO Long-Term U.S. Government Long-term maturity (greater than or A to Aaa
BOND fixed income securities equal to) 8 yrs
FUNDS
--------------------------------------------------------------------------------------------------------
INTERNATIONAL PIMCO Global Bond Intermediate maturity 3-7 yrs B to Aaa; max 10%
BOND U.S. and foreign fixed below Baa
FUNDS income
securities
--------------------------------------------------------------------------------------
PIMCO Foreign Bond Intermediate maturity 3-7 yrs B to Aaa; max 10%
hedged foreign fixed below Baa
income
securities
--------------------------------------------------------------------------------------
PIMCO Emerging Markets Bond Emerging market fixed 0-8 yrs B to Aaa
income securities
--------------------------------------------------------------------------------------------------------
TAX EXEMPT PIMCO Municipal Bond Investment grade 3-10 yrs Ba to Aaa; max 10%
BOND municipal securities below Baa
FUNDS (tax-exempt
bonds)
<CAPTION>
FOREIGN(/2/)
- ----------------
<C>
0%
- ----------------
0-5%
- ----------------
0-20%
- ----------------
0-20%
- ----------------
0-35%
- ----------------
0-20%
- ----------------
0%
- ----------------
0%
- ----------------
0%
- ----------------
25-75%
- ----------------
(greater than
or equal to ) 85%
- ----------------
(greater than
or equal to ) 80%
- ----------------
0%
</TABLE>
1. As rated by Moody's Investors Service, Inc., or if unrated, de-
termined by Pacific Investment Management to be of comparable
quality.
2. Percentage limitations relate to foreign currency-denominated
securities for all Underlying Bond Funds except PIMCO Foreign
Bond, Global Bond and Emerging Markets Bond Funds. Percentage lim-
itations for these three Funds relate to securities of foreign is-
suers, denominated in any currency. Each Underlying Bond Fund (ex-
cept PIMCO Municipal Bond and Long-Term U.S. Government Funds) may
invest beyond these limits in U.S. dollar-denominated securities
of foreign issuers. Neither PIMCO Municipal Bond Fund nor PIMCO
Long-Term U.S. Government Fund may invest in any securities of
foreign issuers.
12 PIMCO Funds Asset Allocation Series
<PAGE>
Each Underlying Bond Fund will normally invest at least 65% of
its assets in the following types of securities, which, unless
provided above, may be issued by domestic or foreign entities and
denominated in U.S. dollars or foreign currencies: securities is-
sued or guaranteed by the U.S. Government, its agencies or instru-
mentalities ("U.S. Government securities"); corporate debt securi-
ties, including convertible securities and corporate commercial
paper; mortgage-backed and other asset-backed securities; infla-
tion-indexed bonds issued by both governments and corporations;
structured notes, including hybrid or "indexed" securities, catas-
trophe bonds and loan participations; delayed funding loans and
revolving credit facilities; bank certificates of deposit, fixed
time deposits and bankers' acceptances; repurchase agreements and
reverse repurchase agreements; debt securities issued by states or
local governments and their agencies, authorities and instrumen-
talities; obligations of foreign governments or their subdivi-
sions, agencies and instrumentalities; and obligations of interna-
tional agencies or supranational entities. Fixed income securities
may have fixed, variable, or floating rates of interest, including
rates of interest that vary inversely at a multiple of a desig-
nated or floating rate, or that vary according to changes in rela-
tive values of currencies. Most of the Underlying Bond Funds may
also make substantial use of derivative instruments or may use a
series of purchase and sale contracts or other investment tech-
niques to obtain market exposure to the securities in which they
primarily invests.
ADDITIONAL In addition to the Funds listed above, a Portfolio may invest in
UNDERLYING additional Underlying Funds, including those that may become
FUNDS available for investment in the future, at the discretion of PIMCO
Advisors and without shareholder approval.
PRINCIPAL There can be no assurance that the investment objectives of any of
RISKS OF the Underlying Funds will be achieved. The following summarizes
THE principal risks associated with investments in the Underlying
UNDERLYING Funds. The summary is not intended to be exhaustive. For a more
FUNDS complete description of these risks, please refer to "Investment
Objectives and Policies" in the Statement of Additional Informa-
tion and "Characteristics and Risks of Securities and Investment
Techniques" in the Underlying Fund Prospectuses, which are incor-
porated herein by reference and are available free of charge by
telephoning the Distributor at 1-800-426-0107.
MARKET RISK Most securities in which the Underlying Funds invest
are subject to some degree of market risk, which is the risk of
unfavorable market-induced changes in the value of a security. The
following summarizes general market risks associated with invest-
ments in fixed income and equity securities.
Fixed Income Securities Changes in the market values of fixed
income securities (i.e., capital appreciation or depreciation) are
largely a function of changes in the current level of interest
rates. The value of an Underlying Fund's investments in fixed in-
come securities will typically change as the level of interest
rates fluctuate. During periods of falling interest rates, the
value of fixed income securities generally rise. Conversely, dur-
ing periods of rising interest rates, the value of fixed income
securities generally decline.
"Duration" is one measure of the expected life of a fixed in-
come security. When interest rates are falling, a portfolio with a
shorter duration will generally not generate as high a level of
total return as a portfolio with a longer duration. When interest
rates are rising, a portfolio with a shorter duration will gener-
ally outperform a longer duration portfolio. When interest rates
are flat, shorter duration portfolios generally will not generate
as high a level of total return as longer duration portfolios (as-
suming that long-term interest rates are higher than short-term
rates, which is commonly the case). Accordingly, longer duration
portfolios generally have a greater potential for total return
than shorter duration portfolios, but are also subject to greater
levels of market risk and price volatility. Therefore, Underlying
Bond Funds with longer average portfolio durations (e.g., PIMCO
Long-Term U.S. Government Fund) are generally subject to higher
levels of market risk than Funds with shorter durations (e.g.,
PIMCO Money Market, Short-Term and Low Duration Funds). Also, some
portfolios (e.g., those with mortgage-backed and other prepayable
securities) have changing durations and may have increasing dura-
tions precisely when that is least advantageous (i.e., when inter-
est rates are rising).
Certain types of securities in which the Underlying Bond Funds
may invest are particularly sensitive to fluctuations in
prevailing interest rates and have relatively high levels of
market risk. These include various mortgage- related securities
(for instance, the interest-only or "IO" class of a stripped
mortgage-backed security) and "zero
October 1, 1998 Prospectus 13
<PAGE>
coupon" securities (fixed income securities, including certain
U.S. Government securities, that do not make periodic interest
payments and are purchased at a discount from their value at
maturity). Please see "Investment Objectives and Policies" in the
Statement of Additional Information for a description of these and
other fixed income securities that are particularly sensitive to
market risk.
Equity Securities Changes in the market values of equity secu-
rities (i.e., capital appreciation or depreciation) may depend
upon a number of factors, including: general economic and market
conditions, prospects of the security's issuer, changing interest
rates, real or perceived economic and competitive industry condi-
tions, and currency exchange rates. Generally, over the long term,
the total return obtained by a portfolio that invests primarily in
equity securities has historically been greater than that obtained
by a portfolio that invests primarily in fixed income securities.
However, an equity portfolio is generally subject to greater mar-
ket risk and price volatility than a fixed income portfolio and is
considered to be a more aggressive investment.
CREDIT RISK OF FIXED INCOME SECURITIES Credit risk associated with
investments in fixed income securities relates to the ability of
the issuer to make scheduled payments of principal and interest on
an obligation. The Underlying Funds that invest in fixed income
securities are subject to varying degrees of risk that the issuers
of the securities will have their credit ratings downgraded or
will default, potentially reducing the Underlying Fund's share
price and income level. Nearly all fixed income securities are
subject to some credit risk, whether the issuers of the securities
are corporations, states and local governments or foreign govern-
ments. Even certain U.S. Government securities are subject to
credit risk.
Credit risk is particularly acute for Underlying Funds which
invest in so-called "high-yield" securities or "junk" bonds, which
are fixed income securities rated lower than Baa by Moody's In-
vestors Service, Inc. ("Moody's") or BBB by Standard & Poor's Rat-
ings Services ("S&P"), or are determined to be of comparable qual-
ity to securities so rated. While such securities offer the poten-
tial for higher investment returns than higher-rated securities,
they carry a high degree of credit risk and are considered predom-
inantly speculative with respect to the issuer's continuing abil-
ity to meet principal and interest payments. High yield securities
may also be more susceptible to real or perceived adverse economic
and competitive industry conditions and may be less liquid than
higher-rated securities. Accordingly, Underlying Funds which in-
vest a significant portion of their assets in high yield securi-
ties (e.g., PIMCO High Yield and Emerging Markets Bond Funds) are
subject to substantial credit risk, while Funds that invest in
higher quality securities (e.g., PIMCO Money Market and Long-Term
U.S. Government Bond Funds) are subject to less credit risk.
INVESTMENTS IN COMPANIES WITH SMALL MARKET CAPITALIZATIONS Certain
Underlying Stock Funds (in particular, PIMCO Micro-Cap Growth,
Small-Cap Value and Small-Cap Growth Funds) invest in common stock
of companies with market capitalizations that are small compared
to other publicly traded companies. Investments in smaller, less
seasoned companies may present greater opportunities for growth
and capital appreciation, but also involve greater risks than cus-
tomarily are associated with larger, more established companies.
These companies may have limited product lines, markets or finan-
cial resources, or they may be dependent upon a limited management
group. In addition, their securities may be traded in the over-
the-counter market or on a regional exchange, or may otherwise
have limited liquidity.
FOREIGN SECURITIES AND CURRENCIES Many Underlying Funds (in par-
ticular, PIMCO International, International Growth, Structured
Emerging Markets, Tax-Efficient Structured Emerging Markets,
Global Bond, Foreign Bond and Emerging Markets Bond Funds) invest
in securities of foreign issuers, securities traded principally in
securities markets outside the United States and/or securities de-
nominated in foreign currencies (together, "foreign securities").
Investing in foreign securities involves special risks not typ-
ically associated with investing in U.S. securities. These risks
include: differences in accounting, auditing and financial report-
ing standards; generally higher commission rates on foreign port-
folio transactions; higher custodial costs; the possibility that
foreign taxes will be charged on dividends and interest payable on
foreign securities; the possibility of nationalization, expropria-
tion or confiscatory
14 PIMCO Funds Asset Allocation Series
<PAGE>
taxation; adverse changes in investment or exchange control regu-
lations (which may include suspension of the ability to transfer
currency from a country); political instability; the possibility
of unfavorable foreign economic factors; and greater price vola-
tility.
Certain Underlying Funds (in particular, PIMCO Structured
Emerging Markets, Tax-Efficient Structured Emerging Markets and
Emerging Markets Bond Funds) may invest in the securities of is-
suers based in countries with developing or "emerging market"
economies. These securities may present market, credit, currency,
liquidity, legal, political and other risks greater than, or in
addition to, risks of investing in developed foreign countries.
These risks include: high currency exchange rate fluctuations;
greater social, economic and political uncertainty and instability
(including the risk of war); more substantial governmental in-
volvement in the economy; less governmental supervision and regu-
lation of the securities markets and participants in those mar-
kets; unavailability of currency hedging techniques in certain
emerging market countries; the fact that companies in emerging
market countries may be newly organized and may be smaller and
less seasoned companies; the difference in, or lack of, auditing
and financial reporting standards, which may result in unavaila-
bility of material information about issuers; different clearance
and settlement procedures, which may be unable to keep pace with
the volume of securities transactions or otherwise make it diffi-
cult to engage in such transactions; the risk that it may be more
difficult to obtain and/or enforce legal judgments in foreign ju-
risdictions; and significantly smaller market capitalizations of
emerging market issuers.
Underlying Funds that invest in fixed income securities denomi-
nated in foreign currencies or in foreign currencies and related
derivative instruments (in particular, PIMCO Global Bond, Foreign
Bond and Emerging Markets Bond Funds) and Underlying Funds that
invest in equity securities traded principally in foreign curren-
cies, may be adversely affected by changes in foreign currency ex-
change rates. Those rates may fluctuate significantly over short
periods of time for a number of reasons, including the forces of
supply and demand in the foreign exchange markets, actual or per-
ceived changes in interest rates, and intervention (or the failure
to intervene) by U.S. or foreign governments or central banks, or
by currency controls or political developments in the U.S. or
abroad. For example, significant uncertainty surrounds the pro-
posed introduction of the euro (a common currency unit for the Eu-
ropean Union) in January 1999 and its effect on the value of secu-
rities denominated in local European currencies.
DERIVATIVE INSTRUMENTS The Underlying Funds (with the exception of
PIMCO Money Market Fund) may utilize a number of derivative in-
struments for risk management purposes or as part of their invest-
ment strategies. These include futures contracts, options con-
tracts, options on futures contracts, forward contracts and swap
agreements. Generally, derivatives are financial contracts whose
value depends upon, or is derived from, the value of an underlying
asset, reference rate or index, and may relate to stocks, bonds,
interest rates, currencies or currency exchange rates, commodi-
ties, and related indexes. For a description of the various deriv-
ative instruments utilized by the Underlying Funds, please see
"Investment Objectives and Policies" in the Statement of Addi-
tional Information.
The use of derivatives instruments involves risks different
from, or greater than, the risks associated with investing di-
rectly in securities and other more traditional investments. The
following provides a general discussion of important risk factors
relating to the use of derivative instruments by the Underlying
Funds.
Management Risk Derivative products are highly specialized in-
struments that require investment techniques and risk analyses
different from those associated with stocks and bonds. The use of
a derivative requires an understanding not only of the underlying
instrument but also of the derivative itself, without the benefit
of observing the performance of the derivative under all possible
market conditions.
Credit Risk The use of a derivative involves the risk that a
loss may be sustained as a result of the failure of another party
to the contract (usually referred to as a "counterparty") to make
required payments or otherwise comply with the contract's terms.
Liquidity Risk Liquidity risk exists when a particular deriva-
tive instrument is difficult to purchase or sell. If a derivative
transaction is particularly large or if the relevant market is il-
liquid (as is the case with many privately negotiated deriva-
tives), it may not be possible to initiate a transaction or liqui-
date a position at an advantageous time or price.
October 1, 1998 Prospectus 15
<PAGE>
Leverage Risk Because many derivatives have a leverage compo-
nent, adverse changes in the value or level of the underlying as-
set, reference rate or index can result in a loss substantially
greater than the amount invested in the derivative itself. Certain
derivatives have the potential for unlimited loss, regardless of
the size of the initial investment. When an Underlying Fund uses
derivatives for leverage, investments in that Fund will tend to be
more volatile, resulting in larger gains or losses in response to
market changes.
Market and Other Risks Like most other investments, derivative
instruments are subject to the general risk that the market value
of the instrument will change in a way detrimental to the invest-
or's interest. Other risks in using derivatives include the risk
of mispricing or improper valuation of derivatives and the inabil-
ity of derivatives to correlate perfectly with underlying assets,
rates and indexes. Many derivatives, in particular privately nego-
tiated derivatives, are complex and often valued subjectively. Im-
proper valuations can result in increased cash payment require-
ments to counterparties or a loss of value to an Underlying Fund.
Also, the value of derivatives may not correlate perfectly, or at
all, with the value of the assets, reference rates or indices they
are designed to closely track. Consequently, an Underlying Fund's
use of derivatives may not always be an effective means of, and
sometimes could be counterproductive to, furthering the Fund's in-
vestment objective or risk management strategy.
A NOTE ON PIMCO STOCKSPLUS FUND While the objective of PIMCO
StocksPLUS Fund is to achieve a total return which exceeds the to-
tal return performance of the S&P 500, it does so by investing
substantially all of its assets in a combination of equity-based
derivative instruments and a portfolio of fixed income securities.
Consequently, the risks of investing in the Fund include the risks
of derivatives and the risks generally associated with the Under-
lying Bond Funds. To the extent that the Fund invests in S&P 500
derivatives backed by a portfolio of fixed income securities, un-
der certain conditions, generally in a market where the value of
both S&P 500 derivatives and fixed income securities are declin-
ing, the Fund may experience greater losses than would be the case
if it were to invest directly in a portfolio of S&P 500 stocks.
CERTAIN OTHER MISCELLANEOUS INVESTMENT PRACTICES In addition to
investing in the securities listed above under "Primary Invest-
ments," some or all of the Underlying Funds may to varying
extents: lend portfolio securities; enter into repurchase agree-
ments and reverse repurchase agreements; purchase and sell securi-
ties on a when-issued or delayed delivery basis; enter into for-
ward commitments to purchase securities; purchase and write call
and put options on securities and securities indexes; enter into
futures contracts, options on futures contracts and swap agree-
ments; invest in foreign securities; and buy or sell foreign cur-
rencies and enter into forward foreign currency contracts. These
and the other types of securities and investment techniques used
by the Underlying Funds all have attendant risks. The Portfolios
are indirectly subject to some or all of these risks to varying
degrees because they invest all of their assets in the Underlying
Funds. For further information concerning the investment practices
of and risks associated with the Underlying Funds, please see "In-
vestment Objectives and Policies" in the Statement of Additional
Information and the Underlying Fund Prospectuses, which are incor-
porated herein by reference and are available free of charge by
telephoning the Distributor at 1-800-426-0107.
Performance Information
From time to time the Trust may make available certain information
about the performance of the Class A, Class B and Class C shares
of some or all of the Portfolios. Information about a Portfolio's
performance is based on that Portfolio's record to a recent date
and is not intended to indicate future performance. Performance
information is computed separately for each Portfolio's Class A,
Class B and Class C shares in accordance with the formulas de-
scribed below. Because Class B and Class C shares bear the expense
of the distribution fee attending the deferred sales charge (Class
B) and asset based sales charge (Class C) alternatives and certain
other expenses, it is expected that, under normal circumstances,
the level of performance of a Portfolio's Class B and Class C
shares will be lower than that of the Portfolio's Class A shares,
although an investment in Class B or Class C shares is not reduced
by the front-end sales charge generally applicable to an invest-
ment in Class A shares.
16 PIMCO Funds Asset Allocation Series
<PAGE>
The total return of Class A, Class B and/or Class C shares of
all Portfolios may be included in advertisements or other written
material. When a Portfolio's total return is advertised with re-
spect to its Class A, Class B and/or Class C shares, it will be
calculated for the past year, the past five years, and the past
ten years (or if the Portfolio has been offered for a period
shorter than one, five or ten years, that period will be substi-
tuted) since the establishment of the Portfolio, as more fully de-
scribed in the Statement of Additional Information. Total return
for each class is measured by comparing the value of an investment
in the Portfolio at the beginning of the relevant period (in the
case of Class A shares, giving effect to the maximum initial sales
charge) to the redemption value of the investment in the Portfolio
at the end of the period (assuming immediate reinvestment of any
dividends or capital gains distributions at net asset value and
giving effect to the deduction of the maximum CDSC which would be
payable). Total return may be advertised using alternative methods
that reflect all elements of return.
Quotations of yield for a Portfolio or class will be based on
the investment income per share (as defined by the Securities and
Exchange Commission) during a particular 30-day (or one-month) pe-
riod (including dividends and interest), less expenses accrued
during the period ("net investment income"), and will be computed
by dividing net investment income by the maximum public offering
price per share on the last day of the period. The Portfolios may
also provide current distribution information to their sharehold-
ers in shareholder reports or other shareholder communications, or
in certain types of sales literature provided to prospective in-
vestors. Current distribution information for a particular class
of a Portfolio will be based on distributions for a specified pe-
riod (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. Current distribution rates differ from
standardized yield rates in that they represent what a class of a
Portfolio has declared and paid to shareholders as of the end of a
specified period rather than the Portfolio's actual net investment
income for that period.
The Adviser may also report to shareholders or to the public in
advertisements concerning its performance as adviser to clients
other than the Portfolios, and on its comparative performance or
standing in relation to other money managers. Such comparative in-
formation may be compiled or provided by independent ratings serv-
ices or by news organizations. Any performance information,
whether related to the Portfolios, the Adviser or an advisory af-
filiate of the Adviser, should be considered in light of the Port-
folios' investment objectives and policies, characteristics and
quality of the Portfolios' investments, and the market conditions
during the time period indicated, and should not be considered to
be representative of what may be achieved by the Portfolios in the
future.
Investment results of the Portfolios will fluctuate over time,
and any representation of the Portfolios' 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.
How to Buy Shares
Class A, Class B and Class C shares of each Portfolio are continu-
ously offered through the Trust's principal underwriter, PIMCO
Funds Distributors LLC (the "Distributor"), and through other
firms which have dealer agreements with the Distributor ("partici-
pating brokers") or which have agreed to act as introducing bro-
kers for the Distributor ("introducing brokers").
There are two ways to purchase Class A, Class B or Class C
shares: either 1) through your dealer or broker which has a dealer
agreement with the Distributor; or 2) directly by mailing a PIMCO
Funds account application (an "account application") with payment,
as described below under the heading Direct Investment, to the
Distributor (if no dealer is named in the account application, the
Distributor may act as dealer).
Each Portfolio currently offers and sells three classes of
shares in this Prospectus (Class A, Class B and Class C). Shares
may be purchased at a price equal to their net asset value per
share next determined after receipt of an order, plus a sales
charge which, at the election of the purchaser, may be imposed ei-
ther (i) at the time of the purchase in the case of Class A shares
(the "initial sales charge alternative"), (ii) on a contingent de-
ferred basis in the case of
October 1, 1998 Prospectus 17
<PAGE>
Class B shares (the "deferred sales charge alternative"), or (iii)
by the deduction of an ongoing asset based sales charge in the
case of Class C shares (the "asset based sales charge alterna-
tive"). In certain circumstances, Class A and Class C shares are
also subject to a CDSC. See "Alternative Purchase Arrangements."
Purchase payments for Class B and Class C shares are fully in-
vested at the net asset value next determined after acceptance of
the trade. Purchase payments for Class A shares, less the applica-
ble sales charge, are invested at the net asset value next deter-
mined after acceptance of the trade.
All purchase orders received by the Distributor prior to the
close of regular trading (normally 4:00 p.m., Eastern time) on the
New York Stock Exchange (the "Exchange"), on a regular business
day, are processed at that day's offering price. However, orders
received by the Distributor from dealers or brokers after the of-
fering price is determined that day will receive such offering
price if the orders were received by the dealer or broker from its
customer prior to such determination and were transmitted to and
received by the Distributor prior to its close of business that
day (normally 5:00 p.m., Eastern time) or, in the case of certain
retirement plans, received by the Distributor prior to 9:30 a.m.,
Eastern time on the next business day. Purchase orders received on
other than a regular business day will be executed on the next
succeeding regular business day. The Distributor, in its sole dis-
cretion, may accept or reject any order for purchase of Portfolio
shares. The sale of shares will be suspended during any period in
which the Exchange is closed for other than weekends or holidays,
or if permitted by the rules of the Securities and Exchange Com-
mission, when trading on the Exchange is restricted or during an
emergency which makes it impracticable for the Portfolios to dis-
pose of their securities or to determine fairly the value of their
net assets, or during any other period as permitted by the Securi-
ties and Exchange Commission for the protection of investors.
Except for purchases through the PIMCO Funds Auto-Invest plan,
the PIMCO Funds Auto-Exchange plan, investments pursuant to the
Uniform Gifts to Minors Act, and tax-qualified and wrap programs
referred to below under "Tax-Qualified Retirement Plans" and
"Sales at Net Asset Value," the minimum initial investment in
Class A, Class B or Class C shares of any Portfolio or other se-
ries of the Trust or any series of PIMCO Funds: Pacific Investment
Management Series is $2,500, and the minimum additional investment
is $100 per Portfolio. For information about dealer commissions,
see "Alternative Purchase Arrangements" below. Persons selling
Portfolio shares may receive different compensation for selling
Class A, Class B or Class C shares. Normally, Portfolio shares
purchased through participating brokers are held in the investor's
account with that broker. No share certificates will be issued un-
less specifically requested in writing by an investor or broker-
dealer.
DIRECT Investors who wish to invest in Class A, Class B or Class C shares
INVESTMENT of the Portfolios directly, rather than through a participating
broker, may do so by opening an account with the Distributor. To
open an account, an investor should complete the account applica-
tion. All shareholders who open direct accounts with the Distribu-
tor will receive from the Distributor individual confirmations of
each purchase, redemption, dividend reinvestment, exchange or
transfer of Trust shares, including the total number of Trust
shares owned as of the confirmation date, except that purchases
which result from the reinvestment of daily-accrued dividends
and/or distributions will be confirmed once each calendar quarter.
See "Distributions" below. Information regarding direct investment
or any other features or plans offered by the Trust may be ob-
tained by calling the Distributor at 1-800-426-0107 or by calling
your broker.
PURCHASE BY
MAIL Investors who wish to invest directly may send a check payable to
PIMCO Funds Distributors LLC, along with a completed application
form to:
PIMCO Funds Distributors LLC
P.O. Box 5866
Denver, CO 80217-5866
Purchases are accepted subject to collection of checks at full
value and conversion into federal funds. Payment by a check drawn
on any member of the Federal Reserve System can normally be con-
verted 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
18 PIMCO Funds Asset Allocation Series
<PAGE>
into federal funds. In all cases, the purchase price is based on
the net asset value next determined after the purchase order and
check are accepted, even though the check may not yet have been
converted into federal funds.
SUBSEQUENT Subsequent purchases of Class A, Class B or Class C shares can be
PURCHASES made as indicated above by mailing a check with a letter describ-
OF ing the investment or with the additional investment portion of a
SHARES confirmation statement. Except for subsequent purchases through
the PIMCO Funds Auto-Invest plan, the PIMCO Funds Auto-Exchange
plan, tax-qualified programs and PIMCO Funds Fund Link referred to
below, and except during periods when an Automatic Withdrawal Plan
is in effect, the minimum subsequent purchase is $100 in any Port-
folio. All payments should be made payable to PIMCO Funds Distrib-
utors LLC and should clearly indicate the shareholder's account
number. Checks should be mailed to the address above under "Pur-
chase by Mail."
TAX- The Distributor makes available retirement plan services and docu-
QUALIFIED ments for Individual Retirement Accounts (IRAs), including Roth
RETIREMENT IRAs, for which First National Bank of Boston serves as trustee
PLANS and for IRA Accounts established with Form 5305-SIMPLE under the
Internal Revenue Code. These accounts include Simplified Employee
Pension Plan (SEP) and Salary Reduction Simplified Employee Pen-
sion Plan (SAR/SEP) IRA accounts and prototype documents. In addi-
tion, prototype documents are available for establishing 403(b)(7)
Custodial Accounts with First National Bank of Boston as custodi-
an. This type of plan is available to employees of certain non-
profit organizations.
The Distributor also makes available prototype documents for
establishing Money Purchase and/or Profit Sharing plans and 401(k)
Retirement Savings Plans. These prototype plans require certain
minimum per participant account sizes, but are not subject to the
small account fees described below that will apply to other plans.
Investors should call the Distributor at 1-800-426-0107 for fur-
ther information about these plans and should consult with their
own tax advisers before establishing any retirement plan. Invest-
ors who maintain their accounts with participating brokers should
consult their broker about similar types of accounts that may be
offered through the broker. The minimum initial investment for all
tax qualified plans (except for employer-sponsored plans, SIMPLE
IRAs, SEPs and SAR/SEPs) is $1,000 per Portfolio and the minimum
subsequent investment is $100. The minimum initial investment for
employer-sponsored plans, SIMPLE IRAs, SEPs and SAR/SEPs and the
minimum subsequent investment per Portfolio for all such plans is
$50.
PIMCO FUNDS The PIMCO Funds Auto-Invest plan provides for periodic investments
AUTO-INVEST into the shareholder's account with the Trust by means of auto-
matic transfers of a designated amount from the shareholder's bank
account. The minimum investment for eligibility in the PIMCO Funds
Auto-Invest plan is $1,000 per Portfolio. Investments may be made
monthly or quarterly, and may be in any amount subject to a mini-
mum of $50 per month for each Portfolio in which shares are pur-
chased through the plan. Further information regarding the PIMCO
Funds Auto-Invest plan is available from the Distributor or par-
ticipating brokers. You may enroll by completing the appropriate
section on the account application, or you may obtain an Auto-In-
vest application by calling the Distributor or your broker.
PIMCO FUNDS The PIMCO Funds Auto-Exchange plan establishes regular, periodic
AUTO- exchanges from one Portfolio to another Portfolio or other series
EXCHANGE of the Trust or PIMCO Funds: Pacific Investment Management Series
which offers Class A, Class B or Class C shares. The plan provides
for regular investments into a shareholder's account in a specific
Portfolio by means of automatic exchanges of a designated amount
from an account for another Portfolio or other series of the same
class of shares and with identical account registration.
Exchanges may be made monthly or quarterly, and may be in any
amount subject to a minimum of $50 for each Portfolio whose shares
are purchased through the plan. Further information regarding the
PIMCO Funds Auto-Exchange plan is available from the Distributor
at 1-800-426-0107 or participating brokers. You may enroll by com-
pleting an application which may be obtained from the Distributor
or by telephone request at 1-800-426-0107. For more information on
exchanges, see "Exchange Privilege."
October 1, 1998 Prospectus 19
<PAGE>
PIMCO FUNDS PIMCO Funds Fund Link ("Fund Link") connects your Portfolio ac-
FUND LINK count with a bank account. Fund Link may be used for subsequent
purchases and for redemptions and other transactions described un-
der "How to Redeem." Purchase transactions are effected by elec-
tronic funds transfers from the shareholder's account at a U.S.
bank or other financial institution that is an Automated Clearing
House ("ACH") member. Investors may use Fund Link to make subse-
quent purchases of shares in amounts from $50 to $10,000. To ini-
tiate such purchases, call 1-800-426-0107. All such calls will be
recorded. Fund Link is normally established within 45 days of re-
ceipt of a Fund Link application by Shareholder Services, Inc.
(the "Transfer Agent"). The minimum investment by Fund Link is $50
per Portfolio. Shares will be purchased on the regular business
day the Distributor receives the funds through the ACH system,
provided the funds are received before the close of regular trad-
ing on the Exchange. If the funds are received after the close of
regular trading, the shares will be purchased on the next regular
business day.
Fund Link privileges must be requested on the account applica-
tion. To establish Fund Link on an existing account, complete a
Fund Link application, which is available from the Distributor or
your broker, with signatures guaranteed from all shareholders of
record for the account. See "Signature Guarantee" below. Such
privileges apply to each shareholder of record for the account un-
less and until the Distributor receives written instructions from
a shareholder of record canceling such privileges. Changes of bank
account information must be made by completing a new Fund Link ap-
plication signed by all owners of record of the account, with all
signatures guaranteed. The Distributor, the Transfer Agent and the
Trust may rely on any telephone instructions believed to be genu-
ine and will not be responsible to shareholders for any damage,
loss or expenses arising out of such instructions. The Trust re-
serves the right to amend, suspend or discontinue Fund Link privi-
leges at any time without prior notice. Fund Link does not apply
to shares held in broker "street name" accounts.
SIGNATURE When a signature guarantee is called for, the shareholder should
GUARANTEE have "Signature Guaranteed" stamped under his signature and guar-
anteed by any of the following entities: U.S. banks, foreign banks
having a U.S. correspondent bank, credit unions, savings associa-
tions, U.S. registered dealers and brokers, municipal securities
dealers and brokers, government securities dealers and brokers,
national securities exchanges, registered securities associations
and clearing agencies (each an "Eligible Guarantor Institution").
The Distributor reserves the right to reject any signature guaran-
tee pursuant to its written signature guarantee standards or pro-
cedures, which may be revised in the future to permit it to reject
signature guarantees from Eligible Guarantor Institutions that do
not, based on credit guidelines, satisfy such written standards or
procedures. The Trust may change the signature guarantee require-
ments from time to time upon notice to shareholders, which may be
given by means of a new or supplemented Prospectus.
ACCOUNT Changes in registration or account privileges may be made in writ-
REGISTRA- ing to the Transfer Agent. Signature guarantees may be required.
TION See "Signature Guarantee" above. All correspondence must include
CHANGES the account number and must be sent to:
PIMCO Funds Distributors LLC
P.O. Box 5866
Denver, CO 80217-5866
SMALL Because of the disproportionately high costs of servicing accounts
ACCOUNT with low balances, a fee at an annual rate of $16, paid to PIMCO
FEE Advisors, the Portfolios' administrator, will automatically be de-
ducted from direct accounts with balances falling below a minimum
level. The valuation of accounts and the deduction are expected to
take place during the last five business days of each calendar
quarter. The fee will be deducted in quarterly installments from
accounts with balances below $2,500 except for Uniform Gift to Mi-
nors, IRA, Roth IRA and Auto-Invest accounts, for which the limit
is $1,000. Effective April 1, 1999, except for prototype plans de-
scribed above, the fee will apply to employer-sponsored retirement
plan accounts, Money Purchase and/or Profit Sharing plans, 401(k)
plans, 403(b)(7) custodial accounts, SIMPLE IRAs, SEPs and
SAR/SEPs. (A separate custodial fee may apply to IRAs, Roth IRAs
and
PIMCO Funds Asset Allocation Series 20
<PAGE>
other retirement accounts.) No fee will be charged on any account
of a shareholder if the aggregate value of all of the sharehold-
er's accounts is at least $50,000. No small account fee will be
charged to employee and employee-related accounts of PIMCO Advi-
sors and/or its affiliates.
MINIMUM Due to the relatively high cost to the Portfolios of maintaining
ACCOUNT small accounts, you are asked to maintain an account balance of at
SIZE least the amount necessary to open the type of account involved.
If your balance is below such minimum for three months or longer,
the Portfolios' administrator shall have the right (except in the
case of employer-sponsored retirement accounts) to close your ac-
count after giving you 60 days in which to increase your balance.
Your account will not be liquidated if the reduction in size is
due solely to market decline in the value of your Portfolio shares
or if the aggregate value of all your accounts in PIMCO Funds ex-
ceeds $50,000.
Alternative Purchase Arrangements
The Trust offers investors three classes of shares in this Pro-
spectus (Class A, Class B and Class C) which bear sales charges in
different forms and amounts and which bear different levels of ex-
penses. The alternative purchase arrangements offered in this Pro-
spectus are designed to enable a retail investor to choose the
method of purchasing Portfolio shares that is most beneficial to
the investor based on all factors to be considered, which include:
the amount and intended length of the investment; the particular
Portfolio; and whether the investor intends to exchange shares for
shares of other PIMCO Funds. Generally, when making an investment
decision, investors should consider the anticipated life of an in-
tended investment in the Portfolios, the accumulated distribution
and servicing fees plus CDSCs on Class B or Class C shares, the
initial sales charge plus accumulated servicing fees on Class A
shares (plus a CDSC in certain circumstances), the possibility
that the anticipated higher return on Class A shares due to the
lower ongoing charges will offset the initial sales charge paid on
such shares, the automatic conversion of Class B shares to Class A
shares and the difference in the CDSCs applicable to Class A,
Class B and Class C shares.
CLASS A The initial sales charge alternative (Class A) might be
preferred by investors purchasing shares of sufficient aggregate
value to qualify for reductions in the initial sales charge appli-
cable to such shares. Similar reductions are not available on the
contingent deferred sales charge alternative (Class B) or the as-
set based sales charge alternative (Class C). Class A shares are
subject to a servicing fee but are not subject to a distribution
fee and, accordingly, such shares are expected to pay correspond-
ingly higher dividends on a per share basis. However, because ini-
tial sales charges are deducted at the time of purchase, not all
of the purchase payment for Class A shares is invested initially.
Class B and Class C shares might be preferable to investors who
wish to have all purchase payments invested initially, although
remaining subject to higher distribution and servicing fees and,
for certain periods, being subject to a CDSC. An investor who
qualifies for an elimination of the Class A initial sales charge
should also consider whether he or she anticipates redeeming
shares in a time period which will subject such shares to a CDSC
as described below. See "Initial Sales Charge Alternative--Class A
Shares--Class A Deferred Sales Charge" below.
CLASS B Class B shares might be preferred by investors who intend
to invest in the Portfolios for longer periods and who do not in-
tend to purchase shares of sufficient aggregate value to qualify
for sales charge reductions applicable to Class A shares. Both
Class B and Class C shares can be purchased at net asset value
without an initial sales charge. However, unlike Class C shares,
Class B shares convert into Class A shares after the shares have
been held for seven years. After the conversion takes place, the
shares will no longer be subject to a CDSC, and will be subject to
the servicing fees charged for Class A shares which are lower than
the distribution and servicing fees charged on either Class B or
Class C shares. See "Deferred Sales Charge Alternative--Class B
Shares" below. Class B shares are not available for purchase by
employer sponsored retirement plans.
CLASS C Class C shares might be preferred by investors who intend
to purchase shares which are not of sufficient aggregate value to
qualify for Class A sales charges of 1% or less and who wish to
have all purchase payments invested initially. Class C shares are
preferable to Class B shares for investors who intend to maintain
their invest-
October 1, 1998 Prospectus 21
<PAGE>
ment for intermediate periods and therefore may also be preferable
for investors who are unsure of the intended length of their in-
vestment. Unlike Class B shares, Class C shares are not subject to
a CDSC after they have been held for one year and are subject to
only a 1% CDSC during the first year. However, because Class C
shares do not convert into Class A shares, Class B shares are
preferable to Class C shares for investors who intend to maintain
their investment in the Portfolios for long periods. See "Asset
Based Sales Charge Alternative--Class C Shares" below.
In determining which class of shares to purchase, an investor
should always consider whether any waiver or reduction of a sales
charge or a CDSC is available. See generally "Initial Sales Charge
Alternative--Class A Shares" and "Waiver of Contingent Deferred
Sales Charges" below.
The maximum single purchase of Class B shares of the Portfolios
and other series of the Trust and PIMCO Funds: Pacific Investment
Management Series accepted is $249,999. The maximum single pur-
chase of Class C shares of the Portfolios and other series of the
Trust and PIMCO Funds: Pacific Investment Management Series ac-
cepted is $999,999. The Portfolios may refuse any order to pur-
chase shares.
For a description of the Distribution and Servicing Plans and
distribution and servicing fees payable thereunder with respect to
Class A, Class B and Class C shares, see "Distributor and Distri-
bution and Servicing Plans" below.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES The CDSC applicable to
Class A and Class C shares is currently waived for (i) any partial
or complete redemption in connection with required minimum distri-
butions to IRA account owners or to plan participants or benefi-
ciaries who are age 70 1/2 or older; (ii) any partial or complete
redemption in connection with a qualifying loan or hardship with-
drawal from an employer sponsored retirement plan; (iii) any com-
plete redemption in connection with a distribution from a quali-
fied employer retirement plan in connection with termination of
employment or termination of the employer's plan and the transfer
to another employer's plan or to an IRA (with the exception of a
Roth IRA); (iv) any partial or complete redemption following death
or disability (as defined in the Internal Revenue Code of 1986, as
amended (the "Code" )), of a shareholder (including one who owns
the shares as joint tenant with his or her spouse) from an account
in which the deceased or disabled is named, provided the redemp-
tion is requested within one year of the death or initial determi-
nation of disability; (v) any redemption resulting from a return
of an excess contribution to a qualified employer retirement plan
or an IRA (with the exception of a Roth IRA); (vi) up to 10% per
year of the value of an account which (a) has the value of at
least $10,000 at the start of such year and (b) is subject to an
Automatic Withdrawal Plan; (vii) redemptions by Trustees, officers
and employees of the Trust, and by directors, officers and employ-
ees of the Distributor and the Adviser; (viii) redemptions ef-
fected pursuant to a Portfolio's right to involuntarily redeem a
shareholder's account if the aggregate net asset value of shares
held in such shareholder's account is less than a minimum account
size specified in such Portfolio's prospectus; (ix) involuntary
redemptions caused by operation of law; (x) redemption of shares
of any Portfolio that is combined with another Portfolio or other
series of the Trust or another investment company, or a personal
holding company by virtue of a merger, acquisition or other simi-
lar reorganization transaction; (xi) redemptions by a shareholder
who is a participant making periodic purchases of not less than
$50 through certain employer sponsored savings plans that are cli-
ents of a broker-dealer with which the Distributor has an agree-
ment with respect to such purchases; (xii) redemptions effected by
trustees or other fiduciaries who have purchased shares for em-
ployer sponsored plans, the trustee, administrator, fiduciary,
broker, trust company or registered investment adviser for which
has an agreement with the Distributor with respect to such pur-
chases; or (xiii) redemptions in connection with IRA accounts es-
tablished with Form 5305-SIMPLE under the Code for which the Trust
is the designated financial institution.
The CDSC applicable to Class B shares is currently waived for
any partial or complete redemption in each of the following cases:
(a) in connection with required minimum distributions to IRA ac-
count owners or to plan participants or beneficiaries who are age
70 1/2 or older; (b) following death or disability (as defined in
the Code) of a shareholder (including one who owns the shares as
joint tenant with his or her spouse) from an account in which the
deceased or disabled is named, provided the redemption is re-
quested within one year of the death or initial determina-
22 PIMCO Funds Asset Allocation Series
<PAGE>
tion of disability; and (c) up to 10% per year of the value of an
account which (i) has a value of at least $10,000 at the start of
such year and (ii) is subject to an Automatic Withdrawal Plan. See
"How to Redeem--Automatic Withdrawal Plan."
The Distributor may require documentation prior to waiver of
the CDSC for any class, including distribution letters, certifica-
tion by plan administrators, applicable tax forms, death certifi-
cates, physicians' certificates, etc.
INITIAL Class A shares are sold at a public offering price equal to their
SALES net asset value per share plus a sales charge, as set forth below.
CHARGE As indicated below under "Class A Deferred Sales Charge," certain
ALTERNATIVE investors that purchase $1,000,000 or more of any Portfolio's
- -- CLASS A Class A shares (and thus pay no initial sales charge) may be sub-
SHARES ject to a 1% CDSC if they redeem such shares during the first 18
months after their purchase.
90/10 PORTFOLIO AND 60/40 PORTFOLIO
<TABLE>
<CAPTION>
DISCOUNT OR
SALES CHARGE AS SALES CHARGE COMMISSION TO
AMOUNT OF % OF NET AS % OF PUBLIC DEALERS AS % OF
PURCHASE AMOUNT INVESTED OFFERING PRICE PUBLIC OFFERING PRICE
----------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 5.82% 5.50% 4.75%
----------------------------------------------------------------------
$50,000 - $99,999 4.71% 4.50% 4.00%
----------------------------------------------------------------------
$100,000 - $249,999 3.63% 3.50% 3.00%
----------------------------------------------------------------------
$250,000 - $499,999 2.56% 2.50% 2.00%
----------------------------------------------------------------------
$500,000 - $999,999 2.04% 2.00% 1.75%
----------------------------------------------------------------------
$1,000,000+ 0.00%(/1/) 0.00%(/1/) 0.75%(/2/)
</TABLE>
30/70 PORTFOLIO
<TABLE>
<CAPTION>
DISCOUNT OR
SALES CHARGE AS SALES CHARGE COMMISSION TO
AMOUNT OF % OF NET AS % OF PUBLIC DEALERS AS % OF
PURCHASE AMOUNT INVESTED OFFERING PRICE PUBLIC OFFERING PRICE
----------------------------------------------------------------------
<S> <C> <C> <C>
$0 - $49,999 4.71% 4.50% 4.00%
----------------------------------------------------------------------
$50,000 - $99,999 4.17% 4.00% 3.50%
----------------------------------------------------------------------
$100,000 - $249,999 3.63% 3.50% 3.00%
----------------------------------------------------------------------
$250,000 - $499,999 2.56% 2.50% 2.00%
----------------------------------------------------------------------
$500,000 - $999,999 2.04% 2.00% 1.75%
----------------------------------------------------------------------
$1,000,000+ 0.00%(/1/) 0.00%(/1/) 0.50%(/2/)
</TABLE>
1. As shown, investors that purchase more than $1,000,000 of any
Portfolio's Class A shares will not pay any initial sales charge
on such purchase. However, purchasers of $1,000,000 or more of
Class A shares (other than those purchasers described below under
"Sales at Net Asset Value" where no commission is paid) will be
subject to a CDSC of 1% if such shares are redeemed during the
first 18 months after such shares are purchased unless such pur-
chaser is eligible for a waiver of the CDSC as described under
"Waiver of Contingent Deferred Sales Charges" above. See "Class A
Deferred Sales Charge" below.
2. The Distributor will pay a commission to dealers who sell
amounts of $1,000,000 or more of Class A shares (or who sell Class
A shares at net asset value to certain employer-sponsored plans as
outlined in "Sales at Net Asset Value" below) of the 90/10 Portfo-
lio and the 60/40 Portfolio according to the following schedule:
0.75% of the first $2,000,000, 0.50% of amounts from $2,000,001 to
$5,000,000, and 0.25% of amounts over $5,000,000; and of the 30/70
Portfolio according to the following schedule: 0.50% of the first
$2,000,000, and 0.25% of amounts over $2,000,000.
October 1, 1998 Prospectus 23
<PAGE>
Each Portfolio receives the entire net asset value of its Class
A shares purchased by investors. The Distributor receives the
sales charge shown above less any applicable discount or commis-
sion "reallowed" to participating brokers in the amounts indicated
in the table above. The Distributor may, however, elect to reallow
the entire sales charge to participating brokers for all sales
with respect to which orders are placed with the Distributor for
any particular Portfolio during a particular period. During such
periods as may from time to time be designated by the Distributor,
the Distributor will pay an additional amount of up to 0.50% of
the purchase price on sales of Class A shares of all or selected
Portfolios purchased to each participating broker which obtains
purchase orders in amounts exceeding thresholds established from
time to time by the Distributor. From time to time, the Distribu-
tor, its parent and/or its affiliates may make additional payments
to one or more participating brokers based upon factors such as
the level of sales or the length of time clients' assets have re-
mained in the Trust.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are issued at net asset
value and are not subject to any sales charges.
Under the circumstances described below, investors may be enti-
tled to pay reduced sales charges for Class A shares.
COMBINED PURCHASE PRIVILEGE Investors may qualify for a reduced
sales charge by combining purchases of the Class A shares of one
or more Portfolios or other series of the Trust or PIMCO Funds:
Pacific Investment Management Series which offer Class A shares
(together, "eligible PIMCO Funds") into a "single purchase," if
the resulting purchase totals at least $50,000. The term "single
purchase" refers to:
(i) a single purchase by an individual, or concurrent pur-
chases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and
their children under the age of 21 years purchasing Class A
shares of the eligible PIMCO Funds for his, her or their
own account;
(ii) a single purchase by a trustee or other fiduciary purchas-
ing shares for a single trust, estate or fiduciary account
although more than one beneficiary is involved; or
(iii) a single purchase for the employee benefit plans of a
single employer.
For further information, call the Distributor at 1-800-426-0107
or your broker.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION) A purchase of
additional Class A shares of any eligible PIMCO Fund may qualify
for a Cumulative Quantity Discount at the rate applicable to the
discount bracket obtained by adding:
(i) the investor's current purchase;
(ii) the value (at the close of business on the day of the cur-
rent purchase) of all Class A shares of any eligible PIMCO
Fund held by the investor computed at the maximum offering
price; and
(iii) the value of all shares described in paragraph (ii) owned
by another shareholder eligible to be combined with the
investor's purchase into a "single purchase" as defined
above under "Combined Purchase Privilege."
For example, if you owned Class A shares of the 90/10 Portfolio
worth $25,000 at the current maximum offering price and wished to
purchase Class A shares of the 60/40 Portfolio worth an additional
$30,000, the sales charge for the $30,000 purchase would be at the
4.50% rate applicable to a single $55,000 purchase of shares of
the 90/10 Portfolio, rather than the 5.50% rate.
LETTER OF INTENT An investor may also obtain a reduced sales
charge by means of a written Letter of Intent, which expresses an
intention to invest not less than $50,000 within a period of 13
months in Class A shares of any eligible PIMCO Fund(s). Each pur-
chase of shares under a Letter of Intent will be made at the pub-
lic offering price or prices applicable at the time of such pur-
chase to a single transaction of the dollar amount indicated in
the Letter. At the investor's option, a Letter of Intent may in-
clude purchases of Class A shares of any eligible PIMCO Fund made
not more than 90 days prior to the date the Letter of Intent is
signed; however, the 13-month period during which the Letter is in
effect will begin on the date of the earliest purchase to be in-
cluded and the sales charge on any purchases prior to the Letter
will not be adjusted.
24 PIMCO Funds Asset Allocation Series
<PAGE>
Investors qualifying for the Combined Purchase Privilege de-
scribed above may purchase shares of the eligible PIMCO Funds un-
der a single Letter of Intent. For example, if at the time you
sign a Letter of Intent to invest at least $100,000 in Class A
shares of any Portfolio, you and your spouse each purchase Class A
shares of the 90/10 Portfolio worth $30,000 (for a total of
$60,000), it will only be necessary to invest a total of $40,000
during the following 13 months in Class A shares of any of the
Portfolios to qualify for the 3.50% sales charge on the total
amount being invested (the sales charge applicable to an invest-
ment of $100,000 in any of the Portfolios).
A Letter of Intent is not a binding obligation to purchase the
full amount indicated. The minimum initial investment under a Let-
ter of Intent is 5% of such amount. Shares purchased with the
first 5% of such amount will be held in escrow (while remaining
registered in your name) to secure payment of the higher sales
charge applicable to the shares actually purchased in the event
the full intended amount is not purchased. If the full amount in-
dicated is not purchased, a sufficient amount of such escrowed
shares will be involuntarily redeemed to pay the additional sales
charge applicable to the amount actually purchased, if necessary.
Dividends on escrowed shares, whether paid in cash or reinvested
in additional eligible PIMCO Fund shares, are not subject to es-
crow. When the full amount indicated has been purchased, the es-
crow will be released.
If you wish to enter into a Letter of Intent in conjunction
with your initial investment in Class A shares of a Portfolio, you
should complete the appropriate portion of the account applica-
tion. If you are a current Class A shareholder desiring to do so
you may obtain a form of Letter of Intent by contacting the Dis-
tributor at 1-800-426-0107 or any broker participating in this
program.
REINSTATEMENT PRIVILEGE A Class A shareholder who has caused any
or all of his shares to be redeemed may reinvest all or any por-
tion of the redemption proceeds in Class A shares of any eligible
PIMCO Fund at net asset value without any sales charge, provided
that such reinvestment is made within 120 calendar days after the
redemption or repurchase date. Shares are sold to a reinvesting
shareholder at the net asset value next determined. See "How Net
Asset Value is Determined." A reinstatement pursuant to this priv-
ilege will not cancel the redemption transaction and, consequent-
ly, any gain or loss so realized may be recognized for federal tax
purposes except that no loss may be recognized to the extent that
the proceeds are reinvested in shares of the same Portfolio within
30 days. The reinstatement privilege may be utilized by a share-
holder only once, irrespective of the number of shares redeemed,
except that the privilege may be utilized without limit in connec-
tion with transactions whose sole purpose is to transfer a share-
holder's interest in a Portfolio to his Individual Retirement Ac-
count or other qualified retirement plan account. An investor may
exercise the reinstatement privilege by written request sent to
the Distributor or to the investor's broker.
SALES AT NET ASSET VALUE Each Portfolio may sell its Class A
shares at net asset value without a sales charge to (a) current or
retired officers, trustees, directors or employees of the Trust,
the Adviser or the Distributor, a parent, brother or sister of any
such officer, trustee, director or employee or a spouse or child
of any of the foregoing persons, or any trust, profit sharing or
pension plan for the benefit of any such person and to any other
person if the Distributor anticipates that there will be minimal
sales expenses associated with the sale, (b) current or retired
trustees of PIMCO Funds: Pacific Investment Management Series, (c)
current registered representatives and other full-time employees
of participating brokers or such persons' spouses or for trust or
custodial accounts for their minor children, (d) trustees or other
fiduciaries purchasing shares for certain plans sponsored by em-
ployers, professional organizations or associations or charitable
organizations, the trustee, administrator, fiduciary, broker,
trust company or registered investment adviser for which has an
agreement with the Distributor with respect to such purchases, and
to participants in such plans and their spouses purchasing for
their account(s) or IRAs (with the exception of Roth IRAs), (e)
participants investing through accounts known as "wrap accounts"
established with brokers or dealers approved by the Distributor
where such brokers or dealers are paid a single, inclusive fee for
brokerage and investment management services, (f) client accounts
of broker-dealers or registered investment advisers affiliated
with such broker-dealers with which the Distributor has an agree-
ment for the use of PIMCO Funds: Multi-Manager Series in particu-
lar investment products or programs, and (g) accounts for which a
trust company affiliated with the Trust or the Adviser
October 1, 1998 Prospectus 25
<PAGE>
serves as trustee or custodian. As described above, the Distribu-
tor will not pay any initial commission to dealers upon the sale
of Class A shares to the purchasers described in this paragraph
except for sales to purchasers described under (d) in this para-
graph.
NOTIFICATION OF DISTRIBUTOR An investor or participating broker
must notify the Distributor whenever a quantity discount or re-
duced sales charge is applicable to a purchase and must provide
the Distributor with sufficient information at the time of pur-
chase to verify that each purchase qualifies for the privilege or
discount. Upon such notification, the investor will receive the
lowest applicable sales charge. The quantity discounts described
above may be modified or terminated at any time.
CLASS A DEFERRED SALES CHARGE For all Portfolios, investors who
purchase $1,000,000 or more of Class A shares (and, thus, purchase
such shares without any initial sales charge) may be subject to a
1% CDSC (the "Class A CDSC") if such shares are redeemed within 18
months of their purchase. The Class A CDSC does not apply to in-
vestors purchasing $1,000,000 or more of any Portfolio's Class A
shares if such investors are otherwise eligible to purchase Class
A shares without any sales charge because they are described under
"Sales at Net Asset Value" above.
For purchases subject to the Class A CDSC, a 1% CDSC will apply
for any redemption of such Class A shares that occurs within 18
months of their purchase. No CDSC will be imposed if the shares
redeemed have been acquired through the reinvestment of dividends
or capital gains distributions or if the amount redeemed is de-
rived from increases in the value of the account above the amount
of purchase payments subject to the CDSC. In determining whether a
CDSC is payable, it is assumed that Class A shares acquired
through the reinvestment of dividends and distributions are re-
deemed first, and thereafter that Class A shares that have been
held by an investor for the longest period of time are redeemed
first.
The Class A CDSC is currently waived in connection with certain
redemptions as described above under "Alternative Purchase Ar-
rangements--Waiver of Contingent Deferred Sales Charges." For more
information about the Class A CDSC, call the Distributor at 1-800-
426-0107.
PARTICIPATING BROKERS Investment dealers and other financial in-
termediaries provide varying arrangements for their clients to
purchase and redeem Portfolio shares. Some may establish higher
minimum investment requirements than set forth above. Firms may
arrange with their clients for other investment or administrative
services and may independently establish and charge transaction
fees and/or other additional amounts to their clients for such
services, which charges would reduce clients' return. Firms also
may hold Portfolio shares in nominee or street name as agent for
and on behalf of their customers. In such instances, the Trust's
transfer agent will have no information with respect to or control
over accounts of specific shareholders. Such shareholders may ob-
tain access to their accounts and information about their accounts
only from their broker. In addition, certain privileges with re-
spect to the purchase and redemption of shares or the reinvestment
of dividends may not be available through such firms. Some firms
may participate in a program allowing them access to their cli-
ents' accounts for servicing including, without limitation, trans-
fers of registration and dividend payee changes; and may perform
functions such as generation of confirmation statements and dis-
bursement of cash dividends. This Prospectus should be read in
connection with such firms' material regarding their fees and
services.
DEFERRED Class B shares are sold at their current net asset value without
SALES any initial sales charge. The full amount of an investor's pur-
CHARGE chase payment will be invested in shares of the Portfolio(s) se-
ALTERNATIVE lected. A CDSC will be imposed on Class B shares if an investor
- -- CLASS B redeems an amount which causes the current value of the investor's
SHARES account for a Portfolio to fall below the total dollar amount of
purchase payments subject to the CDSC, except that no CDSC is im-
posed if the shares redeemed have been acquired through the rein-
vestment of dividends or capital gains distributions or if the
amount redeemed is derived from increases in the value of the ac-
count above the amount of purchase payments subject to the CDSC.
26 PIMCO Funds Asset Allocation Series
<PAGE>
Whether a CDSC is imposed and the amount of the CDSC will de-
pend on the number of years since the investor made a purchase
payment from which an amount is being redeemed. Purchases are sub-
ject to the CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
----------------------------------------
<S> <C>
First 5
----------------------------------------
Second 4
----------------------------------------
Third 3
----------------------------------------
Fourth 3
----------------------------------------
Fifth 2
----------------------------------------
Sixth 1
----------------------------------------
Seventh 0*
</TABLE>
*After the seventh year, Class B shares convert into Class A
shares as described below.
In determining whether a CDSC is payable, it is assumed that
the purchase payment from which a redemption is made is the earli-
est purchase payment from which a redemption or exchange has not
already been fully effected.
The following example will illustrate the operation of the
Class B CDSC:
Assume that an individual opens an account and makes a purchase
payment of $10,000 for Class B shares of a Portfolio and that six
months later the value of the investor's account for that Portfo-
lio has grown through investment performance and reinvestment of
distributions to $11,000. The investor then may redeem up to
$1,000 from that Portfolio ($11,000 minus $10,000) without incur-
ring a CDSC. If the investor should redeem $3,000, a CDSC would be
imposed on $2,000 of the redemption (the amount by which the in-
vestor's account for the Portfolio was reduced below the amount of
the purchase payment). At the rate of 5%, the Class B CDSC would
be $100.
In determining whether an amount is available for redemption
without incurring a CDSC, the purchase payments made for all Class
B shares in the shareholder's account with the particular Portfo-
lio are aggregated, and the current value of all such shares is
aggregated. Any CDSC imposed on a redemption of Class B shares is
paid to the Distributor.
Class B shares are subject to higher distribution fees than
Class A shares for a fixed period after their purchase, after
which they automatically convert to Class A shares and are no
longer subject to such higher distribution fees. Class B shares of
each Portfolio automatically convert into Class A shares after
they have been held for seven years.
For sales of Class B shares made and services rendered to Class
B shareholders, the Distributor intends to make payments to par-
ticipating brokers, at the time a shareholder purchases Class B
shares, of 4.00% of the purchase amount for each of the Portfo-
lios. During such periods as may from time to time be designated
by the Distributor, the Distributor will pay selected participat-
ing brokers an additional amount of up to .50% of the purchase
price on sales of Class B shares of all or selected Portfolios
purchased to each participating broker which obtains purchase or-
ders in amounts exceeding thresholds established from time to time
by the Distributor.
The Class B CDSC is currently waived in connection with certain
redemptions as described above under "Alternative Purchase Ar-
rangements--Waiver of Contingent Deferred Sales Charges." For more
information about the Class B CDSC, call the Distributor at 1-800-
426-0107.
ASSET BASED Class C shares are sold at their current net asset value without
SALES any initial sales charge. A CDSC is imposed on Class C shares if
CHARGE an investor redeems an amount which causes the current value of
ALTERNATIVE the investor's account for a Portfolio to fall below the total
- -- CLASS C dollar amount of purchase payments subject to the CDSC, except
SHARES that no CDSC is imposed if the shares redeemed have been acquired
through the reinvestment of dividends or capital gains distribu-
tions or if the
October 1, 1998 Prospectus 27
<PAGE>
amount redeemed is derived from increases in the value of the ac-
count above the amount of purchase payments subject to the CDSC.
All of an investor's purchase payments are invested in shares of
the Portfolio(s) selected.
Whether a CDSC is imposed and the amount of the CDSC will de-
pend on the number of years since the investor made a purchase
payment from which an amount is being redeemed. Purchases are sub-
ject to the CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PERCENTAGE CONTINGENT
PAYMENT WAS MADE DEFERRED SALES CHARGE
----------------------------------------
<S> <C>
First 1
----------------------------------------
Thereafter 0
</TABLE>
In determining whether a CDSC is payable, it is assumed that
the purchase payment from which the redemption is made is the ear-
liest purchase payment (from which a redemption or exchange has
not already been effected).
The following example will illustrate the operation of the
Class C CDSC:
Assume that an individual opens an account and makes a purchase
payment of $10,000 for Class C shares of a Portfolio and that six
months later the value of the investor's account for that Portfo-
lio has grown through investment performance and reinvestment of
distributions to $11,000. The investor then may redeem up to
$1,000 from that Portfolio ($11,000 minus $10,000) without incur-
ring a CDSC.
If the investor should redeem $3,000, a CDSC would be imposed
on $2,000 of the redemption (the amount by which the investor's
account for the Portfolio was reduced below the amount of the pur-
chase payment). At the rate of 1%, the Class C CDSC would be $20.
In determining whether an amount is available for redemption
without incurring a CDSC, the purchase payments made for all Class
C shares in the shareholder's account with the particular Portfo-
lio are aggregated, and the current value of all such shares is
aggregated. Any CDSC imposed on a redemption of Class C shares is
paid to the Distributor. Unlike Class B shares, Class C shares do
not automatically convert to any other class of shares of the
Portfolios.
Except as described below, for sales of Class C shares made and
services rendered to Class C shareholders, the Distributor expects
to make payments to participating brokers, at the time the share-
holder purchases Class C shares, of 1.00% (representing .75% dis-
tribution fees and .25% servicing fees) of the purchase amount for
all Portfolios. For sales of Class C shares made to participants
making periodic purchases of not less than $50 through certain em-
ployer sponsored savings plans which are clients of a broker-
dealer with which the Distributor has an agreement with respect to
such purchases, no payments are made at the time of purchase. Dur-
ing such periods as may from time to time be designated by the
Distributor, the Distributor will pay an additional amount of up
to .50% of the purchase price on sales of Class C shares of all or
selected Portfolios purchased to each participating broker which
obtains purchase orders in amounts exceeding thresholds estab-
lished from time to time by the Distributor.
The Class C CDSC is currently waived in connection with certain
redemptions as described above under "Alternative Purchase Ar-
rangements--Waiver of Contingent Deferred Sales Charges." For more
information about the Class C CDSC, contact the Distributor at 1-
800-426-0107.
Exchange Privilege
A shareholder may exchange Class A, Class B and Class C shares of
any Portfolio for the same Class of shares of any other Portfolio
or other series of the Trust in an account with identical regis-
tration on the basis of their respective net asset values. Class
A, Class B and Class C shares of each Portfolio may also be ex-
changed for shares of the same class of a series of PIMCO Funds:
Pacific Investment Management Series. There are currently no ex-
change fees or charges.
28 PIMCO Funds Asset Allocation Series
<PAGE>
Exchanges of shares outstanding on September 30, 1998 may be made
in any amount through December 31, 1998. Otherwise, except with
respect to tax-qualified programs and exchanges effected through
the PIMCO Funds Auto-Exchange plan, exchanges are subject to the
$2,500 minimum initial purchase requirement for each Portfolio. An
exchange will constitute a taxable sale for federal income tax
purposes.
Investors who maintain their account with the Distributor may
exchange shares by a written exchange request sent to PIMCO Funds
Distributors LLC, P.O. Box 5866, Denver, CO 80217-5866 or, unless
the investor has specifically declined telephone exchange privi-
leges on the account application or elected in writing not to uti-
lize telephone exchanges, by a telephone request to the Transfer
Agent at 1-800-426-0107. The Trust will employ reasonable proce-
dures to confirm that instructions communicated by telephone are
genuine, and may be liable for any losses due to unauthorized or
fraudulent instructions if it fails to employ such procedures. The
Trust will require a form of personal identification prior to act-
ing on a caller's telephone instructions, will provide written
confirmations of such transactions and will record telephone in-
structions. Exchange forms are available from the Distributor at
1-800-426-0107 and may be used if there will be no change in the
registered name or address of the shareholder. Changes in regis-
tration information or account privileges may be made in writing
to the Transfer Agent, Shareholder Services, Inc., P.O. Box 5866,
Denver, Colorado 80217-5866, or by use of forms which are avail-
able from the Distributor. A signature guarantee is required. See
"How to Buy Shares--Signature Guarantee." Telephone exchanges may
be made between 9:00 a.m., Eastern time and the close of regular
trading (normally 4:00 p.m., Eastern time) on the Exchange on any
day the Exchange is open (generally weekdays other than normal
holidays). The Trust reserves the right to refuse exchange pur-
chases if, in the judgment of the Adviser, the purchase would ad-
versely affect the Portfolio and its shareholders. In particular,
a pattern of exchanges characteristic of "market-timing" strate-
gies may be deemed by the Adviser to be detrimental to the Trust
or a particular Portfolio.
Currently, the Trust limits the number of "round trip" ex-
changes an investor may make. An investor makes a "round trip" ex-
change when the investor purchases shares of a particular Portfo-
lio, subsequently exchanges those shares for shares of a different
Portfolio or other PIMCO Fund and then exchanges back into the
originally purchased Portfolio. The Trust has the right to refuse
any exchange for any investor who completes (by making the ex-
change back into the shares of the originally purchased Portfolio)
more than six round trip exchanges in any twelve-month period. Al-
though the Trust has no current intention of terminating or modi-
fying the exchange privilege other than as set forth in the pre-
ceding sentence, it reserves the right to do so at any time. Ex-
cept as otherwise permitted by Securities and Exchange Commission
regulations, the Trust will give 60 days' advance notice to share-
holders of any termination or material modification of the ex-
change privilege. For further information about exchange privi-
leges, contact your participating broker or call the Transfer
Agent at 1-800-426-0107.
With respect to Class B and Class C shares, or Class A shares
subject to a CDSC, if less than all of an investment is exchanged
out of a Portfolio, any portion of the investment attributable to
capital appreciation and/or reinvested dividends or capital gains
distributions will be exchanged first, and thereafter any portions
exchanged will be from the earliest investment made in the Portfo-
lio from which the exchange was made. Shareholders should take
into account the effect of any exchange on the applicability of
any CDSC that may be imposed upon any subsequent redemption.
Investors may also select the PIMCO Funds Auto-Exchange plan
which establishes automatic periodic exchanges. For further infor-
mation on automatic exchanges, see "How to Buy Shares--PIMCO Funds
Auto-Exchange" above.
How to Redeem
Class A, Class B or Class C shares may be redeemed through a par-
ticipating broker, by telephone, by submitting a written redemp-
tion request directly to the Transfer Agent (for non-broker ac-
counts), or through an Automatic Withdrawal Plan or PIMCO Funds
Fund Link.
October 1, 1998 Prospectus 29
<PAGE>
A CDSC may apply to a redemption of Class A, Class B or Class C
shares. See "Alternative Purchase Arrangements" above. Shares are
redeemed at their net asset value next determined after a proper
redemption request has been received, less any applicable CDSC.
There is no charge by the Distributor (other than an applicable
CDSC) with respect to a redemption; however, a participating bro-
ker who processes a redemption for an investor may charge custom-
ary commissions for its services. Dealers and other financial
services firms are obligated to transmit orders promptly. Requests
for redemption received by dealers or other firms prior to the
close of regular trading (normally 4:00 p.m., Eastern time) on the
Exchange on a regular business day and received by the Distributor
prior to the close of the Distributor's business day will be con-
firmed at the net asset value effective as of the closing of the
Exchange on that day, less any applicable CDSC.
DIRECT A shareholder's original account application permits the share-
REDEMPTION holder to redeem by written request and by telephone (unless the
shareholder specifically elects not to utilize telephone redemp-
tions) and to elect one or more of the additional redemption pro-
cedures described below. A shareholder may change the instructions
indicated on his original account application, or may request ad-
ditional redemption options, only by transmitting a written direc-
tion to the Transfer Agent. Requests to institute or change any of
the additional redemption procedures will require a signature
guarantee.
Redemption proceeds will normally be mailed to the redeeming
shareholder within seven days or, in the case of wire transfer or
Fund Link redemptions, sent to the designated bank account within
one business day. Fund Link redemptions may be received by the
bank on the second or third business day. In cases where shares
have recently been purchased by personal check, redemption pro-
ceeds may be withheld until the check has been collected, which
may take up to 15 days. To avoid such withholding, investors
should purchase shares by certified or bank check or by wire
transfer.
WRITTEN To redeem shares in writing (whether or not represented by certif-
REQUESTS icates), a shareholder must send the following items to the Trans-
fer Agent, Shareholder Services, Inc., P.O. Box 5866, Denver, Col-
orado 80217-5866:
(1) a written request for redemption signed by all registered
owners exactly as the account is registered on the Transfer
Agent's records, including fiduciary titles, if any, and
specifying the account number and the dollar amount or num-
ber of shares to be redeemed;
(2) for certain redemptions described below, a guarantee of all
signatures on the written request or on the share certifi-
cate or accompanying stock power, if required, as described
under "How to Buy Shares--Signature Guarantee";
(3) any share certificates issued for any of the shares to be
redeemed (see "Certificated Shares" below); and
(4) any additional documents which may be required by the
Transfer Agent for redemption by corporations, partnerships
or other organizations, executors, administrators, trust-
ees, custodians or guardians, or if the redemption is re-
quested 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 of $50,000 or
less, 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 contact the Transfer
Agent in writing or call 1-800-426-0107 before submitting a re-
quest. Redemption or transfer requests will not be honored until
all required documents in the proper form have been received by
the Transfer Agent. This redemption option does not apply to
shares held in broker "street name" accounts.
If the proceeds of the redemption (i) exceed $50,000, (ii) are
to be paid to a person other than the record owner, (iii) are to
be sent to an address other than the address of the account on the
Transfer Agent's records, or (iv) are to be paid to a corporation,
partnership, trust or fiduciary, the signature(s) on the redemp-
tion request and on the certificates, if any, or stock power must
be guaranteed as described above, except that the Distributor may
waive
30 PIMCO Funds Asset Allocation Series
<PAGE>
the signature guarantee requirement for redemptions up to $2,500
by a trustee of a qualified retirement plan, the administrator for
which has an agreement with the Distributor.
TELEPHONE The Trust accepts telephone requests for redemption of
REDEMPTIONS uncertificated shares for amounts up to $50,000 within any seven
calendar day period, except for investors who have specifically
declined telephone redemption privileges on the account applica-
tion or elected in writing not to utilize telephone redemptions.
The proceeds of a telephone redemption will be sent to the record
shareholder at his record address. Changes in account information
must be made in a written authorization with a signature guaran-
tee. See "How to Buy Shares--Signature Guarantee." Telephone re-
demptions will not be accepted during the 30-day period following
any change in an account's record address. This redemption option
does not apply to shares held in broker "street name" accounts.
By completing an account application, an investor agrees that
the Trust, the Distributor and the Transfer Agent shall not be li-
able for any loss incurred by the investor by reason of the Trust
accepting unauthorized telephone redemption requests for his ac-
count if the Trust reasonably believes the instructions to be gen-
uine. Thus, shareholders risk possible losses in the event of a
telephone redemption not authorized by them. The Trust may accept
telephone redemption instructions from any person identifying him-
self as the owner of an account or the owner's broker where the
owner has not declined in writing to utilize this service. The
Trust will employ reasonable procedures to confirm that instruc-
tions communicated by telephone are genuine, and may be liable for
any losses due to unauthorized or fraudulent instructions if it
fails to employ such procedures. The Trust will require a form of
personal identification prior to acting on a caller's telephone
instructions, will provide written confirmations of such transac-
tions and will record telephone instructions.
A shareholder making a telephone redemption should call the
Transfer Agent at 1-800-426-0107 and state (i) the name of the
shareholder as it appears on the Transfer Agent's records, (ii)
his account number with the Trust, (iii) the amount to be with-
drawn and (iv) the name of the person requesting the redemption.
Usually the proceeds are sent to the investor on the next Trust
business day after the redemption is effected, provided the re-
demption request is received prior to the close of regular trading
(normally 4:00 p.m., Eastern time) on the Exchange that day. If
the redemption request is received after the close of the Ex-
change, the redemption is effected on the following Trust business
day at that day's net asset value and the proceeds are usually
sent to the investor on the second following Trust business day.
The Trust reserves the right to terminate or modify the telephone
redemption service at any time. During times of severe disruptions
in the securities markets, the volume of calls may make it diffi-
cult to redeem by telephone, in which case a shareholder may wish
to send a written request for redemption as described under "Writ-
ten Requests" above. Telephone communications may be recorded by
the Distributor or the Transfer Agent.
FUND LINK If a shareholder has established Fund Link, the shareholder may
REDEMPTIONS redeem shares by telephone and have the redemption proceeds sent
to a designated account at a financial institution. Fund Link is
normally established within 45 days of receipt of a Fund Link ap-
plication by the Transfer Agent. To use Fund Link for redemptions,
call the Transfer Agent at 1-800-426-0107. Subject to the limita-
tions set forth above under "Telephone Redemptions," the Distribu-
tor, the Trust and the Transfer Agent may rely on instructions by
any registered owner believed to be genuine and will not be re-
sponsible to any shareholder for any loss, damage or expense aris-
ing out of such instructions. Requests received by the Transfer
Agent prior to the close of regular trading (normally 4:00 p.m.,
Eastern time) on the Exchange on a business day will be processed
at the net asset value on that day and the proceeds (less any
CDSC) will normally be sent to the designated bank account on the
following business day and received by the bank on the second or
third business day. If the redemption request is received after
the close of regular trading on the Exchange, the redemption is
effected on the following business day. Shares purchased by check
may not be redeemed through Fund Link until such shares have been
owned (i.e., paid for) for at least 15 days. Fund Link may not be
used to redeem shares held in certificated form.
October 1, 1998 Prospectus 31
<PAGE>
Changes in bank account information must be made by completing
a new Fund Link application, signed by all owners of record of the
account, with all signatures guaranteed. See "How to Buy Shares--
Signature Guarantee." See "How to Buy Shares--PIMCO Funds Fund
Link" for information on establishing the Fund Link privilege. The
Trust may terminate the Fund Link program at any time without no-
tice to shareholders. This redemption option does not apply to
shares held in broker "street name" accounts.
PIMCO FUNDS PIMCO Funds Automated Telephone System ("ATS") is an automated
AUTOMATED telephone system that enables shareholders to perform a number of
TELEPHONE account transactions automatically using a touch-tone telephone.
SYSTEM ATS may be used on already- established Portfolio accounts after
you obtain a Personal Identification Number (PIN) by calling the
special ATS number: 1-800-223-2413.
PURCHASING SHARES. You may purchase shares in amounts up to
$100,000 by telephone by calling 1-800-223-2413. You must have es-
tablished ATS privileges to link your bank account with the Port-
folio to pay for these purchases.
EXCHANGING SHARES. With the PIMCO Funds Exchange Privilege, you
can exchange shares automatically by telephone from your Fund Link
Account to another PIMCO Funds account you have already estab-
lished by calling 1-800-223-2413. Please refer to "Exchange Privi-
lege" for details.
REDEMPTIONS. You may redeem shares by telephone automatically by
calling 1-800-223-2413 and the Portfolio will send the proceeds
directly to your Portfolio bank account. Please refer to "How to
Redeem" for details.
EXPEDITED If a shareholder has given authorization for expedited wire re-
WIRE demption, shares can be redeemed and the proceeds sent by federal
TRANSFER wire transfer to a single previously designated bank account. Re-
REDEMPTIONS quests received by the Trust prior to the close of the Exchange
will result in shares being redeemed that day at the next deter-
mined net asset value (less any CDSC) 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 de-
layed by the Trust for up to 7 days if the Distributor deems it
appropriate under then current market conditions. Once authoriza-
tion is on file, the Trust will honor requests by any person iden-
tifying himself as the owner of an account or the owner's broker
by telephone at 1-800-426-0107 or by written instructions. The
Trust cannot be responsible for the efficiency of the Federal Re-
serve wire system or the shareholder's bank. The Trust does not
currently charge for wire transfers. The shareholder is responsi-
ble for any charges imposed by the shareholder's bank. The minimum
amount that may be wired is $2,500. The Trust reserves the right
to change this minimum or to terminate the wire redemption privi-
lege. Shares purchased by check may not be redeemed by wire trans-
fer until such shares have been owned (i.e., paid for) for at
least 15 days. Expedited wire transfer redemptions may be autho-
rized by completing a form available from the Distributor. Wire
redemptions may not be used to redeem shares in certificated form.
To change the name of the single bank account designated to re-
ceive wire redemption proceeds, it is necessary to send a written
request with signatures guaranteed to PIMCO Funds Distributors
LLC, P.O. Box 5866, Denver, CO 80217-5866. See "How to Buy
Shares--Signature Guarantee." This redemption option does not ap-
ply to shares held in broker "street name" accounts.
CERTIFI- To redeem shares for which certificates have been issued, the cer-
CATED tificates must be mailed to or deposited with the Trust, duly en-
SHARES dorsed or accompanied by a duly endorsed stock power or by a writ-
ten request for redemption. Signatures must be guaranteed as de-
scribed under "How to Buy Shares--Signature Guarantee." Further
documentation may be requested from institutions or fiduciary ac-
counts, such as corporations, custodians (e.g., under the Uniform
Gifts to Minors Act), executors, administrators, trustees or
guardians ("institutional account owners"). The redemption request
and stock power must be signed exactly as the account is regis-
tered, including indication of any special capacity of the regis-
tered owner.
32 PIMCO Funds Asset Allocation Series
<PAGE>
AUTOMATIC An investor who owns or buys shares of a Portfolio having a net
WITHDRAWAL asset value of $10,000 or more may open an Automatic Withdrawal
PLAN Plan and have a designated sum of money (not less than $100 per
Portfolio) paid monthly (or quarterly) to the investor or another
person. Such a plan may be established by completing the appropri-
ate section of the account application or you may obtain an Auto-
matic Withdrawal Plan application from the Distributor or your
broker. If an Automatic Withdrawal Plan is set up after the ac-
count is established providing for payment to a person other than
the record shareholder or to an address other than the address of
record, a signature guarantee is required. See "How to Buy
Shares--Signature Guarantee." Class A, Class B and Class C shares
of any Portfolio are deposited in a plan account and all distribu-
tions are reinvested in additional shares of the particular class
of the Portfolio at net asset value. Shares in a plan account are
then redeemed at net asset value (less any applicable CDSC) to
make each withdrawal payment. Any applicable CDSC may be waived
for certain redemptions under an Automatic Withdrawal Plan. See
"Alternative Purchase Arrangements--Waiver of Contingent Deferred
Sales Charges."
Redemptions for the purpose of withdrawals are ordinarily made
on the business day preceding the day of payment at that day's
closing net asset value and checks are mailed on the day of pay-
ment selected by the shareholder. The Transfer Agent may acceler-
ate the redemption and check mailing date by one day to avoid
weekend delays. Payment will be made to any person the investor
designates; however, if the shares are registered in the name of a
trustee or other fiduciary, payment will be made only to the fidu-
ciary, except in the case of a profit-sharing or pension plan
where payment will be made to the designee. As withdrawal payments
may include a return of principal, they cannot be considered a
guaranteed annuity or actual yield of income to the investor. The
redemption of shares in connection with an Automatic Withdrawal
Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust
invested principal, especially in the event of a market decline.
The maintenance of an Automatic Withdrawal Plan concurrently with
purchases of additional shares of the Portfolio would be disadvan-
tageous to the investor because of the CDSC that may become pay-
able on such withdrawals in the case of Class A, Class B or Class
C shares and because of the initial sales charge in the case of
Class A shares. For this reason, the minimum investment accepted
for a Portfolio while an Automatic Withdrawal Plan is in effect
for that Portfolio is $1,000, and an investor may not maintain a
plan for the accumulation of shares of the Portfolio (other than
through reinvestment of distributions) and an Automatic Withdrawal
Plan at the same time. The Trust or the Distributor may terminate
or change the terms of the Automatic Withdrawal Plan at any time.
Because the Automatic Withdrawal Plan may involve invasion of
capital, investors should consider carefully with their own finan-
cial advisors whether the plan and the specified amounts to be
withdrawn are appropriate in their circumstances. The Trust and
the Distributor make no recommendations or representations in this
regard.
REDEMPTIONS The Trust agrees to redeem shares of each Portfolio solely in cash
IN KIND up to the lesser of $250,000 or 1% of the Portfolio's net assets
during any 90-day period for any one shareholder. In consideration
of the best interests of the remaining shareholders, the Trust re-
serves the right to pay any redemption proceeds exceeding this
amount in whole or in part by a distribution in kind of securities
held by a Portfolio in lieu of cash. It is highly unlikely that
shares would ever be redeemed in kind. When shares are redeemed in
kind, the redeeming shareholder should expect to incur transaction
costs upon the disposition of the securities received in the dis-
tribution.
Distributor and Distribution and Servicing Plans
PIMCO Funds Distributors LLC (the "Distributor"), a wholly owned
subsidiary of the Adviser, is the principal underwriter of the
Trust's shares and in that connection makes distribution and ser-
vicing payments to participating brokers and servicing payments to
certain banks and other financial intermediaries in connection
with the sale of Class B and Class C shares and servicing payments
to participating brokers, certain banks and other financial inter-
mediaries in connection with the sale of Class A shares. In the
case of Class A shares, these parties are also compensated based
on the amount of the front-end sales charge reallowed by the Dis-
tributor, except in cases where Class A shares are sold
October 1, 1998 Prospectus 33
<PAGE>
without a front-end sales charge (although the Distributor may pay
brokers additional compensation in connection with sales of Class
A shares without a sales charge). In the case of Class B shares,
participating brokers and other financial intermediaries are com-
pensated by an advance of a sales commission by the Distributor.
In the case of Class C shares, part or all of the first year's
distribution and servicing fee is generally paid at the time of
sale.
Pursuant to a Distribution Agreement with the Trust, with re-
spect to each Portfolio's Class A, Class B and Class C shares, the
Distributor bears various other promotional and sales related ex-
penses, including the cost of printing and mailing prospectuses to
persons other than current shareholders. The Distributor, located
at 2187 Atlantic Street, Stamford, Connecticut 06902, is a broker-
dealer registered with the Securities and Exchange Commission.
CLASS A SERVICING FEES As compensation for services rendered and
expenses borne by the Distributor in connection with personal
services rendered to Class A shareholders of the Trust and the
maintenance of Class A shareholder accounts, the Trust pays the
Distributor servicing fees up to the annual rate of .25% (calcu-
lated as a percentage of each Portfolio's average daily net assets
attributable to Class A shares).
CLASS B AND CLASS C DISTRIBUTION AND SERVICING FEES As compensa-
tion for services rendered and expenses borne by the Distributor
in connection with the distribution of Class B and Class C shares
of the Trust, and in connection with personal services rendered to
Class B and Class C shareholders of the Trust and the maintenance
of Class B and Class C shareholder accounts, the Trust pays the
Distributor servicing and distribution fees up to the annual rates
set forth below (calculated as a percentage of each Portfolio's
average daily net assets attributable to Class B and Class C
shares, respectively):
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FEE FEE
-----------------------------------
<S> <C> <C>
All Portfolios .25% .75%
</TABLE>
The Class A servicing fees and Class B and Class C distribution
and servicing fees paid to the Distributor are made under Distri-
bution and Servicing Plans adopted pursuant to Rule 12b-l under
the Investment Company Act of 1940, as amended (the "1940 Act"),
and are of the type known as "compensation" plans. This means
that, although the Trustees of the Trust are expected to take into
account the expenses of the Distributor and its predecessors in
their periodic review of the Distribution and Servicing Plans, the
fees are payable to compensate the Distributor for services ren-
dered even if the amount paid exceeds the Distributor's expenses.
The distribution fee applicable to Class B and Class C shares
may be spent by the Distributor on any activities or expenses pri-
marily intended to result in the sale of Class B or Class C
shares, respectively, including compensation to, and expenses (in-
cluding overhead and telephone expenses) of, financial consultants
or other employees of the Distributor or of participating or in-
troducing brokers who engage in distribution of Class B or Class C
shares, printing of prospectuses and reports for other than exist-
ing Class B or Class C shareholders, advertising, and preparation,
printing and distribution of sales literature. The servicing fee,
applicable to Class A, Class B and Class C shares of the Trust,
may be spent by the Distributor on personal services rendered to
shareholders of the Trust and the maintenance of shareholder ac-
counts, including compensation to, and expenses (including tele-
phone and overhead expenses) of, financial consultants or other
employees of participating or introducing brokers, certain banks
and other financial intermediaries who aid in the processing of
purchase or redemption requests or the processing of dividend pay-
ments, who provide information periodically to shareholders show-
ing their positions in a Portfolio's shares, who forward communi-
cations from the Trust to shareholders, who render ongoing advice
concerning the suitability of particular investment opportunities
offered by the Trust in light of the shareholders' needs, who re-
spond to inquiries from shareholders relating to such services, or
who train personnel in the provision of such services. Distribu-
tion and servicing fees may also be spent on interest relating to
unreimbursed distribution or servicing expenses from prior years.
34 PIMCO Funds Asset Allocation Series
<PAGE>
Many of the Distributor's sales and servicing efforts involve
the Trust as a whole, so that fees paid by Class A, Class B or
Class C shares of any Portfolio may indirectly support sales and
servicing efforts relating to other shares of the same class of
the Portfolios or other series of the Trust. In reporting its ex-
penses to the Trustees, the Distributor itemizes expenses that re-
late to the distribution and/or servicing of a single Portfolio's
shares, and allocates other expenses among the Portfolios and
other series of the Trust based on their relative net assets. Ex-
penses allocated to each Portfolio are further allocated among its
classes of shares annually based on the relative sales of each
class, except for any expenses that relate only to the sale or
servicing of a single class. The Distributor may make payments to
brokers (and with respect to servicing fees only, to certain banks
and other financial intermediaries) of up to the following per-
centages annually of the average daily net assets attributable to
shares in the accounts of their customers or clients:
ALL PORTFOLIOS
<TABLE>
<CAPTION>
SERVICING DISTRIBUTION
FEE FEE
----------------------------------
<S> <C> <C>
Class A .25% N/A
----------------------------------
Class B (/1/) .25% None
----------------------------------
Class C (/2/) .25% .65%
</TABLE>
1. Payable only with respect to shares outstanding for one year or
more.
2. Payable only with respect to shares outstanding for one year or
more except in the case of shares for which no payment is made to
the party at the time of sale.
The Distributor may from time to time pay additional cash bo-
nuses or other incentives to selected participating brokers in
connection with the sale or servicing of Class A, Class B and
Class C shares of the Portfolios. On some occasions, such bonuses
or incentives may be conditioned upon the sale of a specified min-
imum dollar amount of the shares of a Portfolio and/or all of the
Portfolios or other series of the Trust together, or a particular
class of shares, during a specific period of time. The Distributor
currently expects that such additional bonuses or incentives will
not exceed .50% of the amount of any sale. In its capacity as ad-
ministrator for the Portfolios, PIMCO Advisors may pay participat-
ing brokers and other intermediaries for sub-transfer agency and
other services.
If in any year the Distributor's expenses incurred in connec-
tion with the distribution of Class B and Class C shares and, for
Class A, Class B and Class C shares, in connection with the ser-
vicing of shareholders and the maintenance of shareholder ac-
counts, exceed the distribution and/or servicing fees paid by the
Trust, the Distributor would recover such excess only if the Dis-
tribution and Servicing Plan with respect to such class of shares
continues to be in effect in some later year when the distribution
and/or servicing fees exceed the Distributor's expenses. The Trust
is not obligated to repay any unreimbursed expenses that may exist
at such time, if any, as the relevant Distribution and Servicing
Plan terminates.
From time to time, expenses of principal underwriters incurred
in connection with the sale of Class B and Class C shares of the
Portfolios and, in connection with the servicing of Class B and
Class C shareholders of the Portfolios and the maintenance of
Class B and Class C shareholder accounts, may exceed the distribu-
tion and servicing fees collected by the Distributor.
How Net Asset Value Is Determined
The net asset values of Class A, Class B and Class C shares of
each Portfolio of the Trust will be determined once on each day on
which the Exchange is open (a "Business Day"), as of the close of
regular trading (normally 4:00 p.m., Eastern time) on the Ex-
change. Net asset value will not be determined on days on which
the Exchange is closed.
October 1, 1998 Prospectus 35
<PAGE>
The market values of the shares of the Underlying Funds held by
the Portfolios are determined once each Business Day in the same
manner as the net asset values of the Portfolios' shares are de-
termined as described below.
Each Portfolio's liabilities are allocated among its classes.
The total of such liabilities allocated to a class plus that
class's distribution and/or servicing fees and any other expenses
specially allocated to that class are then deducted from the
class's proportionate interest in the Portfolio's assets, and the
resulting amount for each class is divided by the number of shares
of that class outstanding to produce the class's "net asset value"
per share. Under certain circumstances, the per share net asset
value of the Class B and Class C shares of the Portfolios that do
not declare regular income dividends on a daily basis may be lower
than the per share net asset value of the Class A shares as a re-
sult of the daily expense accruals of the distribution fee appli-
cable to the Class B and Class C shares. Generally, for Portfolios
that pay income dividends, those dividends are expected to differ
over time by approximately the amount of the expense accrual dif-
ferential between a particular Portfolio's classes.
Distributions
Shares begin earning dividends on the day after the date that
funds are received by the Trust for the purchase of Class A, Class
B and Class C shares. Net investment income from interest and div-
idends, if any, will be declared and paid to shareholders of rec-
ord at least monthly by the 30/70 Portfolio, at least quarterly by
the 60/40 Portfolio and at least annually by the 90/10 Portfolio.
Any net capital gains from the sale of portfolio securities will
be distributed no less frequently than once annually. Net short-
term capital gains may be paid more frequently.
All dividends and/or distributions will be paid in the form of
additional shares of the class of shares of the Portfolio to which
the dividends and/or distributions relate or, at the election of
the shareholder, of another series of the Trust or PIMCO Funds:
Pacific Investment Management Series as described below, at net
asset value, unless the shareholder elects to receive cash (either
paid to shareholders directly or credited to their account with
their participating broker). If a shareholder has elected to re-
ceive dividends and/or capital gain distributions in cash and the
postal or other delivery service is unable to deliver checks to
the shareholder's address of record, such shareholder's distribu-
tions will automatically be invested in PIMCO Money Market Fund
until such shareholder is located. Dividends paid by each Portfo-
lio with respect to each class of shares are calculated in the
same manner and at the same time, but dividends on Class B and
Class C shares are expected to be lower than dividends on Class A
shares as a result of the distribution fee applicable to Class B
and Class C shares. There are no sales charges on reinvested divi-
dends.
Class A, Class B and Class C shareholders of the Portfolios may
elect to invest dividends and/or distributions paid by any Portfo-
lio in shares of the same class of any other series of the Trust
or PIMCO Funds: Pacific Investment Management Series which offers
such class of shares at net asset value. The shareholder must have
an account existing in the PIMCO series selected for investment
with the identical registered name and address and must elect this
option on the account application, on a form provided for that
purpose or by a telephone request to the Transfer Agent at 1-800-
426-0107. For further information on this option, contact your
broker or call the Distributor at 1-800-426-0107.
Taxes
Each Portfolio intends to qualify as a regulated investment com-
pany annually and to elect to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the
"Code"). As such, a Portfolio generally will not pay federal in-
come tax on the income and gains it pays as dividends to its
shareholders. In order to avoid a 4% federal excise tax, each
Portfolio intends to distribute each year substantially all of its
net income and gains.
36 PIMCO Funds Asset Allocation Series
<PAGE>
Shareholders subject to U.S. federal income tax will be subject
to tax on dividends received from a Portfolio, regardless of
whether received in cash or reinvested in additional shares. Dis-
tributions received by tax-exempt shareholders will not be subject
to federal income tax to the extent permitted under applicable tax
law. All shareholders must treat dividends, other than capital
gain dividends, exempt-interest dividends and dividends that rep-
resent a return of capital to shareholders, as ordinary income. In
particular, distributions derived from short-term gains will be
treated as ordinary income. Dividends designated by a Portfolio as
capital gain dividends derived from the Portfolio's net capital
gains (that is, the excess of its net long-term capital gains over
its net short-term capital losses) are taxable to shareholders as
long-term capital gain (generally subject to a 20% tax rate) ex-
cept as provided by an applicable tax exemption. Some 1998 distri-
butions of gains realized in 1997 may be subject to a 28% tax rate
in the hands of shareholders. Any distributions that are not from
a Portfolio's net investment income or net capital gain may be
characterized as a return of capital to shareholders or, in some
cases, as capital gain. Certain dividends declared in October, No-
vember or December of a calendar year are taxable to shareholders
(who otherwise are subject to tax on dividends) as though received
on December 31 of that year if paid to shareholders during January
of the following calendar year. Each Portfolio will advise share-
holders annually of the amount and nature of the dividends paid to
them. Dividends derived from interest on certain U.S. Government
securities may be exempt from state and local taxes, although in-
terest on mortgage-backed U.S. Government securities may not be so
exempt.
Taxable shareholders should note that the timing of their in-
vestment or redemptions could have undesirable tax consequences.
Dividends and distributions on a Portfolio's shares are generally
subject to federal income tax as described herein to the extent
they do not exceed the Portfolio's realized income and gains, even
though such dividends and distributions may economically represent
a return of a particular shareholder's investment. Such distribu-
tions are likely to occur in respect of shares purchased at a time
when the Portfolio's net asset value reflects gains that are ei-
ther unrealized, or realized but not distributed. If shares are
redeemed before payment of an exempt-interest dividend, sharehold-
ers may realize a taxable capital gain, whereas by waiting and re-
ceiving the exempt-interest dividend, a portion of their share
value would have been received in the form of tax-free income.
The preceding discussion relates only to federal income tax;
the consequences under other tax laws may differ. Shareholders
should consult their tax advisers as to the possible application
of state and local income tax laws to Trust dividends and capital
gain distributions. For additional information relating to the tax
aspects of investing in a Portfolio, see the Statement of Addi-
tional Information.
Management of the Portfolios
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 Addi-
tional Information under the heading "Management of the Trust."
INVESTMENT PIMCO ADVISORS serves as investment adviser to the Portfolios pur-
ADVISER suant 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 serv-
ices to private accounts of institutional and individual clients
and to mutual funds. Total assets under management by PIMCO Advi-
sors and its subsidiary partnerships as of August 31, 1998 were
approximately $218.4 billion. The general partners of PIMCO Advi-
sors are PIMCO Partners, G.P. and PIMCO Advisors Holdings L.P.
("PAH"). PIMCO Partners, G.P. is a general partnership between
PIMCO Holding LLC, a Delaware limited liability company and an in-
direct wholly-owned subsidiary of Pacific Life Insurance Company,
and PIMCO Partners LLC, a California limited liability company
controlled by the Managing Directors of Pacific Investment Manage-
ment. PIMCO Partners, G.P. is the sole general partner of PAH.
PIMCO Advisors is governed by a Management Board, which exercises
substantially all of the governance powers of the general partner
and serves as the functional equivalent of a board of directors.
PIMCO Advisors' address is 800 Newport Center Drive, Newport
October 1, 1998 Prospectus 37
<PAGE>
Beach, California 92660. PIMCO Advisors is registered as an in-
vestment adviser with the Securities and Exchange Commission.
PIMCO Advisors currently has seven subsidiary investment adviser
partnerships, the following six of which manage one or more of the
Underlying Funds: Blairlogie, Cadence, Columbus Circle, NFJ, Pa-
cific Investment Management and Parametric.
PIMCO Advisors' Asset Allocation Committee is responsible for
determining how the Portfolios' assets are allocated and reallo-
cated from time to time among the Underlying Funds. Individuals
who determine general investment advice and constitute the Asset
Allocation Committee for PIMCO Advisors are William D. Cvengros,
Timothy R. Clark, Robert S. Venable, David Young and Edward P.
Rennie.
William D. Cvengros is the Chief Executive Officer, President
and a Member of the Management Board of PIMCO Advisors and a
Trustee of the Trust. He was formerly President of the Trust and a
Director and the Vice Chairman and Chief Investment Officer of Pa-
cific Life Insurance Company. He received a B.A. in Economics from
the University of Notre Dame and an M.B.A. from Northwestern Uni-
versity and he is a Chartered Financial Analyst. Timothy R. Clark
is a Vice President of PIMCO Advisors and a Senior Vice President
of the Distributor. He previously served as President of Katonah
Capital Management, Inc. Prior to that, he was with Zweig Advisors
Inc. and its affiliates serving in various capacities, including
portfolio manager for various open- and closed-end funds. He re-
ceived a B.A. in Economics from Harvard University and an M.B.A.
from New York University. Robert S. Venable is a Vice President of
PIMCO Advisors. He previously served as a Vice President and port-
folio manager at Pacific Investment Management. Mr. Venable has a
B.S. from the University of California, Berkeley and an M.B.A.
from the Wharton School of Business and he is a Chartered Finan-
cial Analyst. David Young is a Vice President in Account Manage-
ment at Pacific Investment Management. Previously, he was a Vice
President--Client Relations and Marketing of a former division of
PIMCO Advisors, a Director--Client Relations with Pacific Finan-
cial Asset Management Company and a Vice President and portfolio
manager with Analytic Investment Management, Inc. He received a
B.A. in Economics and Political Science and an M.B.A. from the
University of California, Irvine and he is a Chartered Financial
Analyst. Edward P. Rennie is a Senior Vice President and Regional
Manager of Pacific Investment Management in Singapore. Previously,
he was a Vice President and Director of New Product Services at
Pacific Investment Management or its predecessor. He received a
B.S. in Engineering from Drexel University and he is a Chartered
Financial Analyst.
Under the investment advisory agreement, PIMCO Advisors, sub-
ject to the supervision of the Board of Trustees, is responsible
for providing advice and guidance with respect to the Portfolios
and for managing, either directly or through others selected by
the Adviser, the investment of the Portfolios. PIMCO Advisors also
furnishes to the Board of Trustees periodic reports on the invest-
ment performance of each Portfolio.
PORTFOLIO Pursuant to portfolio management agreements, PIMCO Advisors em-
MANAGERS ploys Portfolio Managers to manage the portfolios of all of the
FOR THE Underlying Stock Funds with the exception of PIMCO StocksPLUS
UNDERLYING Fund, for which Pacific Investment Management serves as investment
FUNDS adviser and Portfolio Manager. Pacific Investment Management also
serves as investment adviser and Portfolio Manager of each Under-
lying Bond Fund. The Portfolio Managers have full investment dis-
cretion and make all determinations with respect to the investment
of the assets of the Underlying Funds they manage. If a Portfolio
Manager ceases to manage the portfolio of an Underlying Stock
Fund, PIMCO Advisors will either assume full responsibility for
the management of that Fund or retain a new portfolio manager sub-
ject to the approval of the Trustees and the shareholders of the
Fund.
PACIFIC INVESTMENT MANAGEMENT manages each Underlying Bond Fund
and PIMCO StocksPLUS Fund, each of which is a series of PIMCO
Funds: Pacific Investment Management Series. Pacific Investment
Management is an investment management firm organized as a general
partnership. Pacific Investment Management has two partners: PIMCO
Advisors as the supervisory partner, and PIMCO Management, Inc. as
the managing partner. Pacific Investment Management Company, the
predecessor investment adviser to Pacific Investment Management,
commenced operations in 1971. Pacific Investment Management had
approximately $142.6 billion of assets under management as
38 PIMCO Funds Asset Allocation Series
<PAGE>
of August 31, 1998. Pacific Investment Management's address is 840
Newport Center Drive, Suite 300, Newport Beach, California 92660.
Pacific Investment Management is registered as an investment ad-
viser with the Securities and Exchange Commission and as a commod-
ity trading adviser with the CFTC.
Pacific Investment Management specializes in all sectors of the
fixed income market using its total return philosophy--seeking
both yield and capital appreciation. Pacific Investment Manage-
ment's total return philosophy revolves around the principle of
diversification and that no single risk should dominate returns.
By diversifying strategies, or relying on multiple sources of val-
ue, Pacific Investment Management attempts to generate a solid
track record with a high degree of consistency. Pacific Investment
Management seeks to add value through the use of "top down" strat-
egies such as its exposure to interest rates, or duration, chang-
ing volatility, yield curve positioning and sector rotation. "Bot-
tom up" strategies are also employed involving analysis and selec-
tion of specific securities.
COLUMBUS CIRCLE manages PIMCO Renaissance, Core Equity, Mid-Cap
Equity, International Growth, and Innovation Funds (the "Columbus
Circle Funds"). Columbus Circle is an investment management firm
organized as a general partnership. Columbus Circle has two part-
ners: PIMCO Advisors as the supervisory partner, and Columbus Cir-
cle 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 com-
bined assets as of August 31, 1998 of approximately $7.3 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 Securities and Exchange Commis-
sion.
At the center of Columbus Circle's equity investment strategy
is its theory of Positive Momentum & Positive Surprise. This the-
ory asserts that a good company doing better than generally ex-
pected will experience a rise in its stock price, and conversely,
a company falling short of expectations will experience a drop in
its stock price. Based on this theory, Columbus Circle attempts to
manage the Columbus Circle Funds with a view to investing in grow-
ing companies that are surprising the market with business results
that are better than anticipated.
CADENCE manages PIMCO Capital Appreciation, Mid-Cap Growth, Small-
Cap Growth, and Micro-Cap Growth Funds (the "Cadence Funds"). Ca-
dence is an investment management firm organized as a general
partnership. Cadence has two partners: PIMCO Advisors as the su-
pervisory partner, and Cadence Capital Management Inc. as the man-
aging partner. Cadence Capital Management Corporation, the prede-
cessor investment adviser to Cadence, commenced operations in
1988. Accounts managed by Cadence had combined assets as of August
31, 1998 of approximately $5.7 billion. Cadence's address is Ex-
change Place, 53 State Street, Boston, Massachusetts 02109. Ca-
dence is registered as an investment adviser with the Securities
and Exchange Commission.
Cadence utilizes an equity investment strategy that focuses on
both growth (evaluating securities on the basis of their potential
earnings growth) and value (evaluating securities based on their
price) characteristics, and attempts to identify reasonably priced
securities that offer rapid prospective earnings growth potential.
Cadence utilizes a quantitative screening process in selecting
stocks. Distinct computerized models are used to screen and rank
each issue in a selected universe according to growth and price
considerations. Cadence believes that the models identify the
stocks in the universe exhibiting growth characteristics with rea-
sonable valuations. Stocks are then selected for a portfolio using
qualitative research, and are replaced when they score worse-than-
median screen ranks, have negative earnings surprises or show poor
relative performance. The universes are rescreened frequently to
obtain a favorable composition of growth and value characteristics
for the Cadence Funds.
NFJ manages PIMCO Equity Income, Value, Value 25, and Small-Cap
Value Funds (the "NFJ Funds"). NFJ is an investment management
firm organized as a general partnership. NFJ has two partners:
PIMCO Advisors as the supervisory partner, and NFJ Management Inc.
as the managing partner. NFJ Investment Group, Inc., the predeces-
sor investment adviser to NFJ, commenced operations in 1989. Ac-
counts managed by NFJ had combined assets as of August 31, 1998 of
approximately $2.1 billion. NFJ's address is 2121 San Jacinto,
Suite 1840, Dallas, Texas 75201. NFJ is registered as an invest-
ment adviser with the Securities and Exchange Commission.
October 1, 1998 Prospectus 39
<PAGE>
In managing the NFJ Funds, NFJ uses a value-based philosophy
and investment process. NFJ adheres to the traditional value phi-
losophy that stocks priced lower than the true value of the issu-
ing company will increase in value, but differs from many value
managers by also considering industry diversification and the ben-
efits it affords a portfolio. NFJ classifies stock universes by
industry and according to market capitalization. Stocks are se-
lected from a universe using screening processes that focus on low
P/E ratios and/or high yields within each industry, subject to
quality and price momentum screens. Although quarterly rebalancing
is a general rule, NFJ will replace stocks when an alternate stock
within the same industry has a significantly better characteris-
tics than the current NFJ Fund holdings.
BLAIRLOGIE manages PIMCO International Fund. Blairlogie is an in-
vestment management firm, organized as a limited partnership under
the laws of the United Kingdom, with two general partners and one
limited partner. Currently, the general partners are PIMCO Advi-
sors, which serves as the supervisory partner, and Blairlogie
Holdings Limited, a wholly owned subsidiary of PIMCO Advisors,
which serves as the managing partner. Blairlogie Capital Manage-
ment Ltd., the predecessor investment adviser to Blairlogie, com-
menced operations in 1992. Accounts managed by Blairlogie had com-
bined assets as of August 31, 1998 of approximately $717 million.
Blairlogie's address is 4th Floor, 125 Princes Street, Edinburgh
EH2 4AD, Scotland. Blairlogie is registered as an investment ad-
viser with the Securities and Exchange Commission in the United
States and with the Investment Management Regulatory Organisation
in the United Kingdom.
Blairlogie has more than 50 years of experience in the highly
specialized field of international investing. Its investment phi-
losophy combines traditional Scottish standards of prudent invest-
ment management with modern quantitative analytical tools. In man-
aging PIMCO International Fund, Blairlogie employs sophisticated
analytical tools to attain specific information on each country
considered for investment and conducts personal visits to numerous
geographical regions, using the information to determine country
allocations. It then selects what it believes to be the best
stocks within each country according to growth, quality and value
characteristics. Through continued monitoring, sell decisions are
influenced by changes in country weightings or changes in a par-
ticular security's attractiveness.
PARAMETRIC manages PIMCO Enhanced Equity, Tax-Efficient Equity,
Structured Emerging Markets, and Tax-Efficient Structured Emerging
Markets Funds (the "Parametric Funds"). Parametric is an invest-
ment management firm organized as a general partnership. Paramet-
ric has two partners: PIMCO Advisors as the supervisory partner,
and Parametric Management Inc. as the managing partner. Parametric
Portfolio Associates, Inc., the predecessor investment adviser to
Parametric, commenced operations in 1987. Accounts managed by Par-
ametric had combined assets as of August 31, 1998 of approximately
$2.7 billion. Parametric's address is 7310 Columbia Center, 701
Fifth Avenue, Seattle, Washington 98104-7090. Parametric is regis-
tered as an investment adviser with the SEC and as a commodity
trading adviser with the CFTC.
Parametric has developed a structured, long-term investment
process that combines quantitatively-driven fundamental analysis
and economic methods. Parametric attempts to build risk-controlled
portfolios of equity securities that are both reasonably priced
and poised to benefit from investor sentiment by combining its un-
derstanding of the financial markets and investment behavior with
extensive quantitative research and modeling. This investment phi-
losophy is applied for each Parametric Fund, including those with
an emerging markets or tax-efficient focus.
FUND PIMCO Advisors also serves as administrator (the "Administrator")
ADMINIS- for the Portfolios' Class A, Class B and Class C shares pursuant
TRATOR to an administration agreement with the Trust. The Administrator
provides or procures administrative services for Class A, Class B
and Class C shareholders of the Portfolios, which include clerical
help and accounting, bookkeeping, internal audit services and cer-
tain other services required by the Portfolios, and preparation of
reports to the Portfolios' shareholders and regulatory filings.
The Administrator has retained Pacific Investment Management 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
40 PIMCO Funds Asset Allocation Series
<PAGE>
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 Portfolios,
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 Portfolios (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 offi-
cers, directors, stockholders, or employees of PIMCO Advisors, Pa-
cific Investment Management, or their subsidiaries or affiliates;
(ii) taxes and governmental fees; (iii) brokerage fees and commis-
sions and other portfolio transaction expenses; (iv) the costs of
borrowing money, including interest expenses; (v) fees and ex-
penses of the Trustees who are not "interested persons" of the Ad-
viser, any Portfolio Manager, or the Trust, and any counsel re-
tained exclusively for their benefit; (vi) extraordinary expenses,
including costs of litigation and indemnification expenses; (vii)
expenses which are capitalized in accordance with generally ac-
cepted accounting principles; and (viii) any expenses allocated or
allocable to a specific class of shares, which include distribu-
tion and/or service fees payable with respect to Class A, Class B
and Class C shares, and may include certain other expenses as per-
mitted by the Trust's Multiple Class Plan adopted pursuant to Rule
18f-3 under the 1940 Act, subject to review and approval by the
Trustees. The Portfolios also indirectly pay their proportionate
share of the expenses of the Underlying Funds (including advisory
and administrative fees) in which they invest. See "Underlying
Fund Expenses" below.
ADVISORY The Portfolios do not pay any fees to PIMCO Advisors under the
FEES Trust's investment advisory agreement in return for the advisory
and asset allocation services provided by PIMCO Advisors. The
Portfolios do, however, indirectly pay a proportionate share of
the advisory fees paid to PIMCO Advisors and Pacific Investment
Management by the Underlying Funds in which the Portfolios invest.
See "Underlying Fund Expenses" below.
ADMINIS- The Portfolios feature fixed administrative fees. For providing or
TRATIVE procuring administrative services to the Portfolios as described
FEES above, the Administrator receives monthly fees from each Portfolio
at the annual rate of 0.40% based on the average daily net assets
attributable in the aggregate to the Portfolio's Class A, Class B
and Class C shares up to and including $2.5 billion, and .35%
based on such net assets in excess of $2.5 billion. The Portfolios
also indirectly pay a proportionate share of the administrative
fees charged by PIMCO Advisors and Pacific Investment Management
to the Underlying Funds in which the Portfolios invest. See "Un-
derlying Fund Expenses" below. The administration and sub-
administration agreements for the Portfolios may be terminated by
the Trustees, or by PIMCO Advisors or Pacific Investment Manage-
ment (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.
UNDERLYING The expenses associated with investing in a "fund of funds," such
FUND as the Portfolios, are generally higher than those for mutual
EXPENSES funds that do not invest primarily in other mutual funds. This is
because shareholders in a "fund of funds" indirectly pay a portion
of the fees and expenses charged at the underlying fund level.
The Trust has structured the Portfolios to reduce expenses in-
curred at the Underlying Fund level as follows: (a) the Portfolios
do not pay any fees for asset allocation or advisory services un-
der the Trust's investment advisory agreement; and (b) the Under-
lying Funds invest in Institutional Class shares of the Underlying
Funds, which are not subject to any sales charges or 12b-1 fees.
The following sets forth annual advisory fee and total operat-
ing expense information for Institutional Class shares of the Un-
derlying Funds. Shareholders of each Portfolio indirectly bear a
proportionate share of these expenses depending upon how the Port-
folio's assets are allocated from time to time among the Under-
lying Funds. See "Schedule of Fees."
October 1, 1998 Prospectus 41
<PAGE>
<TABLE>
<CAPTION>
ANNUAL UNDERLYING FUND EXPENSES
(Based on the average daily net assets
attributable to a Fund's Institutional
Class shares):
ADVISORY ADMINI- TOTAL FUND
UNDERLYING FUND FEES STRATIVE FEES OPERATING EXPENSES
-----------------------------------------------------------------
<S> <C> <C> <C>
PIMCO Equity Income 0.45% 0.25% 0.70%
-----------------------------------------------------------------
PIMCO Renaissance 0.60 0.25 0.85
-----------------------------------------------------------------
PIMCO Core Equity 0.57 0.25 0.82
-----------------------------------------------------------------
PIMCO Mid-Cap Equity 0.63 0.25 0.88
-----------------------------------------------------------------
PIMCO Value 0.45 0.25 0.70
-----------------------------------------------------------------
PIMCO Value 25 0.50 0.25 0.75
-----------------------------------------------------------------
PIMCO Capital
Appreciation 0.45 0.25 0.70
-----------------------------------------------------------------
PIMCO Mid-Cap Growth 0.45 0.25 0.70
-----------------------------------------------------------------
PIMCO Enhanced Equity 0.45 0.25 0.70
-----------------------------------------------------------------
PIMCO Tax-Efficient
Equity 0.45 0.25 0.70
-----------------------------------------------------------------
PIMCO Small-Cap Value 0.60 0.25 0.85
-----------------------------------------------------------------
PIMCO Small-Cap Growth 1.00 0.25 1.25
-----------------------------------------------------------------
PIMCO Micro-Cap Growth 1.25 0.25 1.50
-----------------------------------------------------------------
PIMCO International 0.55 0.50 1.05
-----------------------------------------------------------------
PIMCO International
Growth 0.85 0.50 1.35
-----------------------------------------------------------------
PIMCO Structured Emerging
Markets 0.45 0.50 0.95
-----------------------------------------------------------------
PIMCO Tax-Efficient
Structured Emerging
Markets 0.45 0.50 0.95
-----------------------------------------------------------------
PIMCO Innovation 0.65 0.25 0.90
-----------------------------------------------------------------
PIMCO StocksPLUS 0.40 0.25 0.65
-----------------------------------------------------------------
PIMCO Money Market 0.15 0.20 0.35
-----------------------------------------------------------------
PIMCO Short-Term 0.25 0.20 0.45
-----------------------------------------------------------------
PIMCO Low Duration 0.25 0.18 0.43
-----------------------------------------------------------------
PIMCO Moderate Duration 0.25 0.20 0.45
-----------------------------------------------------------------
PIMCO Real Return Bond 0.25 0.25 0.50
-----------------------------------------------------------------
PIMCO Total Return 0.25 0.18 0.43
-----------------------------------------------------------------
PIMCO Total Return II 0.25 0.25 0.50
-----------------------------------------------------------------
PIMCO High Yield 0.25 0.25 0.50
-----------------------------------------------------------------
PIMCO Long-Term U.S.
Government Bond 0.25 0.25 0.50
-----------------------------------------------------------------
PIMCO Global Bond 0.25 0.30 0.55
-----------------------------------------------------------------
PIMCO Foreign Bond 0.25 0.25 0.50
-----------------------------------------------------------------
PIMCO Emerging Markets
Bond 0.45 0.40 0.85
-----------------------------------------------------------------
PIMCO Municipal Bond 0.25 0.25 0.50
</TABLE>
Description of the Trust
CAPITALIZA- The Trust was organized as a Massachusetts business trust on Au-
TION gust 24, 1990, and currently consists of twenty-eight portfolios
that are operational, three of which are described in this Pro-
spectus. Other portfolios may be offered by means of a separate
prospectus. The Board of Trustees may establish additional portfo-
lios 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 cir-
cumstances, be held liable for the obligations of the Trust. How-
ever, the Trust's Second Amended and Restated Agreement and Decla-
ration of Trust (the "Declaration of 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.
42 PIMCO Funds Asset Allocation Series
<PAGE>
The Declaration of Trust also provides for indemnification out of
a Portfolio's property for all loss and expense of any shareholder
of that Portfolio 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 circum-
stances in which such disclaimer is inoperative or the Portfolio
of which he or she is or was a shareholder is unable to meet its
obligations, and thus should be considered remote.
MULTIPLE Class A, Class B and Class C shares of each Portfolio represent
CLASSES OF interests in the assets of that Portfolio, and each class has
SHARES identical dividend, liquidation and other rights and the same
terms and conditions, except that expenses related to the distri-
bution and shareholder servicing of Class A, Class B and Class C
shares are borne solely by such class and each class may, at the
Trustees' discretion, also pay a different share of other ex-
penses, not including advisory or custodial fees or other expenses
related to the management of the Trust's assets, if these expenses
are actually incurred in a different amount by that class, or if
the class receives services of a different kind or to a different
degree than the other classes. All other expenses are allocated to
each class on the basis of the net asset value of that class in
relation to the net asset value of the particular Portfolio.
VOTING Each class of shares of each Portfolio 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 sub-
mitted to shareholders in which the interests of one class differ
from the interests of any other class. Each class of shares has
exclusive voting rights with respect to matters pertaining to any
Distribution and Servicing Plan or agreement applicable only to
that class. These shares are entitled to vote at meetings of
shareholders. Matters submitted to shareholder vote must be ap-
proved by each Portfolio 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 Port-
folios, then only shareholders of the Portfolio or Portfolios af-
fected shall be entitled to vote on the matter. All classes of
shares of a Portfolio will vote together, except with respect to a
Distribution and Servicing Plan or agreement 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 en-
titled to dividends as declared by the Trustees and, in liquida-
tion of the Trust, are entitled to receive the net assets of their
Portfolio, but not of the other Portfolios or other series of the
Trust. The Trust does not generally hold annual meetings of share-
holders 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.
Shares entitle their holders to one vote per share (with pro-
portionate voting for fractional shares). As used in this Prospec-
tus, the phrase "vote of a majority of the outstanding shares" of
a Portfolio (or the Trust) means the vote of the lesser of: (1)
67% of the shares of the Portfolio (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 Portfolio (or the Trust).
Mailings to Shareholders
To reduce the volume of mail shareholders receive, it is antici-
pated that only one copy of most Trust reports, such as the
Trust's annual reports, will be mailed to a shareholder's house-
hold (same surname, same address). A shareholder may call 1-800-
426-0107 if additional shareholder reports are desired.
October 1, 1998 Prospectus 43
<PAGE>
PIMCO FUNDS ASSET ALLOCATION SERIES
Actively managed portfolios of select PIMCO Funds
<TABLE>
<S> <C> <C>
Investment Adviser and Shareholder Servicing Agent For further information
Administrator and Transfer Agent about PIMCO Funds Asset
PIMCO Advisors L.P. Shareholder Services, Inc. Allocation Series, call
800 Newport Center Drive P.O. Box 5866 1-800-426-0107 or visit
Newport Beach, CA 92660 Denver, CO 80217 our Web site at
www.pimcofunds.com.
Distributor Independent Accountants
PIMCO Funds Distributors LLC PricewaterhouseCoopers LLP
2187 Atlantic Street 1055 Broadway
Stamford, CT 06902 Kansas City, MO 64105
Custodian Legal Counsel
Investors Fiduciary Trust Ropes & Gray
Company One International Place
801 Pennsylvania Boston, MA 02110
Kansas City, MO 64105
</TABLE>
PIMCO
-----
FUNDS
PZ008.10/98
<PAGE>
PIMCO FUNDS:
MULTI-MANAGER SERIES
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
PIMCO Funds: Multi-Manager Series (the "Trust"), formerly PIMCO Funds:
Equity Advisors Series, PIMCO Advisors Institutional Funds, PFAMCo Funds, and
PFAMCo Fund, is an open-end management investment company ("mutual fund")
currently consisting of twenty-eight separate diversified investment series.
The following twenty-five series (the "Funds") invest directly in equity and/or
fixed income securities and other instruments: the Equity Income Fund, the
Value Fund, the Renaissance Fund, the Tax-Efficient Equity Fund, the Enhanced
Equity Fund, the Growth Fund, the Value 25 Fund, the Capital Appreciation Fund,
the Mid-Cap Growth Fund, the Core Equity Fund, the Mid-Cap Equity Fund, the
Target Fund, the Small-Cap Value Fund, the Small-Cap Growth Fund, the
Opportunity Fund, the Micro-Cap Growth Fund, the Innovation Fund, the
International Fund, the International Developed Fund, the International Growth
Fund, the Emerging Markets Fund, the Tax-Efficient Structured Emerging Markets
Fund, the Structured Emerging Markets Fund, the Precious Metals Fund and the
Balanced Fund. Three additional series, PIMCO Funds Asset Allocation Series -
90/10 Portfolio (the "90/10 Portfolio"), PIMCO Funds Asset Allocation Series -
60/40 Portfolio (the "60/40 Portfolio"), and PIMCO Funds Asset Allocation Series
- - 30/70 Portfolio (the "30/70 Portfolio", and together with the 90/10 Portfolio
and the 60/40 Portfolio, the "Portfolios"), are so-called "funds of funds" which
invest all of their assets in certain of the Funds and other series in the PIMCO
Funds family.
The Tax Exempt Fund, formerly a series of the Trust, was merged with and into
the Municipal Bond Fund of PIMCO Funds in a transaction which took place on June
26, 1998 and was liquidated in connection with the transaction.
The Trust's investment adviser is PIMCO Advisors L.P. ("PIMCO Advisors" or the
"Adviser"), 800 Newport Center Drive, Newport Beach, California 92660.
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with the Prospectuses for the Trust, as supplemented from
time to time. The Trust offers up to six classes of shares of each of the Funds
through three Prospectuses. Class A, Class B and Class C shares of certain
Funds are offered through the "Class A, B and C Prospectus," dated July 13,
1998, Class D shares of certain Funds are offered through the "Class D
Prospectus" dated July 13, 1998, and Institutional and Administrative Class
shares of certain Funds are offered through the "Institutional Prospectus,"
dated July 13, 1998. Class A, Class B and Class C shares of the Portfolios are
offered through the "Retail Portfolio Prospectus," dated October 1, 1998. The
Class A, B and C Prospectus, the Class D Prospectus, the Institutional
Prospectus, and the Retail Portfolio Prospectus are collectively referred to
herein as the "Prospectuses." A copy of the applicable Prospectus may be
obtained free of charge at the address and telephone number(s) listed below.
<TABLE>
<CAPTION>
Class A, B and C; Class D; and
Institutional Prospectus: Retail Portfolio Prospectuses:
------------------------ --------------------------------
<S> <C>
PIMCO Funds PIMCO Funds Distributors LLC
840 Newport Center Drive 2187 Atlantic Street
Suite 300 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: Class A, B and C - 1-800-426-0107
Telephone: 1-800-927-4648 Class D - 1-888-87-PIMCO
1-800-987-4626 (PIMCO Infolink Audio Retail Portfolio - 1-800-426-0107
Response Network)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.................................................. 2
U.S. Government Securities.......................................................... 2
Inflation-Indexed Bonds............................................................. 2
Borrowing........................................................................... 3
Preferred Stock..................................................................... 4
Corporate Debt Securities........................................................... 4
High Yield Securities ("Junk Bonds")................................................ 5
Participation on Creditors Committees............................................... 6
Variable and Floating Rate Securities............................................... 6
Mortgage-Related and Asset-Backed Securities........................................ 7
Foreign Securities.................................................................. 11
Foreign Currencies.................................................................. 13
Bank Obligations.................................................................... 14
Commercial Paper.................................................................... 15
Derivative Instruments.............................................................. 15
When-Issued, Delayed Delivery and Forward Commitment Transactions................... 21
Warrants to Purchase Securities..................................................... 22
Metal-Indexed Notes and Precious Metals............................................. 22
Repurchase Agreements............................................................... 23
Securities Loans.................................................................... 23
Investment Strategies of the Portfolios - Incorporation by Reference................ 24
INVESTMENT RESTRICTIONS............................................................. 24
Fundamental Investment Restrictions................................................. 24
Non-Fundamental Investment Restrictions............................................. 27
MANAGEMENT OF THE TRUST............................................................. 30
Trustees............................................................................ 30
Officers............................................................................ 31
Trustees' Compensation.............................................................. 32
Investment Adviser.................................................................. 34
Portfolio Management Agreements..................................................... 37
Fund Administrator.................................................................. 41
DISTRIBUTION OF TRUST SHARES........................................................ 45
Distributor and Multi-Class Plan.................................................... 45
Contingent Deferred Sales Charge and Initial Sales Charge........................... 46
Distribution and Servicing Plans for Class A, Class B and Class C Shares............ 46
Payments Pursuant to Class A Plans.................................................. 47
Payments Pursuant to Class B Plans.................................................. 49
Payments Pursuant to Class C Plans.................................................. 51
Distribution and Administrative Services Plans for Administrative Class Shares...... 52
Payments Pursuant to Administrative Distribution Plan............................... 53
Payments Pursuant to Administrative Services Plan................................... 54
Plan for Class D Shares............................................................. 54
Purchases, Exchanges and Redemptions................................................ 55
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................ 57
Investment Decisions................................................................ 57
Brokerage and Research Services..................................................... 57
Portfolio Turnover.................................................................. 60
NET ASSET VALUE..................................................................... 60
TAXATION............................................................................ 61
Distributions....................................................................... 61
Sales of Shares..................................................................... 62
Backup Withholding.................................................................. 63
Options, Futures, Forward Contracts and Swap Agreements............................. 63
Passive Foreign Investment Companies................................................ 64
Foreign Currency Transactions....................................................... 64
Foreign Taxation.................................................................... 64
Original Issue Discount............................................................. 65
Other Taxation...................................................................... 65
OTHER INFORMATION................................................................... 66
Capitalization...................................................................... 66
Performance Information............................................................. 66
Calculation of Yield................................................................ 67
Voting Rights....................................................................... 79
Certain Ownership of Trust Shares................................................... 80
Custodian........................................................................... 102
Independent Accountants............................................................. 102
Registration Statement.............................................................. 102
Financial Statements................................................................ 103
APPENDIX............................................................................ 104
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund and
each Portfolio are described in the applicable Prospectus(es). Additional
information concerning the characteristics of certain of the Funds' investments
is set forth below.
The 90/10 Portfolio, 60/40 Portfolio and 30/70 Portfolio invest all of
their assets in certain Funds and series of PIMCO Funds ("PIMS"), an open-end
series management investment company advised by Pacific Investment Management
Company ("Pacific Investment Management"), an affiliate of PIMCO Advisors.
These Funds and other series in which the Portfolios invest are referred to in
this Statement as "Underlying PIMCO Funds." By investing in Underlying PIMCO
Funds, the Portfolios may have an indirect investment interest in some or all of
the securities and instruments described below depending upon how their assets
are allocated among the Underlying PIMCO Funds. The Portfolios may also have an
indirect investment interest in other securities and instruments utilized by the
Underlying PIMCO Funds which are series of PIMS. These securities and
instruments are described in the current PIMS prospectus for Institutional Class
and Administrative Class shares and in the PIMS statement of additional
information. The PIMS prospectus and statement of additional informa tion are
incorporated in this document by reference. See "Investment Strategies of the
Portfolios - Incorporation by Reference" below.
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
com pounded, 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 Trea sury
securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
INFLATION-INDEXED BONDS
The Balanced Fund may invest in inflation-indexed bonds, which are fixed
income securities whose principal value is periodically adjusted according to
the rate of inflation. The interest rate on these bonds is generally fixed at
issuance at a rate lower than typical bonds. Over the life of an inflation-
indexed bond, however, interest will be paid based on a principal value which is
adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semi-annual basis, equal to a fixed percentage of the inflation-
adjusted principal amount. For exam ple, 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
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inflation during the second half of the year reached 3%, the end-of-year par
value of the bond would be $1,030 and the second semi-annual interest payment
would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of defla tion. However, the
current market value of the bonds is not guaranteed, and will fluctuate. The
Balanced Fund may also invest in other inflation-related bonds which may or may
not provide a similar guarantee. If such a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal. The value of inflation-indexed bonds is
expected to change in response to changes in real interest rates. Real interest
rates in turn are tied to the relationship between nominal interest rates and
the rate of inflation. Therefore, if inflation were to rise at a faster rate
than nominal interest rates, real interest rates might decline, leading to an
increase in value of inflation-indexed bonds. In contrast, if nominal interest
rates increased 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 in creases in inflation may lead to a decline
in value. If interest rates rise due to reasons other than inflation (for
example, due to changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not reflected
in the bond's inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility a Fund may be forced to liquidate positions when it
would not be advantageous to do so. There also can be no assurance that the U.S.
Treasury will issue any particular amount of inflation-indexed bonds. Certain
foreign governments, such as the United Kingdom, Canada and Australia, have a
longer history of issuing inflation-indexed bonds, and there may be a more
liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food,
transportation and energy. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation index,
calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in
the prices of goods and services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
BORROWING
Subject to the limitations described under "Investment Restrictions" below,
a Fund may be permitted to borrow for temporary purposes and/or for investment
purposes. Such a practice will result in leveraging of a Fund's assets and may
cause a Fund to liquidate portfolio positions when it would not be advantageous
to do so. This borrowing may be unsecured. Provisions of the Investment Company
Act of 1940 ("1940 Act") require a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed, with an exception for borrowings not
in excess of 5% of the Fund's total assets made for temporary administrative
purposes. As noted under "Investment Restrictions," certain Funds are subject
to limitations on borrowings which are more strict than those imposed by the
1940 Act. Any borrowings for
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temporary administrative purposes in excess of 5% of the Fund's total assets
must maintain continuous asset coverage. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, a Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time. Borrowing will
tend to exaggerate the effect on net asset value of any increase or decrease in
the market value of a Fund's portfolio. Money borrowed will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased. A Fund also may be required to maintain minimum average
balances in connection with such borrowing or to pay a commitment or other fee
to maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements if permitted to do so under its investment
restrictions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. The Fund will maintain a segregated
account with its custodian consisting of assets determined to be liquid by the
Adviser or the Fund's sub-adviser (the Funds' sub-advisers are referred to
herein as "Portfolio Managers") in accordance with procedures established by the
Board of Trustees and equal (on a daily mark-to-market basis) to its obligations
under reverse repurchase agreements with broker-dealers (but not banks).
However, reverse repurchase agreements involve the risk that the market value of
securities retained by the Fund may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. Reverse
repurchase agreements will be subject to the Funds' limitations on borrowings as
specified under "Investment Restrictions" below.
PREFERRED STOCK
All Funds may invest in preferred stock. Preferred stock is a form of
equity ownership in a corporation. The dividend on a preferred stock is a fixed
payment which the corporation is not legally bound to pay. Certain classes of
preferred stock are convertible, meaning the preferred stock is convertible into
shares of common stock of the issuer. By holding convertible preferred stock, a
Fund can receive a steady stream of dividends and still have the option to
convert the preferred stock to common stock.
CORPORATE DEBT SECURITIES
All Funds may invest in corporate debt securities. The Equity Income,
Value, Tax-Efficient Equity, Value 25, Capital Appreciation, Mid-Cap Growth,
Micro-Cap Growth, Small-Cap Value, Small-Cap Growth, Core Equity, Mid-Cap
Equity, Enhanced Equity, Emerging Markets, Structured Emerging Markets, Tax-
Efficient Structured Emerging Markets and International Developed Funds'
investments in corporate debt securities are limited to short-term corporate
debt securities. The investment return of corporate debt securities reflects
interest earnings and changes in the market value of the security. The market
value of a corporate debt obligation may be expected to rise and fall inversely
with interest rates generally. There also exists the risk that the issuers of
the securities may not be able to meet their obligations on interest or
principal payments at the time called for by an instrument.
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are deemed to
be comparable in quality to corporate debt securities in which the Fund may
invest. The rate of return or return of principal on some debt obligations may
be linked or indexed to the level of exchange rates between the U.S. dollar and
a foreign currency or currencies.
Among the corporate debt securities in which the Funds may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to non-
convertible debt securities. Convertible
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securities rank senior to common stock in a corporation's capital structure and,
therefore, generally entail less risk than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party.
HIGH YIELD SECURITIES ("JUNK BONDS")
Certain of the Funds may invest in debt/fixed income securities of domestic
or foreign issuers that meet minimum ratings criteria set forth for a Fund, or,
if unrated, are of comparable quality in the opinion of the Fund's Portfolio
Manager. A description of the ratings categories used is set forth in the
Appendix to this Statement of Additional Information.
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 Service, Inc. ("Moody's") or BB or below by
Standard & Poor's Ratings Services ("S&P")) or (2) if unrated, determined by the
relevant Portfolio Manager to be of comparable quality to obligations so rated.
The Renaissance, Growth and Balanced Funds may purchase high yield
securities (as defined in the Prospectuses) rated in either the fifth or sixth
highest rating categories by any NRSRO or comparable unrated securities, and the
Renaissance Fund may invest up to 10% of its total assets in high yield
securities rated below the sixth highest rating category by an NRSRO or
comparable unrated securities (but will not purchase any security in default on
the date of acquisition). The Renaissance and Growth Funds will generally
invest no more than 5% of its net assets in high yield securities. Investment
in high yield securities generally provides greater income and increased
opportunity for capital appreciation than investments in higher quality
securities, but it also typically entails greater price volatility as well as
principal and income risk. High yield securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. The market for these securities is relatively new, and
many of the outstanding high yield securities have not endured a major business
recession. A long-term track record on default rates, such as that for
investment grade corporate bonds, does not exist for this market. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt/fixed income securities. Each Fund of
the Trust that may purchase high yield securities may continue to hold such
securities following a decline in their rating if in the opinion of the Adviser
or the Portfolio Manager, as the case may be, it would be advantageous to do so.
Investments in high yield securities that are eligible for purchase by certain
of the Funds are described as "speculative" by both Moody's and S&P.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
While offering a greater potential opportunity for capital appreciation and
higher yields than investments in higher rated debt securities, high yield
securities typically entail greater potential price volatility and may be less
liquid than investment grade debt. High yield securities may be regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and achievement of a Fund's investment objective may,
to the extent of its investments in high yield securities, depend more heavily
on the Portfolio Manager's creditworthiness analysis than would be the case if
the Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities are likely to be sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of
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a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt/fixed income securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Funds investing in such securities
may incur additional expenses to seek recovery. In the case of high yield
securities structured as zero-coupon or pay-in-kind securities, their market
prices are affected to a greater extent by interest rate changes, and therefore
tend to be more volatile than securities which pay interest periodically and in
cash.
Prices of high yield/high risk securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to economic downturns or individual corporate developments. The
secondary market on which high yield securities are traded may be less liquid
than the market for higher grade securities. Less liquidity in the secondary
trading market could adversely affect the price at which the Funds could sell a
high yield security, and could adversely affect the daily net asset value of the
shares. Lower liquidity in secondary markets could adversely affect the value
of high yield/high risk securities held by the Renaissance, Growth and Balanced
Funds. While lower rated securities typically are less sensitive to interest
rate changes than higher rated securities, the market prices of high yield/high
risk securities structured as "zero coupon" or "pay-in-kind" securities may be
affected to a greater extent by interest rate changes. See Appendix A to this
Statement of Additional Information for further information regarding high
yield/high risk securities. For instance, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market. When secondary markets for high yield securities are less liquid than
the market for higher grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available.
Debt securities are purchased and sold principally in response to current
assessments of future changes in business conditions and the levels of interest
rates on debt/fixed income securities of varying maturities, the availability of
new investment opportunities at higher relative yields, and current evaluations
of an issuer's continuing ability to meet its obligations in the future. The
average maturity or duration of the debt/fixed income securities in a Fund's
portfolio may vary in response to anticipated changes in interest rates and to
other economic factors. Securities may be bought and sold in anticipation of a
decline or a rise in market interest rates. In addition, a Fund may sell a
security and purchase another of comparable quality and maturity (usually, but
not always, of a different issuer) at approximately the same time to take
advantage of what are believed to be short-term differentials in values or
yields.
PARTICIPATION ON CREDITORS COMMITTEES
A Fund may from time to time participate on committees formed by creditors
to negotiate with the management of financially troubled issuers of securities
held by the Fund. Such participation may subject a Fund to expenses such as
legal fees and may make the Fund an "insider" of the issuer for purposes of the
federal securities laws, and therefore may restrict the Fund's ability to trade
in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by a Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws governing the rights of creditors and debtors. A Fund would
participate on such committees only when the Adviser and the relevant Portfolio
Manager believe that such participation is necessary or desirable to enforce the
Fund's rights as a creditor or to protect the value of securities held by the
Fund.
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
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Certain of the Funds may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied
to another interest rate, such as a money-market index or U.S. Treasury bill
rate. The interest rate on a floater resets periodically, typically every six
months. Because of the interest rate reset feature, floaters provide a Fund
with a certain degree of protection against rises in interest rates, but
generally do not allow the Fund to participate fully in appreciation resulting
from any general decline in interest rates.
Certain Funds may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security generally will exhibit greater
price volatility than a fixed rate obligation of similar credit quality. See
"Mortgage-Related and Asset-Backed Securities" below.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (see "Mortgage Pass-Through
Securities" below). Certain debt securities are also secured with collateral
consisting of mortgage-related securities (see "Collateralized Mortgage
Obligations" below).
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional payments
are caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of mortgages insured by the Federal Housing Administration (the "FHA"), or
guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the FNMA and the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. FNMA purchases conventional
(i.e., not insured or guaranteed by any government agency) residential mortgages
from a list of approved seller/services which include state and federally
chartered savings and loan associations, mutual savings banks, commercial banks,
and credit unions and mortgage bankers. Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by FNMA but are
not backed by the full faith and credit of the United States Government.
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FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the twelve Federal Home Loan Banks and
now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or services of the underlying mortgage loans as
well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees, and the creditworthiness of the issuers thereof, will
be considered in determining whether a mortgage-related security meets the
Trust's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. A Fund may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the originator/servicers and poolers, the Portfolio
Manager determines that the securities meet the Fund's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the Portfolio Manager's opinion are illiquid if, as a result,
more than 15% of the value of the Fund's net assets (taken at market value at
the time of investment) will be invested in illiquid securities.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instru mentalities, are not subject to a Fund's
industry concentration restrictions, see "Investment Restrictions," by virtue of
the exclusion from that test available to all U.S. Government securities. In
the case of privately issued mortgage-related securities, the Funds take the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real
properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
--------
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
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In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B, or
C Bond currently being paid off. When the Series A, B, and C Bonds are paid in
full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each semi-annual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
COMMERCIAL MORTGAGE-BACKED SECURITIES include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions
on real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO RESIDUALS. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
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The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
IO class of stripped mortgage-backed securities. See "Other Mortgage-Related
Securities--Stripped Mortgage-Backed Securities." In addition, if a series of a
CMO includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-backed securities, in certain
circumstances a Fund may fail to recoup some or all of its initial investment
in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only recently developed and CMO residuals currently may not
have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not,
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the "IO"
class), while the other class will receive all of the principal (the "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
OTHER ASSET-BACKED SECURITIES. Similarly, the Adviser and Portfolio
Managers expect that other asset-backed securities (unrelated to mortgage loans)
will be offered to investors in the future and may be purchased by the Funds
that may invest in mortgage-related securities. Several types of asset-backed
securities have already been offered to investors, including Certificates for
Automobile Receivables/SM/ ("CARS/SM/"). CARS/SM/ represent undivided
fractional interests in a trust whose assets consist of a pool of motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on CARS/SM/ are
passed through monthly to certificate holders, and are guaranteed up to certain
amounts and for a certain time period by a
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letter of credit issued by a financial institution unaffiliated with the trustee
or originator of the trust. An investor's return on CARS/SM/ may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Consistent with a Fund's investment objectives and policies, the Adviser
and Portfolio Manager also may invest in other types of asset-backed securities.
FOREIGN SECURITIES
The Emerging Markets, Structured Emerging Markets, Tax-Efficient Structured
Emerging Markets, International Developed, International Growth and
International Funds may invest in U.S. dollar or foreign currency-denominated
corporate debt securities of foreign issuers; preferred securities of foreign
issuers; certain foreign bank obligations; and U.S. dollar- or foreign currency-
denominated obligations of foreign governments or their subdivisions, agencies
and instrumentalities, international agencies and supranational entities. Each
of the Funds may invest in American Depository Receipts ("ADRs"). The Emerging
Markets, Structured Emerging Markets, Tax-Efficient Structured Emerging Markets,
International Developed, International Growth, International and Precious
Metals Funds may also invest in common stocks issued by foreign companies or in
securities represented by European Depository Receipts ("EDRs"), or Global
Depository Receipts ("GDRs"). ADRs are dollar-denominated receipts issued
generally by domestic banks and represent the deposit with the bank of a
security of a foreign issuer. The Core Equity and Mid-Cap Equity Funds may
invest in ADRs, EDRs and GDRs. EDRs are foreign currency-denominated receipts
similar to ADRs and are issued and traded in Europe, and are publicly traded on
exchanges or over-the-counter in the United States. GDRs may be offered
privately in the United States and also trade in public or private markets in
other countries. ADRs, EDRs and GDRs may be issued as sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities trade in the form of ADRs, EDRs or GDRs. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of a
sponsored program. The Precious Metals Fund may invest primarily in securities
of foreign issuers, securities denominated in foreign currencies, securities
principally traded on securities markets outside of the United States and in
securities of foreign issuers that are traded on U.S. securities markets. The
Renaissance, Core Equity, Mid-Cap Equity, Growth, Target, Opportunity and
Innovation Funds each may invest up to 15% of their respective net assets in
securities which are traded principally in securities markets outside the United
States (Eurodollar certificates of deposit are excluded for purposes of these
limitations), and (except for the Core Equity and Mid-Cap Equity Funds) may
invest without limit in securities of foreign issuers that are traded in U.S.
securities markets. The Enhanced Equity Fund may invest in common stock of
foreign issuers if it is included in the index from which stocks are selected.
The Balanced Fund may invest up to 20% of its assets allocated for investment in
fixed income securities in securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities of foreign
issuers.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including taxes withheld from payments on those securities. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore
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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.
SPECIAL RISKS OF INVESTING IN RUSSIAN AND OTHER EASTERN EUROPEAN
SECURITIES. The International, International Growth, Emerging Markets, Tax-
Efficient Structured Emerging Markets and Structured Emerging Markets Funds may
invest a portion of their assets in securities of issuers located in Russia and
in other Eastern European countries. The political, legal and operational risks
of investing in the securities of Russian and other Eastern European issuers,
and of having assets custodied within these countries, may be particularly
acute. Investments in Eastern European countries may involve acute risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. Also, certain Eastern European countries, which do not have market
economies, are characterized by an absence of developed legal structures
governing private and foreign investments and private property.
In addition, governments in certain Eastern European countries may require
that a governmental or quasi-governmental authority act as custodian of a Fund's
assets invested in such country. To the extent such governmental or quasi-
governmental authorities do not satisfy the requirements of the 1940 Act to act
as foreign custodians of the Fund's cash and securities, the Fund's investment
in such countries may be limited or may be required to be effected through
intermediaries. The risk of loss through governmental confiscation may be
increased in such circumstances.
Investments in securities of Russian issuers may involve a particularly
high degree of risk and special considerations not typically associated with
investing in U.S. and other more developed markets, many of which stem from
Russia's continuing political and economic instability and the slow-paced
development of its market economy. Investments in Russian securities should be
considered highly speculative. Such risks and special considerations include:
(a) delays in settling portfolio transactions and the risk of loss arising out
of Russia's system of share registration and custody (see below); (b)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (c) difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information; (d) the general financial condition of Russian companies,
which may involve particularly large amounts of inter-company debt; and (e) the
risk that the Russian tax system will not be reformed to prevent inconsistent,
retroactive and/or exorbitant taxation or, in the alternative, the risk that a
reformed tax system may result in the inconsistent and unpredictable enforcement
of the new tax laws. Also, there is the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies to the
detriment of investors, including non-market-oriented policies such as the
support of certain industries at the expense of other sectors or investors, a
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return to the centrally planned economy that existed prior to the dissolution of
the Soviet Union, or the nationalization of privatized enterprises.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of companies is normally
recorded. Ownership of shares (except where shares are held through
depositories that meet the requirements of the 1940 Act) is defined according to
entries in the company's share register and normally evidenced by extracts from
the register or, in certain limited circumstances, by formal share certificates.
However, there is no central registration system for shareholders and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision nor are they licensed with any governmental entity. It is
possible for a Fund to lose its registration through fraud, negligence or even
mere oversight. While a Fund will endeavor to ensure that its interest
continues to be appropriately recorded, which may involve a custodian or other
agent inspecting the share register and obtaining extracts of share registers
through regular confirmations, these extracts have no legal enforceability and
it is possible that subsequent illegal amendment or other fraudulent act may
deprive the Fund of its ownership rights or improperly dilute its interests. In
addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for a Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration.
Also, although a Russian public enterprise with more than 500 shareholders
is required by law to contract out the maintenance of its shareholder register
to an independent entity that meets certain criteria, this regulation has not
always been strictly enforced in practice. Because of this lack of
independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent a Fund from
investing in the securities of certain Russian companies deemed suitable by the
Fund's Portfolio Manager. Further, this also could cause a delay in the sale of
Russian securities held by a Fund if a potential purchaser is deemed unsuitable,
which may expose the Fund to potential loss on the investment.
FOREIGN CURRENCIES
The Renaissance, Core Equity, Mid-Cap Equity, Growth, Target, Opportunity,
Innovation, International, International Developed, International Growth,
Emerging Markets, Structured Emerging Markets, Tax-Efficient Structured Emerging
Markets, Precious Metals and Balanced Funds may enter into forward foreign
currency exchange contracts to reduce the risks of adverse changes in foreign
exchange rates. In addition, the Emerging Markets, Structured Emerging Markets,
Tax-Efficient Structured Emerging Markets, International, International
Developed, International Growth, Balanced and Precious Metals Funds may buy and
sell foreign currency futures contracts and options on foreign currencies and
foreign currency futures.
All of the Funds that may buy or sell foreign currencies may enter into
forward foreign currency exchange contracts to reduce the risks of adverse
changes in foreign exchange rates. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. By entering into a
forward foreign currency exchange contract, the fund "locks in" the exchange
rate between the currency it will deliver and the currency it will receive for
the duration of the contract. As a result, a Fund reduces its exposure to
changes in the value of the currency it will deliver and increases its exposure
to changes in the value of the currency it will exchange into. Contracts to
sell foreign currencies would limit any potential gain which might be realized
by a Fund if the value of the hedged currency increases. A Fund may enter into
these contracts for the purpose of hedging against foreign exchange risks
arising from the Funds' investment or anticipated investment in securities
denominated in foreign currencies. Such hedging transactions may not be
successful and may eliminate any chance for a Fund to benefit from favorable
fluctuations in relevant foreign currencies.
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The International, International Developed, International Growth, Emerging
Markets, Structured Emerging Markets and Tax-Efficient Structured Emerging
Markets Funds may also enter into forward foreign currency exchange contracts
for purposes of increasing exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one currency to another. To the extent
that they do so, the International, International Developed, Emerging Markets,
Structured Emerging Markets and Tax-Efficient Structured Emerging Markets Funds
will be subject to the additional risk that the relative value of currencies
will be different than anticipated by the particular Fund's Portfolio Manager.
A Fund may use one currency (or a basket of currencies) to hedge against adverse
changes in the value of another currency (or a basket of currencies) when
exchange rates between the two currencies are positively correlated. A Fund
will segregate assets determined to be liquid by the Portfolio Manager in
accordance with procedures established by the Board of Trustees in a segregated
account to cover forward currency contracts entered into for non-hedging
purposes. The Funds may also use foreign currency futures contracts and related
options on currencies for the same reasons for which forward foreign currency
exchange contracts are used.
BANK OBLIGATIONS
Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 15% of its net assets (taken at market value at the time of
investment) would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets. Each Fund may also hold
funds on deposit with its sub-custodian bank in an interest-bearing account for
temporary purposes.
Each Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Renaissance, Growth, Target, Core Equity, Mid-Cap Equity, Opportunity,
Innovation, International, Emerging Markets, Structured Emerging Markets, Tax-
Efficient Structured Emerging Markets, International Developed, International
Growth, Precious Metals and Balanced Funds limit their investments in foreign
bank obligations to obligations of foreign banks (including United States
branches of foreign banks) which at the time of investment (i) have more than
$10 billion, or the equivalent in other currencies, in total assets; (ii) are
among the 75 largest foreign banks in the world in terms of total assets; (iii)
have branches or agencies (limited purpose offices which do not offer all
banking services) in the United States; and (iv) in the opinion of the relevant
Portfolio Manager, are of an investment quality comparable to obligations of
United States banks in which the Funds may invest. Subject to each Fund's
limitation on concentration of no more than 25% of its assets in the securities
of issuers in a particular industry, there is no limitation on the amount of a
Fund's assets which may be invested in obligations of foreign banks which meet
the conditions set forth above.
Obligations of foreign banks involve certain risks associated with
investing in foreign securities described under "Foreign Securities" above,
including the possibilities that their liquidity could be impaired because of
future political and economic developments, that their obligations may be less
marketable than comparable obligations of United States banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
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obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
COMMERCIAL PAPER
All Funds may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Funds consists of U.S. dollar-denominated obligations of
domestic issuers, or, additionally for the Renaissance, Growth, Target, Core
Equity, Mid-Cap Equity, Opportunity, Innovation, Emerging Markets, Structured
Emerging Markets, Tax-Efficient Structured Emerging Markets, International,
International Developed and International Growth, Precious Metals and Balanced
Funds, foreign currency-denominated obligations of domestic or foreign issuers
which, at the time of investment, are (i) rated "P-1" or "P-2" by Moody's or "A-
1" or "A-2" or better by S&P, (ii) issued or guaranteed as to principal and
interest by issuers or guarantors having an existing debt security rating of "A"
or better by Moody's or "A" or better by S&P, or (iii) securities which, if not
rated, are, in the opinion of the Portfolio Manager, of an investment quality
comparable to rated commercial paper in which the Fund may invest. The rate of
return on commercial paper may be linked or indexed to the level of exchange
rates between the U.S. dollar and a foreign currency or currencies.
DERIVATIVE INSTRUMENTS
The following describes certain derivative instruments and products in
which the Funds may invest (to the extent described in the Prospectuses and
under "Investment Restrictions" below) and risks associated therewith.
OPTIONS ON SECURITIES AND INDEXES. A Fund may, to the extent specified for
the Fund in the Prospectuses and under "Investment Restrictions" below, purchase
and sell both put and call options on fixed income or other securities or
indexes in standardized contracts traded on foreign or domestic securities
exchanges, boards of trade, or similar entities, or quoted on National
Association of Securities Dealers Automated Quotations ("NASDAQ") or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Fund. For a call
option on an index, the option is covered if the Fund maintains with its
custodian assets determined to be liquid by the Portfolio Manager in accordance
with procedures established by the Board of Trustees in an amount equal to the
contract value of the index. A call option is also
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covered if the Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written, provided the difference is maintained by the Fund in assets
determined to be liquid by the Portfolio Manager in accordance with procedures
established by the Board of Trustees in a segregated account with its custodian.
A put option on a security or an index is "covered" if the Fund maintains assets
determined to be liquid by the Portfolio Manager in accordance with procedures
established by the Board of Trustees equal to the exercise price in a segregated
account with its custodian. A put option is also covered if the Fund holds a put
on the same security or index as the put written where the exercise price of the
put held is (i) equal to or greater than the exercise price of the put written,
or (ii) less than the exercise price of the put written, provided the difference
is maintained by the Fund in assets determined to be liquid by the Portfolio
Manager in accordance with procedures established by the Board of Trustees in a
segregated account with the Fund's custodian.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the market
value of a put or a call option include supply and demand, interest rates, the
current market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying security or
index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
OTC OPTIONS. The Renaissance, Growth, Target, Opportunity, Innovation,
International, International Growth and Precious Metals may enter into over-the-
counter ("OTC") options transactions only with primary dealers in U.S.
Government securities and only pursuant to agreements that will assure that the
relevant Fund will at all times have the right to repurchase the option written
by it from the dealer at a specified formula price. The Funds will treat the
amount by which such formula price exceeds the intrinsic value of the option
(i.e., the amount, if any, by which the market price of the underlying security
exceeds the exercise price of the option) as an illiquid investment.
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Fund forgoes,
during the option's life, the opportunity to
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profit from increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
FOREIGN CURRENCY OPTIONS. Each of the Funds that may buy or sell foreign
currencies may buy or sell put and call options on foreign currencies either on
exchanges or in the over-the-counter market. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the
exercise price until the option expires. A call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A Fund may use
interest rate, foreign currency or index futures contracts, as specified in the
Prospectuses. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instru ment, foreign currency or the cash
value of an index at a specified price and time.
For instance, futures contract on a securities index (an "Index Future") 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 a securities index
("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 unit is the value of the relevant Index
from time to time. Entering into a contract to buy units is commonly referred
to as buying or purchasing a contract or holding a long position in an Index.
Index Futures contracts can be traded through all major commodity brokers. A
Fund's purchase and sale of Index Futures is limited to contracts and exchanges
which have been approved by the CFTC. A Fund will ordinarily be able to close
open positions on the futures exchange on which Index Futures are then traded at
any time up to and including the expiration day. As described below, a Fund
will be required to deposit initial margin with its custodian in a segregated
account in the name of the futures broker upon entering into an Index Future.
Variation margin will be paid to and received from the broker on a daily basis
as the contracts are marked to market. For example, when a Fund has purchased
an Index Future and the price of the relevant Index has risen, that position
will have increased in value and the Fund will receive from the broker a
variation margin payment equal to that increase in value. Conversely, when a
Fund has purchased an Index Future and the price of the relevant Index has
declined, the position would be less valuable and the Fund would be required to
make a variation margin payment to the broker.
The following example illustrates generally the manner in which Index
Futures operate. The Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract
would be worth $18,000 (100 units x $180). The Index Future specifies that no
delivery of the actual stocks making up the Index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the actual level
of the Index at the expiration of the contract. For example, if a Fund enters
into a futures contract to buy 100 units of the S&P 100 Index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $184 on that
future date, the Fund will gain $400 (100 units x gain of $4). If the Fund
enters into a futures contract to sell 100 units of the Index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on that
future date, the Fund will lose $200 (100 units x loss of $2).
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A public market exists in futures contracts covering a number of Indexes as
well as financial instruments and foreign currencies, including but not limited
to: the S&P 500; the S&P Midcap 400; the Nikkei 225; the NYSE composite; U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit;
Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar;
the British pound; the German mark; the Japanese yen; the French franc; the
Swiss franc; the Mexican peso; and certain multinational currencies, such as the
European Currency Unit ("ECU"). It is expected that other futures contracts in
which the Funds may invest will be developed and traded in the future.
Certain Funds may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the holder acquires a short
position and the writer is assigned the opposite long position.
A Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or in the case of futures options, for which an established
over-the-counter market exists.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of assets determined to be liquid by the Portfolio Manager in
accordance with procedures established by the Board of Trustees ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. Margin requirements on foreign exchanges may be different than U.S.
exchanges. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by a Fund but is instead
a settlement between the Fund and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset value, each
Fund will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (i.e.,
with the same exchange, underlying security or index, and delivery month). If
an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. Any transaction costs must also be included in these
calculations.
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. The Funds may enter
into positions in futures contracts and related options for "bona fide hedging"
purposes. In addition, certain Funds may utilize futures contracts for
investment purposes. For instance, the Emerging Markets, International
Developed, International, International Growth, Structured Emerging Markets and
Tax-Efficient Structured Emerging Markets Funds may invest to a significant
degree in Index Futures on stock indexes and related options (including those
which may trade outside of the United States) as an alternative to purchasing
individual stocks in order to adjust their exposure to a particular market.
With respect to positions in futures and related options that do not constitute
bona fide hedging positions, a
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Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's net assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Portfolio Manager in accordance with procedures established by the Board of
Trustees that, when added to the amounts deposited with a futures commission
merchant as margin, are equal to the total market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a put option on
the same futures contract with a strike price as high or higher than the price
of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) assets determined to be liquid by the
Portfolio Manager in accordance with procedures established by the Board of
Trustees that are equal to the market value of the instruments underlying the
contract. Alternatively, the Fund may "cover" its position by owning the
instruments underlying the contract (or, in the case of an Index Future, a
portfolio with a volatility substantially similar to that of the Index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Portfolio Manager in accordance with procedures established by the
Board of Trustees that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Portfolio Manager in accordance with procedures established by the
Board of Trustees that equal the purchase price of the futures contract, less
any margin on deposit. Alternatively, the Fund may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. Some of the risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation.
For example, if the price of the futures contract moves more than the price of
the hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. In addition, there are significant differences between the
securities and futures markets that could result in an imperfect correlation
between the markets, causing a given hedge not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options on
securities, including technical influences in futures trading and futures
options, and differences between the
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financial instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. To compensate for imperfect
correlations, a Fund may purchase or sell futures contracts in a greater dollar
amount than the hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the futures contracts. Conversely, a
Fund may purchase or sell fewer contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts. The
risk of imperfect correlation generally tends to diminish as the maturity date
of the futures contract approaches. A decision as to whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS AND FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS THEREON.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees; and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. Some foreign exchanges may be principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Trust's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume. In addition, unless a Fund hedges against fluctuations in the
exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that a Fund might realize in trading
could be eliminated by adverse changes in the exchange rate, or the Fund could
incur losses as a result of those changes.
SWAP AGREEMENTS. The Tax-Efficient Equity, Emerging Markets, Structured
Emerging Markets, Tax-Efficient Structured Emerging Markets, and International
Developed Funds may enter into equity index swap agreements for purposes of
attempting to gain exposure to the stocks making up an index of securities in a
market without actually purchasing those stocks. The Balanced Fund may enter
into swap agreements to hedge against changes in interest rates, foreign
currency exchange rates or securities prices. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the return on or increase in value of
a particular dollar amount invested in a "basket" of securities representing a
particular index.
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Most swap agreements entered into by the Funds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counter party will be covered by the maintenance of a
segregated account consisting of assets determined to be liquid by the Portfolio
Manager in accordance with procedures established by the Board of Trustees, to
avoid any potential leveraging of the Fund's portfolio. Obligations under swap
agreements so covered will not be construed to be "senior securities" for
purposes of a Fund's investment restriction concerning senior securities. A
Fund will not enter into a swap agreement with any single party if the net
amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Portfolio Manager's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Funds will enter
into swap agreements only with counter parties that meet certain standards of
creditworthiness (generally, such counter parties would have to be eligible
counter parties under the terms of the Funds' repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
a Fund's ability to terminate existing swap agreements or to realize amounts to
be received under such agreements.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
A Fund may purchase or sell securities on a when-issued or delayed delivery
basis. These transactions involve a commitment by the Fund to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Fund will set aside and maintain until the
settlement date in a segregated account, assets determined to be liquid by the
Portfolio Manager in accordance with procedures established by the Board of
Trustees in an amount sufficient to meet the purchase price. Typically, no
income accrues on securities purchased on a delayed delivery basis prior to the
time delivery of the securities is made, although a Fund may earn income on
securities it has deposited in a segregated account. When purchasing a security
on a delayed delivery basis, the Fund assumes the rights and risks of ownership
of the security, including the risk of price and yield fluctuations, and takes
such fluctuations into account when determining its net asset value. Because a
Fund is not required to pay for the security until the delivery date, these
risks are in addition to the risks associated with the Fund's other investments.
If the Fund remains substantially fully invested at a time when delayed delivery
purchases are outstanding, the delayed delivery purchases may result in a form
of leverage. When the Fund has sold a security on a delayed delivery basis, the
Fund does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Fund could miss a favorable price or yield
opportunity or could suffer a loss. A Fund may dispose of or renegotiate a
delayed delivery transaction after it is entered into, and may sell when-issued
securities before they are delivered, which may result in a capital gain or
loss. There is no percentage limitation on the extent to which the Funds may
purchase or sell securities on a delayed delivery basis.
Each Fund may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the Fund
either (i) holds, and maintains until the settlement date in a segregated
account, assets determined to be liquid by the Portfolio Manager in accordance
with procedures established by the Board of Trustees in an amount sufficient to
meet the purchase price or (ii) enters into an offsetting contract for the
forward sale of securities of equal value that it owns. Certain Funds may enter
into forward commitments for the
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purchase or sale of foreign currencies. Forward commitments may be considered
securities in themselves. They involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. A Fund may
dispose of a commitment prior to settlement and may realize short-term profits
or losses upon such disposition.
WARRANTS TO PURCHASE SECURITIES
Certain Funds may invest in warrants to purchase equity or fixed income
securities. Bonds with warrants attached to purchase equity securities have
many characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value.
METAL-INDEXED NOTES AND PRECIOUS METALS
The Precious Metals Fund may invest in notes, the principal amount or
redemption price of which is indexed to, and thus varies directly with, changes
in the market price of gold bullion or other precious metals ("Metal-Indexed
Notes"). It is expected that the value of Metal-Indexed Notes will be as
volatile as the price of the underlying metal.
The Precious Metals Fund will only purchase Metal-Indexed Notes which are
rated investment grade or are issued by issuers that have outstanding debt
obligations rated investment grade or commercial paper rated in the top rating
category by any NRSRO, or Metal-Indexed Notes issued by issuers that the
Portfolio Manager has determined to be of similar creditworthiness. Debt
obligations rated in the fourth highest rating category by an NRSRO are
considered to have some speculative characteristics. The Metal-Indexed Notes
might be backed by a bank letter of credit, performance bond or might be
otherwise secured, and any such security, which would be held by the Fund's
custodian, would be taken into account in determining the creditworthiness of
the securities. The Precious Metals Fund might purchase unsecured Metal-Indexed
Notes if the issuer thereof met the Fund's credit standards without any such
security. While the principal amount or redemption price of Metal-Indexed Notes
would vary with the price of the resource, such securities would not be secured
by a pledge of the resource or any other security interest in or claim on the
resource. In the case of Metal-Indexed Notes not backed by a performance bond,
letter of credit or similar security, it is expected that such securities
generally would not be secured by any other specific assets.
The Precious Metals Fund anticipates that if Metal-Indexed senior
securities were to be purchased, such securities would be issued by precious
metals or commodity brokers or dealers, by mining companies, by commercial banks
or by other financial institutions. Such issuers would issue notes to hedge
their inventories and reserves of the resource, or to borrow money at a
relatively low cost (which would include the nominal rate of interest paid on
Metal-Indexed Notes, described below, and the cost of hedging the issuer's
metals exposure). The Precious Metals Fund would not purchase a Metal-Indexed
Note issued by a broker or dealer if as a result of such purchase more than 5%
of the value of the Fund's total assets would be invested in securities of such
issuer. The Precious Metals Fund might purchase Metal-Indexed Notes from
brokers or dealers which are not also securities brokers or dealers. Precious
metals or commodity brokers or dealers are not subject to supervision or
regulation by any governmental authority or self-regulatory organization in
connection with the issuance of Metal-Indexed Notes.
Until fairly recently, there were no Metal-Indexed Notes outstanding and
consequently there is no secondary trading market for such securities. Although
a limited secondary market might develop among institutional traders, there is
no assurance that such a market will develop. No public market is expected to
develop, since the Precious Metals Fund expects that Metal-Indexed Notes will
not be registered under the 1933 Act, and therefore disposition of such
securities, other than to the issuer thereof (as described below), would be
dependent upon the availability of an exemption from such registration.
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Any Metal-Indexed Notes which the Precious Metals Fund might purchase
generally will have maturities of one year or less. Such notes, however, will
be subject to being called for redemption by the issuer on relatively short
notice. In addition, it is expected that the Metal-Indexed Notes will be
subject to being put by the Precious Metals Fund to the issuer or to a stand-by
broker meeting the credit standards set forth above, with payments being
received by the Precious Metals Fund on no more than seven days' notice. A
stand-by broker might be a securities broker-dealer, in which case the Precious
Metals Fund's investment will be limited by applicable regulations of the
Securities and Exchange Commission (the "SEC"). The put feature of the Metal-
Indexed Notes will ensure liquidity even in the absence of a secondary trading
market. The securities will be repurchased upon exercise of the holder's put at
the specified exercise price, less repurchase fees, if any, which are not
expected to exceed 1% of the redemption or repurchase proceeds. Depending upon
the terms of particular Metal-Indexed Notes, there might be a period as long as
five days between the date upon which the Precious Metals Fund notifies the
issuer of the exercise of the put and determination of the sale price.
It is expected that any Metal-Indexed Notes which the Precious Metals Fund
might purchase will bear interest or pay preferred dividends at relatively
nominal rates under 2% per annum. The Precious Metals Fund's holdings of such
senior securities therefore would not generate appreciable current income, and
the return from such senior securities would be primarily from any profit on the
sale or maturity thereof at a time when the price of the relevant precious metal
is higher than it was when the senior securities were purchased.
REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements with domestic
commercial banks or registered broker/dealers. A repurchase agreement is a
contract under which a Fund would acquire a security for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). In the case of repurchase
agreements with broker-dealers, the value of the underlying securities (or
collateral) will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. The Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities. The Adviser and the Portfolio Managers,
as appropriate, will monitor the creditworthiness of the counter parties.
SECURITIES LOANS
Subject to certain conditions described in the Prospectuses, each of the
Equity Income, Value, Tax-Efficient Equity, Enhanced Equity, Value 25, Capital
Appreciation, Mid-Cap Growth, Small-Cap Value, Small-Cap Growth, Core Equity,
Mid-Cap Equity, Target, Micro-Cap Growth, International Developed, Emerging
Markets, Structured Emerging Markets, Tax-Efficient Structured Emerging Markets
and Balanced Funds may make secured loans of its portfolio securities amounting
to no more than 33% of its total assets, and each of the Renaissance, Growth,
Opportunity, Innovation, International, International Growth and Precious Metals
Funds may make such loans amounting to no more than 25% of its total assets.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. However, such
loans will be made only to broker-dealers that are believed by the Adviser or
the Portfolio Managers to be of relatively high credit standing. Securities
loans are made to broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral at least equal at all times to the market
value of the securities lent. The borrower pays to the lending Fund an amount
equal to any dividends or interest received on the securities lent. The Fund
may invest only the cash collateral received in interest-bearing, short-term
securities or receive a fee from the borrower. In the case of cash collateral,
the Fund typically pays a rebate to the lender. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved.
23
<PAGE>
INVESTMENT STRATEGIES OF THE PORTFOLIOS - INCORPORATION BY REFERENCE
The 90/10 Portfolio, 60/40 Portfolio and 30/70 Portfolio invest all of
their assets in Underlying PIMCO Funds, which include certain Funds of the Trust
and series of PIMS as specified in the Retail Portfolio Prospectus. By investing
in Underlying PIMCO Funds, the Portfolios may be subject to some or all of the
risks associated with the securities, instruments and techniques utilized by the
Funds described above. They may also be subject to additional risks associated
with other securities, instruments and techniques utilized by Underlying Funds
which are series of PIMS. The PIMS series and their attendant risks as
described in the current PIMS prospectus for Institutional Class and
Administrative Class shares and PIMS statement of additional information, which
are included in the PIMS registration statement (File Nos. 033-12113 and 811-
5028) on file with the Securities and Exchange Commission. The current PIMS
prospectus and statement of additional are each on file with the Securities and
Exchange Commission and are incorporated in this document by reference. The
PIMS documents may also be obtained free of charge by calling PIMCO Funds
Distributors LLC at 1-800-426-0107.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies of the
Renaissance, Growth, Target, Opportunity, Innovation, International,
International Growth and Precious Metals Funds and may not be changed with
respect to any such Fund without shareholder approval by vote of a majority of
the outstanding voting securities of that Fund. Under these restrictions, none
----
of the above-mentioned Funds may:
(1) borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of such Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will be
repaid before any additional investments are purchased;
(2) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of such Fund's total assets (taken at cost) and then only to
secure borrowings permitted by Restriction (1) above. (The deposit of
securities or cash or cash equivalents in escrow in connection with the writing
of covered call or put options, respectively, is not deemed to be pledges or
other encumbrances.) (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, futures contracts, options
on futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are deemed
to be the issuance of a senior security.);
(3) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
(4) purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate, except that the Precious Metals Fund may purchase or sell
agricultural land;
(5) acquire more than 10% of the voting securities of any issuer, both
with respect to any such Fund and to the Funds to which this policy relates, in
the aggregate; or
24
<PAGE>
(6) concentrate more than 25% of the value of its total assets in any one
industry; except that the Precious Metals Fund will concentrate more than 25% of
its total assets in securities of companies principally engaged in the
extraction, processing, distribution or marketing of precious metals, and the
Innovation Fund will concentrate more than 25% of its assets in companies which
use innovative technologies to gain a strategic, competitive advantage in their
industry as well as companies that provide and service those technologies.
The investment objective of each of the above-referenced Funds and the Tax-
Efficient Equity, Value 25 and Tax-Efficient Structured Emerging Markets Funds
is non-fundamental and may be changed with respect to each such Fund by the
Trustees without shareholder approval.
The investment restrictions set forth below are fundamental policies of
each of the Equity Income, Value, Tax-Efficient Equity, Enhanced Equity, Value
25, Capital Appreciation, Mid-Cap Growth, Small-Cap Value, Small-Cap Growth,
Core Equity, Mid-Cap Equity, Micro-Cap Growth, International Developed, Emerging
Markets, Tax-Efficient Structured Emerging Markets, Structured Emerging Markets
and Balanced Funds, and may not be changed with respect to any such Fund without
shareholder approval by vote of a majority of the outstanding shares of that
Fund. The investment objective of each of these Funds (with the exception of
the Tax-Efficient Equity, Value 25 and Tax-Efficient Structured Emerging Markets
Funds) is also fundamental and may not be changed without such shareholder
approval. Under the following restrictions, none of the above-mentioned Funds
----
may:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(4) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(5) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Fund may
engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(6) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures, and except that effecting short sales will be deemed not
to constitute a margin purchase for purposes of this restriction;
(7) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Fund may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts as described in the Prospectuses
and in this Statement of Additional
25
<PAGE>
Information (the deposit of assets in escrow in connection with the writing of
covered put and call options and the purchase of securities on a when-issued or
delayed delivery basis and collateral arrangements with respect to initial or
variation margin deposits for futures contracts, options on futures contracts,
and forward foreign currency contracts will not be deemed to be pledges of such
Fund's assets);
(8) issue senior securities, except insofar as such Fund may be deemed to
have issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies, and except for purposes of this investment
restriction, collateral, escrow, or margin or other deposits with respect to the
making of short sales, the purchase or sale of futures contracts or related
options, purchase or sale of forward foreign currency contracts, and the writing
of options on securities are not deemed to be an issuance of a senior security;
(9) lend any funds or other assets, except that such Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans, (b) enter into repurchase agreements and reverse
repurchase agreements, and (c) lend its portfolio securities in an amount not to
exceed one-third of the value of its total assets, provided such loans are made
in accordance with applicable guidelines established by the SEC and the Trustees
of the Trust; or
(10) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
Notwithstanding the provisions of fundamental investment restrictions (7)
and (8) above, a Fund may borrow money for temporary administrative purposes.
To the extent that borrowings for temporary administrative purposes exceed 5% of
the total assets of a Fund, such excess shall be subject to the 300% asset
coverage requirement of fundamental investment restriction (7).
The investment restrictions set forth below are fundamental policies of the
90/10 Portfolio, the 60/40 Portfolio and the 30/70 Portfolio and may not be
changed with respect to any such Portfolio without shareholder approval by vote
of a majority of the outstanding voting securities of that Portfolio. Under
these restrictions, a Portfolio may not:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto) or securities issued by any investment company;
(2) purchase securities of any issuer unless such purchase is consistent
with the maintenance of the Portfolio's status as a diversified company under
the Investment Company Act of 1940, as amended;
(3) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(4) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Portfolio
may engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(5) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Portfolio may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts to the extent described in the
then current Prospectus(es) for the
26
<PAGE>
Portfolio and in this Statement of Additional Information (the deposit of assets
in escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis and collateral
arrangements with respect to initial or variation margin deposits for futures
contracts, options on futures contracts, and forward foreign currency contracts
will not be deemed to be pledges of such Portfolio's assets);
(6) issue senior securities, except insofar as such Portfolio may be
deemed to have issued a senior security by reason of borrowing money in
accordance with the Portfolio's borrowing policies, and except for purposes of
this investment restriction, collateral, escrow, or margin or other deposits
with respect to the making of short sales, the purchase or sale of futures
contracts or related options, purchase or sale of forward foreign currency
contracts, and the writing of options on securities are not deemed to be an
issuance of a senior security;
(7) lend any funds or other assets, except that such Portfolio may,
consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures, or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans, (b) enter into repurchase agreements
and reverse repurchase agreements, and (c) lend its portfolio securities in an
amount not to exceed one-third of the value of its total assets, provided such
loans are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the Trustees of the Trust; or
(8) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
Notwithstanding the provisions of fundamental investment restrictions (5)
and (6) above, a Portfolio may borrow money for temporary administrative
purposes. To the extent that borrowings for temporary administrative purposes
exceed 5% of the total assets of a Portfolio, such excess shall be subject to
the 300% asset coverage requirement of fundamental investment restriction (5).
Notwithstanding any other fundamental investment restriction or policy,
each Portfolio may invest some or all of its assets in a single registered open-
end investment company or a series thereof. Unless specified above, any
fundamental investment restriction or policy of any such registered open-end
investment company or series thereof shall not be considered a fundamental
investment restriction or policy of a Portfolio investing therein.
The investment objective of each of the Portfolios is non-fundamental and
may be changed with respect to each such Portfolio by the Trustees without
shareholder approval.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund (but not any Portfolio) is also subject to the following non-
fundamental restrictions and policies (which may be changed without shareholder
approval) and, unless otherwise indicated, may not:
(1) invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities the disposition of which is restricted under
federal securities laws, (c) repurchase agreements maturing in more than seven
days, (d) OTC options (to the extent described above under "Derivative
Instruments -- OTC Options"), and (e) IO/PO SMBS (as described above under
"Mortgage-Related and Asset-Backed Securities -- Stripped Mortgage -Backed
Securities") if, as a result, more than 15% of a Fund's net assets, taken at
current value, would then be invested in securities described in (a), (b), (c),
(d) and (e) above. For the purpose of this restriction, securities subject to a
7-day put option or convertible into readily saleable securities or commodities
are not included with subsections (a) or (b);
(2) purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment by a Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.);
27
<PAGE>
(3) make short sales of securities or maintain a short position for the
account of a Fund unless at all times when a short position is open such Fund
owns an equal amount of such securities or owns or has the right to acquire
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
(4) purchase or sell commodities or commodity contracts except that a Fund
may purchase and sell financial futures contracts and related options and the
Precious Metals Fund may purchase and sell precious metals and other commodities
and futures thereon;
(5) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth and Precious Metals Funds, make
loans, except by purchase of debt obligations or by entering into repurchase
agreements or through the lending of the Fund's portfolio securities with
respect to not more than 25% of its total assets (33 1/3% in the case of the
Target Fund);
(6) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth and Precious Metals Funds, and
in each case with respect to 75% of such Fund's total assets, invest in
securities of any issuer if, immediately after such investment, more than 5% of
the total assets of such Fund (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not apply to bank
certificates of deposit or to obligations issued or guaranteed as to interest
and principal by the U.S. government or its agencies or instrumentalities;
(7) purchase securities the disposition of which is restricted under the
federal securities laws (excluding for purposes of this restriction securities
offered and sold pursuant to Rule 144A of the 1933 Act and Section 4(2)
commercial paper) if, as a result, such investments would exceed 15% of the
value of the net assets of the relevant Fund;
(8) write (sell) or purchase options except that each Fund may (a) write
covered call options or covered put options on securities that it is eligible to
purchase and enter into closing purchase transactions with respect to such
options, and (b) in combination therewith, or separately, purchase put and call
options on securities it is eligible to purchase, and (c) each Fund may engage
in options on securities indexes, options on foreign currencies, options on
futures contracts, and options on other financial instruments or one or more
groups of instruments; provided that the premiums paid by each Fund on all
outstanding options it has purchased do not exceed 5% of its total assets. Each
Fund may enter into closing sale transactions with respect to options it has
purchased;
(9) invest more than 15% of the net assets of a Fund (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include repurchase agreements maturing in more than
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide withdrawal penalties upon prepayment (other
than overnight deposits), or other securities which legally or in the Adviser's
or Portfolio Manager's opinion may be deemed illiquid (other than securities
issued pursuant to Rule 144A under the 1933 Act and certain commercial paper
that the Adviser or Portfolio Manager has determined to be liquid under
procedures approved by the Board of Trustees); or
(10) borrow money (excluding reverse repurchase agreements which are
subject to such Fund's fundamental borrowing restriction), except for temporary
administrative purposes.
The Trust has not adopted any non-fundamental investment restrictions or
policies for the 90/10 Portfolio, 60/40 Portfolio or 30/70 Portfolio.
Unless otherwise indicated, all limitations applicable to Fund or Portfolio
investments apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a security (or,
if unrated, deemed to be of comparable quality), or change in the percentage of
Fund or Portfolio assets invested in
28
<PAGE>
certain securities or other instruments resulting from market fluctuations or
other changes in a Fund's or Portfolio's total assets will not require the Fund
or Portfolio to dispose of an investment until the Adviser or Portfolio Manager
determines that it is practicable to sell or close out the investment without
undue market or tax consequences to the Fund or Portfolio. In the event that
ratings services assign different ratings to the same security, the Adviser or
Portfolio Manager will determine which rating it believes best reflects the
security's quality and risk at that time, which may be the higher of the several
assigned ratings.
The phrase "shareholder approval," as used in the Prospectuses, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund, the Portfolio or the Trust, as the case may be,
or (2) 67% or more of the shares of the Fund, the Portfolio or the Trust, as the
case may be, present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
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. 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 Proprietor, Cannon & Company, an affiliate of Inverness Management
3838 Olympia LLC, a private equity investment firm. Formerly, Headmaster, St. John's
Houston, TX 77019 School, Houston, Texas, Trustee of PIMCO Advisors Funds ("PAF") and
Age 56 Cash Accumulation Trust ("CAT"), General Partner, J.B. Poindexter &
Co., Houston, Texas (private partnership), and Partner, Iberia Petroleum
Company (oil and gas production). Mr. Cannon was a director of WNS
Inc., a retailing company which filed a petition in bankruptcy within the last
five years.
- -----------------------------------------------------------------------------------------------------------
Donald P. Carter Formerly, Trustee of PAF and CAT, Chairman, Executive Vice President
434 Stable Lane and Director, Cunningham & Walsh, Inc., Chicago (advertising agency).
Lake Forest, IL 60045
Age 70
- -----------------------------------------------------------------------------------------------------------
Gary A. Childress Private investor. Formerly, Chairman and Director, Bellefonte Lime
11 Longview Terrace Company, Inc. Mr. Childress is a partner in GenLime, L.P., a private
Madison, CT 06443 limited partnership, which has filed a petition in bankruptcy within the last
Age 64 five years. Formerly, Trustee of PAF and CAT.
- -----------------------------------------------------------------------------------------------------------
(*) William D. Cvengros Chairman of the Board of the Trust; Chief Executive Officer, President, and
800 Newport Center Drive member of the Management Board, PIMCO Advisors; Director, The
Newport Beach, CA 92660 Emerging Markets Income Fund, Inc., The Emerging Markets Income Fund
Age 49 II, Inc., The Emerging Markets Floating Rate Fund, Inc., Global Partners
Income Fund, Inc., Municipal Partners Fund, Inc., and Municipal Partners
Fund II, Inc. Formerly, Trustee of PAF and CAT, President of the Trust,
Director, Vice Chairman, and Chief Investment Officer, Pacific Life
Insurance Company ("Pacific Life") and Director, PIMCO Funds
Distribution Company (currently, PIMCO Funds Distributors LLC).
- -----------------------------------------------------------------------------------------------------------
Richard L. Nelson President, Nelson Financial Consultants; Director, Wynn's International,
8 Cherry Hills Lane Inc.; Trustee, Pacific Select Fund. Formerly, Partner, Ernst & Young.
Newport Beach, CA 92660
Age 68
- -----------------------------------------------------------------------------------------------------------
Lyman W. Porter Professor of Management at the University of California, Irvine; Trustee,
2639 Bamboo Street Pacific Select Fund.
Newport Beach, CA 92660
Age 68
- -----------------------------------------------------------------------------------------------------------
Alan Richards President, Alan Richards Consulting, Inc.; Trustee, Pacific Select Fund;
7381 Elegans Place Director, Western National Corporation. Formerly, President, Chief
Carlsbad, CA 92009 Executive Officer and Director, E.F. Hutton Insurance Group, Inc.;
Age 68 Chairman of the Board, Chief Executive Officer and President, E.F. Hutton
Life Insurance Company; Director, E.F. Hutton & Company, Inc.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Joel Segall Formerly, Trustee of PAF and CAT, President and University Professor,
11 Linden Shores Bernard M. Baruch College, The City University of New York; Deputy
Branford, CT 06405 Under Secretary for International Affairs, United States Department of
Age 74 Labor; Professor of Finance, University of Chicago; Board of Managers,
Coffee, Sugar and Cocoa Exchange.
- -----------------------------------------------------------------------------------------------------------
W. Bryant Stooks President, Bryant Investments, Ltd.; Director, American Agritec LLC.
1530 E. Montebello Formerly, Trustee of PAF and CAT, President, Senior Vice President,
Phoenix, AZ 85014 Director and Chief Executive Officer, Archirodon Group Inc.; Partner,
Age 57 Arthur Andersen & Co.
- -----------------------------------------------------------------------------------------------------------
Gerald M. Thorne Director, UPI Inc., Kaytee Inc., and American Orthodontics Corp.
5 Leatherwood Lane Formerly, Trustee of PAF and CAT, President and Director, Firstar
Savannah, GA 31414 National Bank of Milwaukee; Chairman, President and Director, Firstar
Age 59 National Bank of Sheboygan; Director, Bando-McGlocklin.
- -----------------------------------------------------------------------------------------------------------
(*) Stephen J. Treadway President and Chief Executive Officer of the Trust; Executive Vice
2187 Atlantic Street President, PIMCO Advisors; Chairman and President, PIMCO Funds
Stamford, CT 06902 Distributors LLC ("PFDLLC"); Director, Municipal Advantage Fund, Inc.
Age 50 and The Central European Value Fund, Inc. Formerly, Trustee, President
and Chief Executive Officer of CAT; Executive Vice President, Smith
Barney Inc.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Trustee is an "interested person" of the Trust (as defined in Section
2(a)(19) of the 1940 Act).
OFFICERS
The chart below sets forth the name, address, age, position with the Trust,
and principal occupation during the past five years of each officer of the
Trust. Unless otherwise indicated, the business address of all persons listed
below is 840 Newport Center Drive, Suite 300, Newport Beach, California 92660:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) WITH THE PRINCIPAL OCCUPATION(S) DURING THE PAST
TRUST FIVE YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen J. Treadway Trustee, President and Executive Vice President, PIMCO Advisors;
2187 Atlantic Street Chief Executive Officer Chairman and President, PFDLLC;
Stamford, CT 06902 Director, Municipal Advantage Fund, Inc.
Age 50 and The Central European Value Fund, Inc.
Formerly, Trustee, President and Chief
Executive Officer of CAT; Executive Vice
President, Smith Barney Inc.
- ---------------------------------------------------------------------------------------------------
R. Wesley Burns Executive Vice Trustee and President, PIMCO Funds;
Age 38 President Executive Vice President, Pacific Investment
Management Company ("Pacific Investment
Management"); Trustee and President,
PIMCO Variable Insurance Trust.
Formerly, Vice President, Pacific Investment
Management, PAF and CAT.
- ------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) WITH THE PRINCIPAL OCCUPATION(S) DURING THE PAST
TRUST FIVE YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Newton B. Schott, Jr. Vice President and Executive Vice President, Chief
2187 Atlantic Street Secretary Administrative Officer and Secretary,
Stamford, CT 06902 PFDLLC. Formerly, Vice President and
Age 56 Clerk of PAF and CAT, Senior Vice
President-Legal and Secretary, PIMCO
Advisors; Executive Vice President,
Secretary and General Counsel, Thomson
Advisory Group and PIMCO Advisors.
- ---------------------------------------------------------------------------------------------------
Jeffrey M. Sargent Vice President Vice President and Manager of Fund
Age 35 Shareholder Servicing, Pacific Investment
Management; Vice President of PIMCO
Funds; Vice President, PIMCO Variable
Insurance Trust. Formerly, Project
Specialist, Pacific Investment Management.
- ---------------------------------------------------------------------------------------------------
Richard M. Weil Vice President Senior Vice President - Legal, PIMCO
Age 34 Advisors. Formerly, Vice President,
Bankers Trust Company; Associate,
Simpson, Thatcher & Bartlett.
- ---------------------------------------------------------------------------------------------------
John P. Hardaway Treasurer Treasurer of PIMCO Funds; Treasurer,
Age 40 PIMCO Variable Insurance Trust; Vice
President and Manager of Fund Operations,
Pacific Investment Management. Formerly,
Treasurer of PAF and CAT.
- ---------------------------------------------------------------------------------------------------
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Fund
Age 34 Taxation, Pacific Investment Management;
Assistant Treasurer, PIMCO Funds;
Assistant Treasurer of PIMCO Variable
Insurance Trust. Formerly, Director of
Financial Reporting, Carl I. Brown & Co.;
Tax Manager, Price Waterhouse LLP.
- ---------------------------------------------------------------------------------------------------
Garlin G. Flynn Assistant Secretary Lead of PIMCO Funds Administration;
Age 51 Secretary, PIMCO Funds; Secretary,
PIMCO Variable Insurance Trust.
Formerly, Senior Fund Administrator,
Pacific Investment Management; Senior
Mutual Fund Analyst, PIMCO Advisors
Institutional Services; Senior Mutual Fund
Analyst, Pacific Financial Asset Management
Corporation.
- ---------------------------------------------------------------------------------------------------
</TABLE>
TRUSTEES' COMPENSATION
Trustees other than those affiliated with PIMCO Advisors, a Portfolio
Manager, or Pacific Investment Management, receive an annual retainer of
$45,000, plus $2,000 for each Board of Trustees meeting attended, and $500 for
each Audit and Performance Committee meeting attended, plus reimbursement of
related expenses. Each Audit and Performance Committee member receives an
additional annual retainer of $1,000, the Chairman of the Audit and Performance
Committees receives an additional annual retainer of $2,000, the Chairman of the
Independent Trustees receives an additional annual retainer of $6,000, and each
Vice Chairman of the entire Board receives an additional annual retainer of
$3,000. Trustees do not currently receive any pension or retirement benefits
32
<PAGE>
from the Trust or the Fund Complex (see below). The Trust has adopted a deferred
compensation plan for the Trustees, which went into place during 1997, which
permits the Trustees to defer their receipt of compensation from the Trust, at
their election, in accordance with the terms of the plan. Certain of the
Trustees earned deferred compensation for their services on behalf of PAF which
was carried forward under the Trust's plan.
The following table sets forth information regarding compensation received
by those Trustees who are not "interested persons" (as defined in the 1940 Act)
of the Trust for the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(1) (2) (3)
TOTAL
AGGREGATE COMPENSATION
NAME OF TRUSTEE COMPENSATION FROM FROM TRUST AND
TRUST/1/ FUND COMPLEX/2/
- -------------------------------------------------------------
<S> <C> <C>
E. Philip Cannon/3/ $24,750.00 $54,000.00
- -------------------------------------------------------------
Donald P. Carter/3/ $28,800.00 $60,000.00
- -------------------------------------------------------------
Gary A. Childress/3/ $24,750.00 $54,000.00
- -------------------------------------------------------------
Gary L. Light/3/ $25,650.00 $56,000.00
- -------------------------------------------------------------
Richard L. Nelson $43,150.00 $70,000.00
- -------------------------------------------------------------
Lyman W. Porter $41,750.00 $71,500.00
- -------------------------------------------------------------
Alan Richards $44,500.00 $67,500.00
- -------------------------------------------------------------
Joel Segall/3/ $25,875.00 $56,750.00
- -------------------------------------------------------------
W. Bryant Stooks/3/ $24,750.00 $54,000.00
- -------------------------------------------------------------
Gerald M. Thorne/3/ $24,750.00 $54,000.00
- -------------------------------------------------------------
</TABLE>
/1/ The Trust has adopted a deferred compensation plan (the "Plan") which
went into place during fiscal 1997. Aggregate deferred compensation earned in
prior years by certain Trustees under a deferred compensation plan for PAF was
carried forward under the Plan. Of the amounts listed in column (2), the
following Trustees elected to have the following amounts deferred from the Trust
and all investment companies in the Fund Complex, respectively: Cannon -
$24,750, $54,000; Carter - $0, $28,000; Segall - $25,875, $56,750; Thorne -
$24,750, $54,000; Porter - $24,750, $27,500.
/2/ The amounts listed in column (3) include total compensation paid to
the Trustees for their services as Trustees of the Trust (for all Trustees), PAF
(for Messrs. Cannon, Carter, Childress, Light, Segall, Stooks and Thorne), CAT
(for all Trustees), and Pacific Select Fund (for Messrs. Nelson, Porter, and
Richards) for the twelve-month period ended June 30, 1997. By virtue of having
PIMCO Advisors or an affiliate of PIMCO Advisors as investment adviser, the
Trust, PAF, CAT and Pacific Select Fund were considered to be part of the same
"Fund Complex" for these purposes. PAF ceased operations on January 17, 1997 and
did not pay compensation for services rendered after that date. Messrs. Nelson,
Porter and Richards became Trustees of CAT in February 1997 and did not receive
compensation from CAT prior thereto. As a result of a change in management of
CAT, no Trustee of the Trust is currently a Trustee of CAT and CAT is no longer
part of the same "Fund Complex" as the Trust. In addition, any fees payable by
CAT which have been deferred will be distributed to the Trustees in accordance
with the provisions of the Plan and the elections of the Trustees.
/3/ Messrs. Cannon, Carter, Childress, Light, Segall, Stooks and Thorne
became Trustees of the Trust in December 1997 and did not receive compensation
from the Trust prior thereto. Mr. Light retired as a Trustee of the Trust
during the fiscal year ended June 30, 1998.
33
<PAGE>
INVESTMENT ADVISER
PIMCO Advisors serves as investment adviser to each of the Funds and
Portfolios 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. ("PGP") and PIMCO
Advisors Holdings L.P. ("PAH") are the general partners of PIMCO Advisors. PGP
is a general partnership between PIMCO Holding LLC ("PH LLC"), a Delaware
limited liability company and an indirect wholly-owned subsidiary of Pacific
Life Insurance Company, and PIMCO Partners LLC, a California limited liability
company controlled by the Managing Directors of Pacific Investment Management,
who are William H. Gross, Dean S. Meiling, James F. Muzzy, William F. Podlich,
III, Brent R. Harris, John L. Hague, William S. Thompson, Jr., William C.
Powers, Benjamin L. Trosky, William R. Benz, II and Lee R. Thomas, III
(collectively, the "Managing Directors"). PGP is the sole general partner of
PAH. PGP and PAH have equal right, power and authority to manage and control
the business and affairs of PIMCO Advisors and to take any action deemed
necessary or desirable by them in connection with the business of PIMCO
Advisors. Any difference arising as to any action connected with the business
of PIMCO Advisors, other than those requiring the unanimous consent of the
general partners, is decided by the general partner(s) holding a majority of the
outstanding PIMCO GP Units.
PGP and PAH have substantially delegated their management and control of
PIMCO Advisors to a Management Board of PIMCO Advisors. The activities of PIMCO
Advisors are controlled by the Management Board. As of April 1, 1998, the
members of the Management Board were Walter E. Auch, Sr., David B. Breed,
William D. Cvengros, Walter B. Gerken, William H. Gross, Brent R. Harris, Donald
R. Kurtz, George A. Long, James F. McIntosh, Kenneth H. Mortenson, William F.
Podlich, III, Glenn S. Schafer, Donald A. Chiboucas, Thomas C. Sutton, William
S. Thompson, Jr., and Benjamin L. Trosky.
Pursuant to the terms of the delegation of authority by PGP and PAH, the
Management Board of PIMCO Advisors is composed of (i) the Chief Executive
Officer of PIMCO Advisors; (ii) six other persons designated by PGP; (iii) three
disinterested persons designated by (A) representatives of the Public General
Partners (defined as any general partner of PIMCO Advisors that has at least one
class of equity security outstanding that is registered under Section 12 of the
Securities Exchange Act of 1934 and which, together with its subsidiaries, holds
PIMCO Units representing more than 95% of its consolidated assets other than
cash and cash equivalents), if any, in proportion to their ownership of PIMCO GP
Units or (B) if there are no Public General Partners, PGP or its successor as
general partner of PIMCO Advisors; (iv) the Chief Executive Officer and one
Managing Director of each of the two Investment Managing Firms having the
greatest total income, determined as of the date of appointment; and (v) one
Managing Director of each of two other Investment Managing Firms designated from
time to time by the Management Board upon the recommendation of the Nominating
Committee. PAH is a Public General Partner for the purposes set forth above.
PH LLC, a wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners, LLC, the general partners of PGP, have agreed that the six persons
designated by PGP (referred to in clause (ii) above) will be the Chief Executive
Officer of Pacific Investment Management, two other individuals designated by
PIMCO Partners, LLC and three individuals designated by Pacific Life Insurance
Company.
The Management Board has in turn delegated the authority to manage day-to-
day operations and policies to an Executive Committee. The Executive Committee
is composed of five members. The members of the Executive Committee include (i)
the Chief Executive Officer of PIMCO Advisors; (ii) three members appointed by
the PGP-appointed members of the Management Board; and (iii) one member
appointed by the Management Board, upon the recommendation of the Nominating
Committee, which members must have been appointed to the Management Board by an
Investment Management Firm other than Pacific Investment Management. PH LLC and
PIMCO Partners, LLC, the general partners of PGP, have agreed that the three
members of the Management Board of PIMCO Advisors designated by PGP to the
Executive Committee will be (a) the Chief Executive Officer of Pacific
Investment Management, (b) one member designated by PIMCO Partners, LLC, who
shall be the chairperson of the Executive Committee, and (c) one member
designated by Pacific Life Insurance Company.
34
<PAGE>
PIMCO Advisors, PGP and PAH are located at 800 Newport Center Drive,
Newport Beach, CA 92660. PIMCO Advisors and its subsidiary partnerships had
approximately $218.4 billion of assets under management as of August 31, 1998.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Funds and
Portfolios and for managing, either directly or through others selected by the
Adviser, the investment of the Funds and Portfolios. PIMCO Advisors also
furnishes to the Board of Trustees periodic reports on the investment
performance of each Fund and Portfolio. For all of the Funds except the
Precious Metals Fund, PIMCO Advisors has engaged affiliates to serve as
Portfolio Managers.
PIMCO Advisors' Asset Allocation Committee is responsible for determining
how the assets of the 90/10 Portfolio, the 60/40 Portfolio and the 30/70
Portfolio are allocated and reallocated from time to time among the Underlying
PIMCO Funds. The Portfolios do not pay any fees to PIMCO Advisors in return for
these services under the Advisory Agreement. The Portfolios do, however,
indirectly pay a proportionate share of the advisory fees paid to PIMCO Advisors
and Pacific Investment Management Company by the Underlying PIMCO Funds in which
the Portfolios invest.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Funds and the Portfolios 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 will continue in effect with respect to a Fund and
Portfolio 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 Portfolio, or by
the Board of Trustees, and (ii) by a majority of the Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Advisory Agreement. The Advisory
Agreement may be terminated without penalty by vote of the Trustees or the
shareholders of the Trust, or by the Adviser, on 60 days' written notice to the
other party and will terminate automatically in the event of its assignment. In
addition, the Advisory Agreement may be terminated with regard to the
Renaissance, Growth, Target, Opportunity, Innovation, International and Precious
Metals Funds by vote of a majority of the Trustees who are not interested
persons of PIMCO Advisors, on 60 days' written notice to PIMCO Advisors.
The Adviser currently receives a monthly investment advisory fee from each
Fund at the following annual rates (based on the average daily net assets of the
particular Funds):
<TABLE>
<CAPTION>
ADVISORY
FUND FEE RATE
- ---- --------
<S> <C>
Equity Income, Value, Tax-Efficient Equity, Capital
Appreciation, Mid-Cap Growth, Structured Emerging
Markets, Tax-Efficient Structured Emerging Markets,
Enhanced Equity and Balanced Funds............................ .45%
Growth and Value 25 Funds....................................... .50%
International and Target Funds.................................. .55%
Core Equity Fund................................................ .57%
Small-Cap Value, Renaissance, Precious Metals
and International Developed Funds.............................. .60%
Mid-Cap Equity Fund............................................. .63%
Opportunity and Innovation Funds................................ .65%
Emerging Markets and International Growth Funds................. .85%
Small-Cap Growth Fund........................................... 1.00%
Micro-Cap Growth Fund........................................... 1.25%
</TABLE>
35
<PAGE>
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period) the Funds
paid the Adviser (or its predecessor) the following amounts under the Advisory
Contract:
<TABLE>
<CAPTION>
YEAR PERIOD YEAR
ENDED ENDED ENDED
FUND 6/30/97 6/30/96 10/31/95
- ------------------------------ ----------- ---------- ----------
<S> <C> <C> <C>
Equity Income Fund $ 555,146 $ 425,899 $ 445,739
Value Fund 463,869 65,873 60,686
Small-Cap Value Fund 249,347 156,721 203,158
Core Equity Fund 234,333 145,931 73,930
Mid-Cap Equity Fund 48,656 35,315 26,276
Capital Appreciation Fund 1,953,374 883,498 881,358
Mid-Cap Growth Fund 1,219,531 617,546 650,017
Micro-Cap Growth Fund 1,390,317 669,726 609,540
Small-Cap Growth Fund 327,245 426,098 594,905
Enhanced Equity Fund 292,187 274,512 319,036
Emerging Markets Fund 568,277 440,978 638,097
International Developed Fund 525,817 294,777 282,055
Balanced Fund 306,756 235,529 417,190
Renaissance Fund * 913,256 N/A N/A
Growth Fund* 3,758,433 N/A N/A
Target Fund* 2,887,743 N/A N/A
Opportunity Fund* 2,324,663 N/A N/A
Innovation Fund* 750,414 N/A N/A
International Fund* 559,353 N/A N/A
Precious Metals Fund* 119,710 N/A N/A
Tax Exempt Fund*/ (1)/ 66,977 N/A N/A
----------- ---------- ----------
TOTAL $19,515,404 $4,672,403 $5,201,987
- --------------
</TABLE>
* For the period 1/18/97 through 6/30/97
(1) The Tax Exempt Fund merged with and into the Municipal Bond Fund of PIMS in
a transaction which took place on June 26, 1998. The Tax Exempt Fund was
liquidated in connection with the transaction and is no longer a series of the
Trust.
In addition, the predecessors of the Renaissance, Growth, Target,
Opportunity, Innovation, International, Precious Metals and Tax Exempt Funds
(each of which is a former series of PAF which reorganized as a Fund of the
Trust on January 17, 1997) paid the Adviser the following amounts for the fiscal
period ended January 17, 1997 and the fiscal years ended September 30, 1996 and
1995 under separate management contracts between the Adviser and PAF:
<TABLE>
<CAPTION>
10/1/96 YEAR YEAR
TO ENDED ENDED
FUND 1/17/97 9/30/96 9/30/95
- ---------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Renaissance Fund $ 653,744 $ 1,627,632 $ 1,371,809
Growth Fund 3,370,567 9,987,541 8,268,603
Target Fund 2,584,257 7,295,767 5,294,008
Opportunity Fund 1,898,337 6,183,575 5,000,057
Innovation Fund 545,586 1,063,584 265,836
International Fund 537,647 1,872,608 2,097,974
Precious Metals Fund 107,290 397,969 434,323
Tax Exempt Fund 99,023 333,349 369,918
---------- ----------- -----------
TOTAL $9,796,451 $28,762,025 $23,102,528
</TABLE>
36
<PAGE>
PORTFOLIO MANAGEMENT AGREEMENTS
The Adviser employs Portfolio Managers to provide investment advisory
services to each Fund pursuant to portfolio management agreements (each a
"Portfolio Management Agreement") between the Adviser and the relevant Portfolio
Manager. Each Portfolio Manager is an affiliate of the Adviser except for Van
Eck Associates Corporation ("Van Eck"), which advises the Precious Metals Fund.
The Adviser currently has seven subsidiary partnerships, the following six of
which manage one or more of the Funds: Pacific Investment Management,
Parametric Portfolio Associates ("Parametric"), Cadence Capital Management
("Cadence"), NFJ Investment Group ("NFJ"), Columbus Circle Investors ("Columbus
Circle"), and Blairlogie Capital Management ("Blairlogie").
Pacific Investment Management
- -----------------------------
Pursuant to a Portfolio Management Agreement between the Adviser and
Pacific Investment Management, Pacific Investment Management provides investment
advice with respect to the portion of the assets of the Balanced Fund allocated
by the Adviser for investment in fixed income securities. For the services
provided, the Adviser (not the Trust) pays Pacific Investment Management a fee
at the annual rate of .25% of the average daily net assets of the Balanced Fund
allocated to Pacific Investment Management for investment in fixed income
securities.
Pacific Investment Management is an investment management firm
organized as a general partnership. Pacific Investment Management has two
partners: PIMCO Advisors as the supervisory partner, and PIMCO Management Inc.
as the managing partner. The predecessor investment adviser to Pacific
Investment Management commenced operations in 1971. Pacific Investment
Management is located at 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. Pacific Investment Management also provides investment
advisory services to PIMS, Harbor Fund, various funds advised by Frank Russell
Investment Management Company, Total Return Bond Portfolio and Intermediate Term
Bond Portfolio of Prudential Securities Target Portfolio Trust, Total Return
Bond and Limited Maturity Bond Portfolios of American Skandia Trust, Total
Return Fund of Fremont Mutual Fund, Inc., Managed Bond and Government Securities
Series of Pacific Select Fund, and the PaineWebber Short-Term U.S. Government
Income Fund, a series of PaineWebber Managed Investments Trust, all of which are
open-end management investment companies. Pacific Investment Management also
advises PIMCO Commercial Mortgage Securities Trust, Inc. which is a closed-end
management investment company, and managed accounts consisting of proceeds from
various pension and profit sharing plans. Pacific Investment Management had
approximately $142.6 billion of assets under management as of August 31, 1998.
Parametric
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Parametric, Parametric is the Portfolio Manager and provides investment advisory
services to the Tax-Efficient Equity, Enhanced Equity, Structured Emerging
Markets and Tax-Efficient Structured Emerging Markets Funds. For the services
provided to each Fund, the Adviser (not the Trust) pays Parametric a monthly fee
for each Fund at the following annual rates (based on the average daily net
assets of the particular Fund): .35% for the Tax-Efficient Equity Fund, .35% for
37
<PAGE>
the Enhanced Equity Fund, .35% for the Structured Emerging Markets Fund, and
.35% for the Tax-Efficient Structured Emerging Markets Fund.
Parametric is an investment management firm organized as a general
partnership. Parametric is the successor investment adviser to Parametric
Portfolio Associates, Inc., a wholly-owned corporate subsidiary of PFAMCo.
Parametric has two partners: PIMCO Advisors as the supervisory partner, and
Parametric Management Inc. as the managing partner. The predecessor investment
adviser to Parametric commenced operations in 1987. Parametric is located at
7310 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104-7090.
Parametric provides investment management services to a number of institutional
accounts, including employee benefit plans, college endowment funds and
foundations. Accounts managed by Parametric had combined assets, as of August
31, 1998, of approximately $2.7 billion.
Cadence
- -------
Pursuant to a Portfolio Management Agreement between the Adviser and
Cadence, Cadence provides investment advisory services to the Capital
Appreciation Fund, the Mid-Cap Growth Fund, the Micro-Cap Growth Fund, the
Small-Cap Growth Fund and a portion of the Balanced Fund allocated by the
Adviser for investment in common stocks. For the services provided, the
Adviser (not the Trust) pays Cadence a monthly fee for each Fund at the
following annual rates (based on the average daily net assets of the particular
Fund): .35% for the Capital Appreciation Fund, .35% for the Mid-Cap Growth
Fund, .35% for the portion of the Balanced Fund's assets allocated to Cadence
for investment in common stock, .90% for the Small-Cap Growth Fund, and 1.15%
for the Micro-Cap Growth Fund.
Cadence is an investment management firm organized as a general
partnership. Cadence is the successor investment adviser to Cadence Capital
Management Corporation, a wholly owned subsidiary of PFAMCo. Cadence has two
partners: PIMCO Advisors as the supervisory partner, and Cadence Capital
Management Inc. as the managing partner. The predecessor investment adviser to
Cadence commenced operations in 1988. Cadence is located at Exchange Place, 53
State Street, Boston, Massachusetts 02109. Cadence provides investment
management services to a number of institutional accounts, including employee
benefit plans, college endowment funds and foundations. Accounts managed by
Cadence had combined assets, as of August 31, 1998, of approximately $5.7
billion.
NFJ
- ---
Pursuant to a Portfolio Management Agreement between the Adviser and NFJ,
NFJ provides investment advisory services to the Equity Income Fund, the Value
Fund, the Value 25 Fund, the Small-Cap Value Fund, and a portion of the Balanced
Fund allocated by the Adviser for investment in common stocks. For the services
provided, the Adviser (not the Trust) pays NFJ a monthly fee for each Fund at
the following annual rates (based on the average daily net assets of the
particular Fund): .35% for the Equity Income Fund, 40% for the Value 25 Fund,
.35% for the Value Fund, .35% for the portion of the Balanced Fund allocated to
NFJ for investment in common stock, and .50% for the Small-Cap Value Fund.
NFJ is an investment management firm organized as a general partnership.
NFJ is the successor investment adviser to NFJ Investment Group, Inc., a wholly
owned subsidiary of PFAMCo. NFJ has two partners: PIMCO Advisors as the
supervisory partner, and NFJ Management Inc. as the managing partner. The
predecessor investment adviser to NFJ commenced operations in 1989. NFJ is
located at 2121 San Jacinto, Suite 1840, Dallas, Texas 75201. NFJ provides
investment management services to a number of institutional accounts, including
employee benefit plans, college endowment funds and foundations. Accounts
managed by NFJ had combined assets, as of August 31, 1998, of approximately
$2.1 billion.
38
<PAGE>
Columbus Circle
- ---------------
Pursuant to a Portfolio Management Agreement between the Adviser and
Columbus Circle, Columbus Circle provides investment advisory services to the
Renaissance, Growth, Target, Opportunity, Innovation, Core Equity, Mid-Cap
Equity, and International Growth Funds. For the services provided, the Adviser
(not the Trust) pays Columbus Circle a monthly fee for each Fund at the
following annual rates (based on the average daily net assets of the particular
Fund): .34% for the Growth Fund, .36% for the Target Fund, .38% for the
Renaissance Fund, .38% for the Innovation Fund, .47% for the Core Equity Fund,
.48% for the Opportunity Fund, .53% for the Mid-Cap Equity Fund, and .75% for
the International Growth Fund.
Columbus Circle is an investment management firm organized as a general
partnership. Columbus Circle is the successor investment adviser to the Columbus
Circle Investors Division of Thomson Advisory Group L.P. ("TAG"). Columbus
Circle has two partners: PIMCO Advisors as the supervisory partner, and Columbus
Circle Investors Management Inc. as the managing partner. Columbus Circle's
ultimate predecessor commenced operations in 1975. Columbus Circle is located at
Metro Center, One Station Place, 8th Floor, Stamford, Connecticut 06902.
Columbus Circle manages discretionary accounts for institutions, including
corporate, government and union pension and profit-sharing plans, foundations
and educational institutions. Accounts managed by Columbus Circle had combined
assets, as of August 31, 1998, of $7.3 billion.
Blairlogie
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Blairlogie, Blairlogie provides investment advisory services to the
International, International Developed and Emerging Markets Funds. For the
services provided, the Adviser (not the Trust) pays Blairlogie a monthly fee for
each Fund at the following annual rates (based on the average daily net assets
of the particular Fund): .40% for the International Fund, .50% for the
International Developed Fund, and .75% for the Emerging Markets Fund.
Blairlogie is an investment management firm organized as a limited
partnership under the laws of the United Kingdom. Blairlogie is the successor
investment adviser to Blairlogie Capital Management Ltd., an indirect subsidiary
of PFAMCo, which commenced operations in 1992. Blairlogie has two general
partners and one limited partner. The general partners are PIMCO Advisors, which
serves as the supervisory partner, and Blairlogie Holdings Limited, a wholly-
owned subsidiary of PIMCO Advisors, which serves as the managing partner. The
limited partner is Blairlogie Partners L.P., a limited partnership, the general
partner of which is Pacific Asset Management LLC (a subsidiary of Pacific Life
Insurance Company), and the limited partners of which are the principal
executive officers of Blairlogie Capital Management. Blairlogie is located at
4th Floor, 125 Princes Street, Edinburgh EH2 4AD, Scotland. Blairlogie provides
investment management services to a number of institutional accounts, including
employee benefit plans, college endowment funds and foundations. Accounts
managed by Blairlogie had combined assets, as of August 31, 1998, of
approximately $717 million.
Van Eck
- -------
Pursuant to a Portfolio Management Agreement between the Adviser and
Van Eck, Van Eck provides investment advisory services to the Precious Metals
Fund. For the Services provided, the Adviser (not the Trust) pays Van Eck a
monthly fee at the annual rate of .35% based on the average daily net assets of
the Precious Metals Fund.
Van Eck is a Delaware corporation registered as an investment adviser with
the SEC. Van Eck and its affiliates advise other mutual funds and private
accounts. Van Eck is controlled by John C. van Eck who, along with members of
his immediate family, owns 100% of the stock of Van Eck. Van Eck is located at
99 Park Avenue, New York, New York 10001. Accounts managed by Van Eck had
combined assets as of May 31, 1998, of approximately $1.4 billion.
39
<PAGE>
PIMCO Advisors determines the allocation of the Balanced Fund's assets
among the various asset classes and types of securities in which the Fund
invests. PIMCO Advisors reserves the right to allocate a portion of the Fund's
assets for investment in money market instruments and reserves the right to
manage the investment of such assets.
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
amount of portfolio management fees paid by the Adviser (or its predecessor) to
the applicable Portfolio Manager (or its predecessor) for each of the Funds was
as follows:
<TABLE>
<CAPTION>
YEAR PERIOD YEAR
ENDED ENDED ENDED
FUND 06/30/97 06/30/96 10/31/95
- ------------------------------ ----------- ---------- ----------
<S> <C> <C> <C>
Equity Income Fund $ 492,429 $ 425,899 $ 445,739
Value Fund 388,966 65,873 60,686
Small-Cap Value Fund 224,788 156,721 203,158
Core Equity Fund 215,998 136,615 62,906
Mid-Cap Equity Fund 45,074 23,814 13,832
Capital Appreciation Fund 1,714,191 883,498 881,358
Mid-Cap Growth Fund 1,059,242 617,546 650,017
Micro-Cap Growth Fund 1,325,695 669,726 609,540
Small-Cap Growth Fund 311,280 426,098 594,905
Enhanced Equity Fund 268,021 274,512 319,036
Emerging Markets Fund 501,411 385,438 550,590
International Developed Fund 478,789 237,138 241,135
Balanced Fund 228,898 161,345 332,255
Renaissance Fund* 575,288 N/A N/A
Growth Fund* 2,544,364 N/A N/A
Target Fund* 1,869,073 N/A N/A
Opportunity Fund* 1,709,827 N/A N/A
Innovation Fund* 435,246 N/A N/A
International Fund* 348,938 N/A N/A
Precious Metal Fund* 66,070 N/A N/A
Tax Exempt Fund* 66,756 N/A N/A
----------- ---------- ----------
TOTAL $14,870,344 $4,464,223 $4,965,157
</TABLE>
_________________
*For the period 1/18/97 through 6/30/97.
40
<PAGE>
The Adviser paid the Portfolio Managers for the predecessors of the
Renaissance, Growth, Target, Opportunity, Innovation, International, Precious
Metals and Tax Exempt Funds (each of which is a former series of PAF which
reorganized as a Fund of the Trust on January 17, 1997) the following amounts
for the fiscal period ended January 17, 1997 and the fiscal years ended
September 30, 1996 and 1995 under separate sub-adviser agreements between the
Adviser and the relevant Portfolio Manager:
<TABLE>
<CAPTION>
10/1/96 YEAR YEAR
TO ENDED ENDED
FUND 1/17/97 09/30/96 09/30/95
- ---------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Renaissance Fund $ 326,864 $ 813,816 $ 595,500
Growth Fund 1,685,284 4,993,770 3,634,403
Target Fund 1,292,168 3,647,884 2,353,106
Opportunity Fund 949,192 3,091,788 2,205,293
Innovation Fund 272,772 531,792 132,918
International Fund 268,824 936,304 889,339
Precious Metals Fund 53,837 198,985 217,162
Tax Exempt Fund 49,512 166,675 159,370
---------- ----------- -----------
TOTAL $4,898,453 $14,381,014 $10,187,091
</TABLE>
FUND ADMINISTRATOR
In addition to its services as Adviser, PIMCO Advisors serves as
administrator (and is referred to in this capacity as the "Administrator") to
the Funds and Portfolios pursuant to an administration agreement (the
"Administration Agreement") with the Trust. The Administrator provides or
procures administrative services to the Funds and Portfolios, which include
clerical help and accounting, bookkeeping, internal audit services and certain
other services they require, and preparation of reports to the Trust'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"). PIMCO
Advisors may also retain other affiliates to provide such services. In
addition, the Administrator arranges at its own expense for the provision of
legal, audit, custody, transfer agency and other services necessary for the
ordinary operation of the Funds and Portfolios, and is responsible for the costs
of registration of theTrust's shares and the printing of prospectuses and
shareholder reports for current shareholders. Under the Administration
Agreement, the Administrator has agreed to provide or procure these services,
and to bear these expenses, at the following annual rates for each Fund and
Portfolio (each expressed as a percentage of the Fund's or Portfolio's average
daily net assets attributable to the indicated class or classes of shares on an
annual basis):
ADMINISTRATIVE FEE RATE
-----------------------
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A, CLASS B,
ADMINISTRATIVE AND CLASS C CLASS D
CLASSES* SHARES* SHARES**
--------------- ----------------------------------------- ---------
<S> <C> <C> <C>
Equity Income Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Tax-Efficient Equity Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Value Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Small-Cap Value Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Core Equity Fund .25% N/A N/A
Mid-Cap Equity Fund .25% N/A N/A
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A, CLASS B,
ADMINISTRATIVE AND CLASS C CLASS D
CLASSES* SHARES* SHARES**
--------------- ----------------------------------------- ---------
<S> <C> <C> <C>
Value 25 Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Capital Appreciation Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Mid-Cap Growth Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Micro-Cap Growth Fund .25% N/A N/A
Small-Cap Growth Fund .25% N/A N/A
Enhanced Equity Fund .25% N/A N/A
Emerging Markets Fund .50% .65% of first $2.5 billion N/A
.60% of amounts in excess of $2.5 billion
International Development .50% .65% of first $2.5 billion N/A
Fund .60% of amounts in excess of $2.5 billion
Balanced Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Renaissance Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Growth Fund N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Target Fund N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Opportunity Fund N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Innovation Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
International Fund .50% .65% of first $2.5 billion N/A
.60% of amounts in excess of $2.5 billion
International Growth Fund .50% N/A N/A
Precious Metal Fund N/A .45% of first $2.5 billion N/A
.40% of amounts in excess of $2.5 billion
Tax-Efficient Structured N/A N/A N/A
Emerging Markets Fund
Structured Emerging .50% N/A N/A
Markets Fund
90/10 Portfolio N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS A, CLASS B,
ADMINISTRATIVE AND CLASS C CLASS D
CLASSES* SHARES* SHARES**
--------------- ----------------------------------------- ---------
<S> <C> <C> <C>
60/40 Portfolio N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
30/70 Portfolio N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
</TABLE>
* The Administrator receives administrative fees based on a Fund's or
Portfolio's average daily net assets attributable in the aggregate to its
Institutional and Administrative Class shares on the one hand, and to its Class
A, Class B and Class C shares on the other.
** As described below, the Administration Agreement includes a plan adopted in
conformity with Rule 12b-1 which provides for the payment of up to .25% of the
.65% Class D Administrative Fee rate as reimbursement for expenses in respect of
activities that may be deemed to be primarily intended to result in the sale of
Class D shares.
Except for the expenses paid by the Administrator, the Trust bears all
costs of its operations. The Trust is responsible for the following expenses:
(i) salaries and other compensation of any of the Trust's executive officers and
employees who are not officers, directors, stockholders, or employees of PIMCO
Advisors, Pacific Investment Management, or their subsidiaries or affiliates;
(ii) taxes and governmental fees; (iii) brokerage fees and commissions and other
portfolio transaction expenses; (iv) costs of borrowing money, including
interest expenses; (v) fees and expenses of the Trustees who are not "interested
persons" of PIMCO Advisors, any Portfolio Manager, or the Trust, and any counsel
retained exclusively for their benefit; (vi) extraordinary expenses, including
costs of litigation and indemnification expenses; (vii) expenses which are
capitalized in accordance with generally accepted accounting principals; and
(viii) any expenses allocated or allocable to a specific class of shares
("Class-specific expenses").
Class-specific expenses include distribution and/or service fees payable
with respect to the Class A, Class B, Class C, Class D or Administrative Class
shares and administrative fees as described above, and may include certain other
expenses as permitted by the Trust's Amended and Restated Multi-Class Plan (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 and administrative
fees will be allocated on a class-specific basis.
The Administration Agreement may be terminated by the Trust at any time by
vote of (1) a majority of the Trustees, (2) a majority of the outstanding voting
securities of the Trust, or (3) with respect to the Renaissance, Growth, Target,
Opportunity, Innovation, International and Precious Metals Funds, by a majority
of the Trustees who are not interested persons of the Trust or PIMCO Advisors,
on 60 days' written notice to PIMCO Advisors.
Under the Administration Agreement, the Administrator or an affiliate may
pay financial service firms a portion of the Class D administration fees in
return for the firms' services (normally not to exceed an annual rate of .35% of
a Fund's average daily net assets attributable to Class D shares purchased
through such firms). The Administration Agreement includes a plan specific to
Class D shares which has been adopted in conformity with the requirements set
forth under Rule 12b-1 of the 1940 Act to allow for payment of up to .25% per
annum of the Class D administrative fees as reimbursement for expenses in
respect of activities that may be deemed to be primarily intended to result in
the sale of Class D shares. The principal types of activities for which such
payments may be made are services in connection with the distribution of Class D
shares and/or the provision of shareholder services. See "Distribution of Trust
Shares - Plan for Class D Shares."
43
<PAGE>
After an initial two-year term, the Sub-Administration Agreement will
continue from year to year upon the approval of the parties thereto. The Sub-
Administration Agreement may be terminated at any time by PIMCO Advisors or
Pacific Investment Management upon 60 days' written notice to the other party
and, with respect to the services rendered to the Trust, at any time by vote of
a majority of the disinterested Trustees of the Trust. The Sub-Administration
Agreement will also terminate upon termination of the Administration Agreement.
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
aggregate amount of the administration fees paid by the Funds was as follows
(Class A, Class B and Class C shares were not offered prior to January 17, 1997
and Class D shares were not offered during the periods listed):
<TABLE>
<CAPTION>
YEAR PERIOD YEAR
ENDED ENDED ENDED
06/30/97 06/30/96 10/31/95
-------- -------- --------
FUND
- ----
<S> <C> <C> <C>
Equity Income Fund $ 311,798 $ 236,611 $ 247,633
Value Fund 318,624 36,596 33,714
Small-Cap Value Fund 114,067 65,176 84,649
Core Equity Fund 102,634 63,942 32,425
Mid-Cap Equity Fund 19,291 14,011 10,427
Capital Appreciation Fund 1,093,013 490,803 489,643
Mid-Cap Growth Fund 729,997 342,880 361,121
Micro-Cap Growth Fund 278,025 133,934 121,908
Small-Cap Growth Fund 81,774 106,715 148,726
Enhanced Equity Fund 161,982 151,842 177,243
Emerging Markets Fund 312,540 259,300 375,351
International Developed Fund 437,490 244,350 235,046
Balanced Fund 170,134 130,017 231,772
Renaissance Fund* 605,566 N/A N/A
Growth Fund* 2,993,370 N/A N/A
Target Fund* 2,076,748 N/A N/A
Opportunity Fund* 1,424,856 N/A N/A
Innovation Fund* 458,154 N/A N/A
International Fund* 567,025 N/A N/A
Precious Metals Fund* 84,947 N/A N/A
Tax Exempt Fund* 89,008 N/A N/A
----------- ---------- ----------
TOTAL $12,431,043 $2,276,177 $2,549,658
- ------------------------
</TABLE>
* For the period from 1/17/97 through 6/30/97
The predecessor series of the Renaissance, Growth, Target, Opportunity,
Innovation, International, Precious Metals and Tax Exempt Funds (each a series
of PAF which reorganized as a Fund of the Trust on January 17, 1997) received
administrative services during fiscal 1997, 1996 and 1995 under separate
management contracts between the Adviser and PAF on behalf of each such series.
See "Investment Adviser" above for the amounts paid to the Adviser by these
series under such management contracts during fiscal 1997, 1996 and 1995.
Shares of the Portfolios were not offered during the periods listed above.
44
<PAGE>
DISTRIBUTION OF TRUST SHARES
DISTRIBUTOR AND MULTI-CLASS PLAN
PIMCO Funds Distributors LLC (the "Distributor") serves as the distributor
of each class of the Trust's shares pursuant to a distribution contract (the
"Distribution Contract") with the Trust. The Distributor is a wholly-owned
subsidiary of PIMCO Advisors. The Distribution Contract is terminable with
respect to a Fund, Portfolio or class of shares without penalty, at any time, by
the Fund, Portfolio 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 Portfolio, and each class of shares thereof, for successive one-year
periods, provided that each such continuance is specifically approved (i) by the
vote of a majority of the entire Board of Trustees or by the majority of the
outstanding shares of the Fund, Portfolio or class, and (ii) by a majority of
the Trustees who are not interested persons (as defined in the 1940 Act) of the
Trust and who have no direct or indirect interest financial interest in the
Distribution Contract or the Distribution and/or Servicing Plans described
below, by vote cast in person at a meeting called for the purpose. If the
Distribution Contract is terminated (or not renewed) with respect to one or more
Funds, Portfolios or classes, it may continue in effect with respect to any
Fund, Portfolio or class as to which it has not been terminated (or has been
renewed).
The Trust currently offers up to six classes of shares of each of the
Funds: Class A, Class B, Class C, Class D, Institutional Class and
Administrative Class shares. The Trust currently offers Class A, Class B and
Class C shares of each Portfolio.
Class A, Class B and Class C shares of the Trust are offered through firms
("participating brokers") which are members of the National Association of
Securities Dealers, Inc. ("NASD"), and which have dealer agreements with the
Distributor, or which have agreed to act as introducing brokers for the
Distributor ("introducing brokers").
Class D shares are generally offered to clients of financial service firms,
such as broker-dealers or registered investment advisors, with which the
Distributor has an agreement for the use of PIMCO Funds: Multi-Manager Series in
particular investment products, programs or accounts for which a fee may be
charged.
Institutional Class shares are offered primarily for direct investment by
investors such as pension and profit sharing plans, employee benefit trusts,
endowments, foundations, corporations, and high net worth individuals
(Institutional Class shares may also be offered through certain financial
intermediaries that charge their customers transaction or other fees with
respect to the customers' investments in the Funds). Administrative Class
shares are offered primarily through employee benefit plan alliances, broker-
dealers, and other intermediaries, and each Fund pays service or distribution
fees to such entities for services they provide to Administrative Class
shareholders.
Under the Trust's Multi-Class Plan, shares of each class of each Fund and
Portfolio represent an equal pro rata interest in the Fund or Portfolio and,
generally, have identical voting, dividend, liquidation, and other rights
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (a) each class has a different designation; (b) each
class of shares bears any class-specific expenses allocated to it; (c) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its distribution or service arrangements; and (d) each class
has separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. In
addition, each class may have a differing sales charge structure, and differing
exchange and conversion features.
45
<PAGE>
CONTINGENT DEFERRED SALES CHARGE AND INITIAL SALES CHARGE
As described in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "How to Redeem," a contingent deferred sales charge
is imposed upon certain redemptions of Class A, Class B and Class C shares. No
contingent deferred sales charge is currently imposed upon redemptions of Class
D, Institutional Class or Administrative Class shares. Because contingent
deferred sales charges are calculated on a series-by-series basis, shareholders
should consider whether to exchange shares of one Fund or Portfolio for shares
of another Fund or Portfolio prior to redeeming an investment if such an
exchange would reduce the contingent deferred sales charge applicable to such
redemption.
During the fiscal year ended June 30, 1997, the Distributor received an
aggregate of $40,456, $789,851, and $533,975, in contingent deferred sales
charges on, respectively, Class A shares, Class B shares and Class C shares of
the Funds. Shares of the Portfolios were first offered beginning October 1,
1998.
The Funds did not offer Class A, B and C shares in prior fiscal years.
However, during the fiscal year ended September 30, 1996, the Distributor
received the following amounts in contingent deferred sales charges on shares of
series of PAF which reorganized as the following Funds of the Trust: Class A
-------
shares: Growth -$9,168, Target - $14 and Opportunity - $4,190. Class B shares:
- ------ --------------
Renaissance - $8,722, Growth - $37,445, Target - $31,670, Innovation - $36,477,
International - $6,359, Precious Metals - $1,179 and Tax Exempt -$4,055. Class
-----
C shares: Renaissance - $12,809, Growth - $124,264, Target - $89,334,
- --------
Opportunity - $37,154, Innovation - $29,110, International - $22,016, Precious
Metals - $15,384 and Tax Exempt - $1,596.
As described in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "Alternative Purchase Arrangements - Initial Sales
Charge Alternative - Class A Shares," Class A shares of the Trust are sold
pursuant to an initial sales charge, which declines as the amount of the
purchase reaches certain defined levels. For the fiscal year ended June 30,
1997, the Distributor received an aggregate of $2,927,636 and retained an
aggregate of $369,546, in initial sales charges paid by Class A shareholders of
the Trust.
The Trust did not offer Class A shares in prior fiscal years. However,
during the fiscal year ended September 30, 1996, the Distributor received the
following amounts in initial sales charges paid by shareholders of PAF series
which reorganized as the following Funds of the Trust: Renaissance - $205,419,
Growth -549,330, Target - $852,363, Opportunity - $176,391, Innovation -
$685,093, International - $91,177, Precious Metals - $72,503 and Tax Exempt -
$37,180, and retained the following amounts: Renaissance - $27,477, Growth -
$83,657, Target - $126,693, Opportunity - $29,605, Innovation - $114,091,
International - $13,871, Precious Metals - $7,738 and Tax Exempt - $3,140.
During the fiscal year ended September 30, 1995, the Distributor received an
aggregate of $3,708,105 and retained an aggregate of $366,062 in initial sales
charges paid by shareholders of PAF.
DISTRIBUTION AND SERVICING PLANS FOR CLASS A, CLASS B AND CLASS C SHARES
As stated in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "Distributor and Distribution and Servicing Plans,"
Class A, Class B and Class C shares of the Trust are continuously offered
through participating brokers which are members of the NASD and which have
dealer agreements with the Distributor, or which have agreed to act as
introducing brokers.
Pursuant to separate Distribution and Servicing Plans for Class A, Class B
and Class C shares (the "Retail Plans"), the Distributor receives (i) in
connection with the distribution of Class B and Class C shares of the Trust,
certain distribution fees from the Trust, and (ii) in connection with personal
services rendered to Class A, Class B and Class C shareholders of the Trust and
the maintenance of shareholder accounts, certain servicing fees from the Trust.
Subject to the percentage limitations on these distribution and servicing fees
set forth in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus, the distribution and servicing fees may be paid with respect to
services rendered and expenses borne in the past with respect to Class A, Class
B and Class C
46
<PAGE>
shares as to which no distribution and servicing fees were paid on account of
such limitations. The Distributor pays (i) all or a portion of the distribution
fees it receives from the Trust to participating and introducing brokers, and
(ii) all or a portion of the servicing fees it receives from the Trust to
participating and introducing brokers, certain banks and other financial
intermediaries.
Each Retail Plan may be terminated with respect to any Fund or Portfolio to
which the Plan relates by vote of a majority of the Trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Plan or the
Distribution Contract ("disinterested Retail Plan Trustees"), or by vote of a
majority of the outstanding voting securities of the relevant class of that Fund
or Portfolio. Any change in any Retail Plan that would materially increase the
cost to the class of shares of any Fund or Portfolio to which the Plan relates
requires approval by the affected class of shareholders of that Fund or
Portfolio. The Trustees review quarterly written reports of such costs and the
purposes for which such costs have been incurred. Each Retail Plan may be
amended by vote of the Trustees, including a majority of the disinterested
Retail Plan Trustees, cast in person at a meeting called for the purpose. As
long as the Retail Plans are in effect, selection and nomination of those
Trustees who are not interested persons of the Trust shall be committed to the
discretion of such disinterested Trustees.
The Retail Plans will continue in effect with respect to each Fund and
Portfolio, and each class of shares thereof, for successive one-year periods,
provided that each such continuance is specifically approved (i) by the vote of
a majority of the disinterested Retail Plan Trustees and (ii) by the vote of a
majority of the entire Board of Trustees cast in person at a meeting called for
the purpose of voting on such approval.
If a Retail Plan is terminated (or not renewed) with respect to one or more
Funds or Portfolios, or classes thereof, it may continue in effect with respect
to any class of any Fund or Portfolio as to which it has not been terminated (or
has been renewed).
The Trustees believe that the Retail Plans will provide benefits to the
Trust. In this regard, the Trustees believe that the Retail Plans will result
in greater sales and/or fewer redemptions of Trust shares, although it is
impossible to know for certain the level of sales and redemptions of Trust
shares that would occur in the absence of the Retail Plans or under alternative
distribution schemes. Although the expenses of the Funds and Portfolios are
essentially fixed, the Trustees believe that the effect of the Retail Plans on
sales and/or redemptions may benefit the Trust by reducing expense ratios and/or
by affording greater flexibility to Portfolio Managers. From time to time,
expenses of the Distributor incurred in connection with the sale of Class B and
Class C shares of the Trust, and in connection with the servicing of Class B and
Class C shareholders and the maintenance of shareholder accounts, may exceed the
distribution and servicing fees collected by the Distributor. The Trustees
consider such unreimbursed amounts, among other factors, in determining whether
to cause the Funds and Portfolios to continue payments of distribution and
servicing fees in the future with respect to Class B and Class C shares.
PAYMENTS PURSUANT TO CLASS A PLANS
For the fiscal year ended June 30, 1997, the Trust paid the Distributor an
aggregate of $1,147,572 pursuant to the Class A Retail Plan. Such payments were
allocated among the operational Funds as follows (shares of the Portfolios were
initially offered beginning October 1, 1998):
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ------------------------------ ---------
<S> <C>
Equity Income Fund $ 938
Value Fund 14,876
Small-Cap Value Fund 2,770
Core Equity Fund N/A
Mid-Cap Equity Fund N/A
Capital Appreciation Fund 5,510
Mid-Cap Growth Fund 12,246
Micro-Cap Growth Fund N/A
Small-Cap Growth Fund N/A
Enhanced Equity Fund N/A
Emerging Markets Fund 108
International Developed Fund 169
Balanced Fund 173
Renaissance Fund 53,527
Growth Fund 290,828
Target Fund 288,012
Opportunity Fund 320,127
Innovation Fund 99,910
International Fund 34,195
Precious Metals Fund 14,218
Tax Exempt Fund 9,965
</TABLE>
47
<PAGE>
During the fiscal year ended June 30, 1997, the amounts collected pursuant
to the Class A Retail Plan and the contingent deferred sales charge imposed on
Class A shares were used as follows by the Distributor: sales commissions and
other compensation to sales personnel, $1,166,294; preparing, printing and
distributing sales material and advertising (including preparing, printing and
distributing prospectuses to non-shareholders), and other expenses (including
data processing, legal and operations), $397,691. The total, if allocated among
the Funds, based on the net assets attributable to their Class A shares at June
30, 1997, would have been as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- --------
<S> <C> <C> <C>
Equity Income Fund $ 3,107 $ 1,059 $ 4,166
Value Fund 27,041 9,221 36,262
Small-Cap Value Fund 11,241 3,833 15,074
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 11,288 3,849 15,137
Mid-Cap Growth Fund 20,972 7,151 28,123
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 356 121 477
International Developed Fund 549 187 736
Balanced Fund 632 216 848
Renaissance Fund 58,097 19,810 77,907
Growth Fund 256,697 87,530 344,227
Target Fund 263,570 89,874 353,444
Opportunity Fund 367,870 125,439 493,309
Innovation Fund 94,778 32,318 127,096
International Fund 33,683 11,485 45,168
Precious Metals Fund 6,932 2,364 9,296
Tax Exempt Fund 9,480 3,833 13,313
</TABLE>
The Trust did not offer Class A shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $1,556,119 and $1,064,958, respectively, pursuant to a Distribution
and Servicing Plan applicable to the Class A shares of PAF (the "PAF
48
<PAGE>
Class A Plan"), which is similar to the Class A Plan of the Trust. Such payments
were allocated among the predecessors of the following Funds (each of which was
formerly a series of PAF which reorganized as a series of the Trust on January
17, 1997) as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Renaissance Fund $ 38,973 $ 33,249
Growth Fund 351,506 289,263
Target Fund 338,598 251,511
Opportunity Fund 308,794 255,940
Innovation Fund 88,089 28,918
International Fund 42,411 49,788
Precious Metals Fund 21,416 22,178
Tax Exempt Fund 10,288 6,485
</TABLE>
The remainder of the total payments made under the PAF Class A Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMS, an
affiliated mutual fund family, in transactions which took place on January 17,
1997.
PAYMENTS PURSUANT TO CLASS B PLANS
For the fiscal year ended June 30, 1997, the Trust paid the Distributor an
aggregate of $1,670,623 pursuant to the Class B Retail Plan. Such payments were
allocated among the operational Funds as follows (shares of the Portfolios were
initially offered beginning October 1, 1998):
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ------------------------------ ---------
<S> <C>
Equity Income Fund $ 5,019
Value Fund 101,067
Small-Cap Value Fund 17,419
Core Equity Fund N/A
Mid-Cap Equity Fund N/A
Capital Appreciation Fund 5,077
Mid-Cap Growth Fund 104,374
Micro-Cap Growth Fund N/A
Small-Cap Growth Fund N/A
Enhanced Equity Fund N/A
Emerging Markets Fund 633
International Developed Fund 2,256
Balanced Fund 2,223
Renaissance Fund 204,965
Growth Fund 351,684
Target Fund 450,009
Innovation Fund 332,295
International Fund 53,098
Precious Metals Fund 21,713
Tax Exempt Fund 18,818
</TABLE>
During the fiscal year ended June 30, 1997, the amounts collected pursuant
to the Class B Retail Plan and the contingent deferred sales charge imposed on
Class B shares were used as follows by the Distributor: sales
49
<PAGE>
commissions and other compensation to sales personnel, $499,840; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders), and other expenses
(including data processing, legal and operations), $170,439. The total, if
allocated among the Funds, based on the net assets attributable to their Class B
shares at June 30, 1997, would have been as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- --------
<S> <C> <C> <C>
Equity Income Fund $ 4,235 $ 1,444 $ 5,679
Value Fund 42,327 14,433 56,760
Small-Cap Value Fund 18,336 6,252 24,588
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 5,026 1,714 6,740
Mid-Cap Growth Fund 45,721 15,590 61,311
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 514 175 689
International Developed Fund 1,836 626 2,462
Balanced Fund 1,872 638 2,510
Renaissance Fund 62,109 21,178 83,287
Growth Fund 92,401 31,507 123,908
Target Fund 113,822 38,812 152,634
Innovation Fund 85,939 29,304 115,243
International Fund 14,406 4,912 19,318
Precious Metals Fund 7,073 2,412 9,485
Tax Exempt Fund 4,225 1,441 5,666
</TABLE>
The Trust did not offer Class B shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $1,839,931 and $87,552, respectively, pursuant to a Distribution
and Servicing Plan applicable to the Class B shares of PAF (the "PAF Class B
Plan"), which is similar to the Class B Plan of the Trust. Such payments were
allocated among the predecessors of the following Funds (each of which was
formerly a series of PAF which reorganized as a series of the Trust on January
17, 1997) as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Renaissance Fund $ 62,195 $ 2,071
Growth Fund 211,778 12,583
Target Fund 241,125 11,816
Opportunity Fund N/A N/A
Innovation Fund 166,747 9,364
International Fund 289,719 555
Precious Metals Fund 14,083 270
Tax Exempt Fund 14,673 745
</TABLE>
The remainder of the total payments made under the PAF Class B Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMS, an
affiliated mutual fund family, in transactions which took place on January 17,
1997.
50
<PAGE>
PAYMENTS PURSUANT TO CLASS C PLANS
For the fiscal year ended June 30, 1997, the Trust paid the Distributor an
aggregate of $28,944,078 pursuant to the Class C Retail Plan. Such payments
were allocated among the operational Funds as follows (shares of the Portfolios
were initially offered beginning October 1, 1998):
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ---- -----------
<S> <C>
Equity Income Fund $ 13,919
Value Fund 245,893
Small-Cap Value Fund 39,558
Core Equity Fund N/A
Mid-Cap Equity Fund N/A
Capital Appreciation Fund 28,078
Mid-Cap Growth Fund 197,365
Micro-Cap Growth Fund N/A
Small-Cap Growth Fund N/A
Enhanced Equity Fund N/A
Emerging Markets Fund 5,070
International Developed Fund 4,936
Balanced Fund 1,876
Renaissance Fund 2,024,245
Growth Fund 11,107,219
Target Fund 7,238,372
Opportunity Fund 4,950,118
Innovation Fund 1,149,018
International Fund 1,354,452
Precious Metals Fund 255,508
Tax Exempt Fund 328,451
</TABLE>
During the fiscal year ended June 30, 1997, the amounts collected pursuant
to the Class C Retail Plan and the contingent deferred sales charge imposed on
Class C shares were used as follows by the Distributor: sales commissions and
other compensation to sales personnel, $6,664,535; preparing, printing and
distributing sales material and advertising (including preparing, printing and
distributing prospectuses to non-shareholders), and other expenses (including
data processing, legal and operations), $2,272,518. The total, if allocated
among the Funds, based on the net assets attributable to their Class C shares at
June 30, 1997, would have been as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- ----------
<S> <C> <C> <C>
Equity Income Fund $ 10,972 $ 3,741 $ 14,713
Value Fund 106,994 36,484 143,478
Small-Cap Value Fund 34,094 11,626 45,720
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 21,817 7,439 29,256
Mid-Cap Growth Fund 89,419 30,491 119,910
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 3,057 1,043 4,100
International Developed Fund 4,160 1,419 5,579
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- ----------
<S> <C> <C> <C>
Balanced Fund 1,470 501 1,971
Renaissance Fund 519,433 177,120 696,553
Growth Fund 2,534,587 854,261 3,388,848
Target Fund 1,618,653 551,939 2,170,592
Opportunity Fund 1,049,063 357,717 1,406,780
Innovation Fund 271,932 92,725 364,657
International Fund 287,886 98,165 386,051
Precious Metals Fund 41,949 14,304 56,253
Tax Exempt Fund 69,048 23,544 92,592
</TABLE>
The Trust did not offer Class C shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $41,704,155 and $34,667,013, respectively, pursuant to a
Distribution and Servicing Plan applicable to the Class C shares of PAF (the
"PAF Class C Plan"), which is similar to the Class C Plan of the Trust. Such
payments were allocated among the predecessors of the following Funds (each of
which was formerly a series of PAF Fund which reorganized as a series of the
Trust on January 17, 1997) as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Renaissance Fund $ 1,965,449 $ 1,694,012
Growth Fund 13,593,775 11,397,447
Target Fund 8,684,223 6,402,149
Opportunity Fund 7,455,633 5,976,316
Innovation Fund 899,377 229,411
International Fund 1,858,512 2,422,761
Precious Metals Fund 430,849 490,116
Tax Exempt Fund 499,738 589,843
</TABLE>
The remainder of the total payments made under the PAF Class C Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMS, an
affiliated mutual fund family, in transactions which took place on January 17,
1997.
DISTRIBUTION AND ADMINISTRATIVE SERVICES PLANS FOR ADMINISTRATIVE CLASS SHARES
The Trust has adopted an Administrative Services Plan with respect to the
Administrative Class shares of each Fund. The Trust also has adopted a
Distribution Plan (together with the Administrative Services Plan, the
"Administrative Plans") with respect to the Administrative Class shares of each
Fund except the Emerging Markets, Capital Appreciation and Mid-Cap Growth Funds,
which are not subject to such Distribution Plan. The Portfolios do not
currently offer Administrative Class shares.
Under the terms of the Administrative Distribution Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each applicable Fund, in an amount up to 0.25% on an annual
basis of the average daily net assets of that class, financial intermediaries
for costs and expenses incurred in connection with the distribution and
marketing of Administrative Class shares and/or the provision of certain
shareholder services to its customers that invest in Administrative Class shares
of the Funds. Such services may include, but are not limited to, the following:
providing facilities to answer questions from prospective investors about a
Fund; receiving and answering correspondence, including requests for
prospectuses and statements of additional information; preparing, printing and
delivering prospectuses and shareholder reports to prospective shareholders;
complying with federal and state securities laws pertaining to the sale of
Administrative Class shares; and assisting investors in completing application
forms and selecting dividend and other account options.
52
<PAGE>
Under the terms of the Administrative Services Plan, the Trust is permitted
to reimburse, out of the assets attributable to the Administrative Class shares
of each Fund, in an amount up to 0.25% on an annual basis of the average daily
net assets of that class, financial intermediaries that provide certain
administrative services for Administrative Class shareholders. Such services
may include, but are not limited to, the following: receiving, aggregating and
processing shareholder orders; furnishing shareholder sub-accounting; providing
and maintaining elective shareholder services such as check writing and wire
transfer services; providing and maintaining pre-authorized investment plans;
communicating periodically with shareholders; acting as the sole shareholder of
record and nominee for shareholders; maintaining accounting records for
shareholders; answering questions and handling correspondence from shareholders
about their accounts; and performing similar account administrative services.
The same entity may be the recipient of fees under both the Administrative
Distribution Plan and the Administrative Services Plan, but may not receive fees
under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to increase
materially the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (ii) those Trustees ("disinterested Administrative Plan Trustees")
who are not "interested persons" of the Trust (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to it, cast in person at a meeting called for the
purpose of voting on the Plan and any related amendments.
Each Administrative Plan provides that it may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Administrative Plan Trustees. The Administrative Class
Distribution Plan further provides that it may not take effect unless approved
by the vote of a majority of the outstanding voting securities of the
Administrative Class.
Each Administrative Plan provides that it shall continue in effect so long
as such continuance is specifically approved at least annually by the Trustees
and the disinterested Administrative Plan Trustees. Each Administrative Plan
provides that any person authorized to direct the disposition of monies paid or
payable by a class pursuant to the Plan or any related agreement shall provide
to the Trustees, and the Board shall review at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made.
Each Administrative Plan provides that expenses payable under the Plan may
be carried forward for reimbursement for up to twelve months beyond the date in
which the expense is incurred, subject to the limit that not more than 0.25% of
the average daily net assets of Administrative Class shares may be used in any
month to pay expenses under the Plan. Each Administrative Plan requires that
Administrative Class shares incur no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
PAYMENTS PURSUANT TO ADMINISTRATIVE DISTRIBUTION PLAN
For the fiscal year ended June 30, 1997, the Trust made no payments
pursuant to the Administrative Distribution Plan. The Administrative
Distribution Plan was not in effect in prior fiscal years.
53
<PAGE>
PAYMENTS PURSUANT TO ADMINISTRATIVE SERVICES PLAN
For the fiscal year ended June 30, 1997, the Trust paid qualified service
providers an aggregate of $132,422 pursuant to the Administrative Services Plan.
Such payments were allocated among the operational Funds as follows:
<TABLE>
<CAPTION>
Year Ended
Fund 06/30/97
- ---- ----------
<S> <C>
Equity Income Fund $16,938
Value Fund 0
Small-Cap Value Fund 12,276
Core Equity Fund 79,366
Mid-Cap Equity Fund 0
Capital Appreciation Fund 3,297
Mid-Cap Growth Fund 4,723
Micro-Cap Growth Fund 1,898
Small-Cap Growth Fund 137
Enhanced Equity Fund 0
Emerging Markets Fund 582
International Developed Fund 13,205
Balanced Fund 0
Renaissance Fund 0
Growth Fund 0
Target Fund 0
Opportunity Fund 0
Innovation Fund 0
International Fund 0
Precious Metals Fund 0
Tax Exempt Fund 0
</TABLE>
The Trust believes that all of these amounts constituted "service fees"
under applicable NASD rules. The Administrative Services Plan was not in effect
in prior fiscal years.
PLAN FOR CLASS D SHARES
As described above under "Management of the Trust - Fund Administrator,"
the Trust's Administration Agreement includes a plan (the "Class D Plan")
adopted in conformity with Rule 12b-1 under the 1940 Act which provides for the
payment of up to .25% of the Class D administrative fees as reimbursement for
expenses in respect of activities that may be deemed to be primarily intended to
result in the sale of Class D shares.
Specifically, the Administration Agreement provides that the Administrator
shall provide in respect of Class D shares (either directly or by procuring
through other entities, including various financial services firms such as
broker-dealers and registered investment advisors ("Service Organizations"))
some or all of the following services and facilities in connection with direct
purchases by shareholders or in connection with products, programs or accounts
offered by such Service Organizations ("Special Class D Services"): (i)
facilities for placing orders directly for the purchase of a Fund's Class D
shares and tendering a Fund's Class D shares for redemption; (ii) advertising
with respect to a Fund's Class D shares; (iii) providing information about the
Funds; (iv) providing facilities to answer questions from prospective investors
about the Funds; (v) receiving and answering correspondence, including requests
for prospectuses and statements of additional information; (vi) preparing,
printing and delivering prospectuses and shareholder reports to prospective
shareholders; (vii) assisting investors in applying to purchase Class D shares
and selecting dividend and other account options; and (viii) shareholder
services provided by a Service Organization that may include, but are not
limited to, the following functions:
54
<PAGE>
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; issuing
confirmations for transactions by shareholders; performing similar account
administrative services; providing such shareholder communications and
recordkeeping services as may be required for any program for which the Service
Organization is a sponsor that relies on Rule 3a-4 under the 1940 Act; and
providing such other similar services as may reasonably be requested to the
extent the Service Organization is permitted to do so under applicable statutes,
rules, or regulations.
The Administrator has entered into an agreement with the Distributor under
which the Distributor is compensated for providing or procuring certain of the
Special Class D Services at the rate of 0.25% per annum of all assets
attributable to Class D shares sold through the Distributor.
The Trust and the Administrator understand that some or all of the Special
Class D Services provided pursuant to the Administration Agreement may be deemed
to represent services primarily intended to result in the sale of Class D
shares. The Administration Agreement includes the Class D Plan to account for
this possibility. The Administration Agreement provides that any portion of the
fees paid thereunder in respect of Class D shares representing reimbursement for
the Administrator's and the Distributor's expenditures and internally allocated
expenses in respect of Class D Services of any Fund shall not exceed the rate of
0.25% per annum of the average daily net assets of such Fund attributable to
Class D shares.
In accordance with Rule 12b-1 under the 1940 Act, the Class D Plan may not
be amended to increase materially the costs which Class D shareholders may bear
under the Plan without the approval of a majority of the outstanding Class D
shares, and by vote of a majority of both (i) the Trustees of the Trust and (ii)
those Trustees ("disinterested Class D 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. The Class D Plan may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Class D Plan Trustees. In addition, the Class D Plan may not
take effect unless it is approved by the vote of a majority of the outstanding
Class D shares and it shall continue in effect only so long as such continuance
is specifically approved at least annually by the Trustees and the disinterested
Class D Plan Trustees.
With respect to the Class D Plan, the Administration Agreement requires the
Administrator to present reports as to out-of-pocket expenditures and internal
expense allocations of the Administrator and the Distributor at least quarterly
and in a manner that permits the disinterested Class D Plan Trustees to
determine that portion of the Class D administrative fees paid thereunder which
represents reimbursements in respect of Special Class D Services.
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 the Class D Plan will qualify as "service
fees" and therefore will not be limited by NASD rules.
PURCHASES, EXCHANGES AND REDEMPTIONS
Purchases, exchanges and redemptions of the Trust's shares are discussed in
the Class A, B and C Prospectus, the Class D Prospectus and the Retail Portfolio
Prospectus under the headings "How to Buy Shares," "Exchange Privilege," and
"How to Redeem," and in the Institutional Prospectus under the headings
"Purchase of Shares," "Redemption of Shares," and "Net Asset Value."
55
<PAGE>
Certain clients of the Adviser or a Portfolio Manager whose assets would be
eligible for purchase by one or more of the Funds may purchase shares of the
Trust with such assets. Assets so purchased by a Fund will be valued in
accordance with procedures adopted by the Board of Trustees.
One or more classes of shares of the Funds and Portfolios may not be
qualified or registered for sale in all States. Prospective investors should
inquire as to whether shares of a particular Fund or Portfolio, or class of
shares thereof, are available for offer and sale in their state of domicile or
residence. Shares of a Fund or Portfolio may not be offered or sold in any
State unless registered or qualified in that jurisdiction, unless an exemption
from registration or qualification is available.
As described in the Class A, B, and C Prospectus, the Class D Prospectus
and the Retail Portfolio Prospectus under the caption "Exchange Privilege," and
in the Institutional Prospectus under the caption "Redemption of Shares," a
shareholder may exchange shares of any Fund or Portfolio for shares of the same
class of any other Fund or Portfolio of the Trust that is available for
investment, or any series of PIMS, a mutual fund family advised by Pacific
Investment Management, on the basis of their respective net asset values. The
original purchase date(s) of shares exchanged for purposes of calculating any
contingent deferred sales charge will carry over to the investment in the new
Fund or Portfolio. For example, if a shareholder invests in Class C shares of
one Fund and 6 months later (when the contingent deferred sales charge upon
redemption would normally be 1%) exchanges his shares for Class C shares of
another Fund, no sales charge would be imposed upon the exchange, but the
investment in the other Fund would be subject to the 1% contingent deferred
sales charge until one year after the date of the shareholder's investment in
the first Fund as described in the Class A, B and C Prospectus and the Retail
Portfolio Prospectus under "Alternative Purchase Arrangements." With respect to
Class B or Class C shares, or Class A shares subject to a contingent deferred
sales charge, if less than all of an investment is exchanged, any portion of the
investment attributable to capital appreciation and/or reinvested dividends or
capital gains distributions will be exchanged first, and thereafter any portions
exchanged will be from the earliest investment made in the Fund or Portfolio
from which the exchange was made.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of regular
trading on the New York Stock Exchange on any business day will be executed at
the respective net asset values determined at the close of the next business
day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12 month
period or in any calendar year. For instance, with respect to exchanges
involving Class A, Class B, Class C or Class D shares, the Trust currently
limits the number of "round trip" exchanges an investor may make. An investor
makes a "round trip" exchange when the investor purchases shares of a particular
Fund or Portfolio, subsequently exchanges those shares for shares of a different
Fund or Portfolio and then exchanges back into the originally purchased Fund or
Portfolio. The Trust has the right to refuse any exchange for any investor who
completes (by making the exchange back into the shares of the originally
purchased Fund or Portfolio) more than six round trip exchanges in any twelve-
month period. Although the Trust has no current intention of terminating or
modifying the exchange privilege other than as set forth in the preceding
sentence, it reserves the right to do so at any time.
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of a Fund or
Portfolio not reasonably practicable.
56
<PAGE>
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Funds and Portfolios, limited in amount with
respect to each shareholder during any 90-day period to the lesser of (i)
$250,000, or (ii) 1% of the net asset value of the Trust at the beginning of
such period. Although the Trust will normally redeem all shares for cash, it
may, in unusual circumstances, redeem amounts in excess of the lesser of (i) or
(ii) above by payment in kind of securities held by the particular Fund or
Portfolio.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, the minimums of which are currently set at $250 for Class A,
Class B and Class C shares, $2,000 for Class D shares, and $100,000 with respect
to Institutional Class and Administrative Class shares. The Prospectuses may
set forth higher minimum account balances for one or more classes from time to
time depending upon the Trust's current policy. An investor will be notified
that the value of the account is less than the minimum and allowed at least 30
days to bring the value of the account up to at least the specified amount
before the redemption is processed. The Trust's Agreement and Declaration of
Trust, as amended and restated (the "Declaration of Trust"), also authorizes the
Trust to redeem shares under certain other circumstances as may be specified by
the Board of Trustees. The Funds and Portfolios may also charge periodic
account fees for accounts that fall below minimum balances as described in the
Prospectuses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser and Portfolio Managers are made with a view to achieving
their respective investment objectives. Investment decisions are the product of
many factors in addition to basic suitability for the particular client involved
(including the Trust). Thus, a particular security may be bought or sold for
certain clients even though it could have been bought or sold for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the security. In some instances,
one client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in the Adviser's or the Portfolio Manager's opinion is equitable to each
and in accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price paid
by the Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction.
Transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
The Adviser and/or each Portfolio Manager places orders for the purchase
and sale of portfolio securities, options and futures contracts and buys and
sells such securities, options and futures for the Trust through a substantial
number of brokers and dealers. In so doing, the Adviser or Portfolio Manager
uses its best efforts to obtain for the Trust the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions as described below. In seeking the most favorable price
and execution, the Adviser or
57
<PAGE>
Portfolio Manager, having in mind the Trust's best interests, considers all
factors it deems relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions. Because the Portfolios invest exclusively in Institutional Class
shares of Underlying PIMCO Funds, they generally do not pay brokerage
commissions and related costs, but do indirectly bear a proportionate share of
these costs incurred by the Underlying PIMCO Funds in which they invest.
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
following amounts of brokerage commissions were paid by the Funds:
<TABLE>
<CAPTION>
Year Period Year
Ended Ended Ended
Fund 6/30/97 6/30/96 10/31/95
- ---- ----------- ----------- ---------
<S> <C> <C> <C>
Equity Income Fund $ 161,012 $ 221,694 $ 170,712
Value Fund 203,403 65,062 39,801
Small-Cap Value Fund 146,551 74,170 74,739
Capital Appreciation Fund 889,931 467,569 411,595
Mid-Cap Growth Fund 634,436 382,764 332,045
Micro-Cap Growth Fund 315,009 124,194 202,678
Small-Cap Growth Fund 113,103 76,333 111,918
Enhanced Equity Fund 196,460 114,363 47,226
Emerging Markets Fund 591,312 622,328 1,061,823
International Developed Fund 498,041 306,741 301,313
Balanced Fund 197,598 95,606 32,346
Core Equity Fund 114,173 57,047 40,203
Mid-Cap Equity Fund 31,940 16,961 20,084
Renaissance Fund* 717,040 N/A N/A
Growth Fund* 2,632,126 N/A N/A
Target Fund* 2,584,198 N/A N/A
Opportunity Fund* 1,187,818 N/A N/A
Innovation Fund* 224,529 N/A N/A
International Fund* 748,412 N/A N/A
Precious Metals Fund* 81,251 N/A N/A
Tax Exempt Fund* 0 N/A N/A
----------- ----------- ----------
TOTAL $12,268,343 $2,624,832 $2,846,483
__________________
* For the period 1/18/97 through 6/30/97.
</TABLE>
58
<PAGE>
For the fiscal period ended January 17, 1997 and the fiscal years ended
September 30, 1996 and 1995, the following amounts of brokerage commissions were
paid by the predecessors of the Funds listed below (each of which was a series
of PAF during such periods and reorganized as a Fund of the Trust on January 17,
1997):
<TABLE>
<CAPTION>
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 9/30/96 9/30/95
- ---- ---------- ----------- -----------
<S> <C> <C> <C>
Renaissance Fund $ 363,501 $ 993,617 $ 605,124
Growth Fund 1,064,573 2,985,777 3,500,524
Target Fund 1,375,601 3,080,238 2,289,076
Opportunity Fund 505,221 1,757,263 1,728,282
Innovation Fund 105,556 228,473 84,173
International Fund 393,808 1,530,476 2,727,326
Precious Metals Fund 53,096 79,838 48,592
Tax Exempt Fund 0 0 0
---------- ----------- -----------
TOTAL $3,861,356 $10,655,682 $10,983,097
</TABLE>
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser and Portfolio Managers receive research services from many broker-
dealers with which the Adviser and Portfolio Managers place the Trust's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such matters as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser and Portfolio Managers in advising various
of their clients (including the Trust), although not all of these services are
necessarily useful and of value in managing the Trust. The advisory fees paid
by the Trust are not reduced because the Adviser and Portfolio Managers receive
such services.
In reliance on the "safe harbor" provided by Section 28(e) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), the Adviser and
Portfolio Managers may cause the Trust to pay broker-dealers which provide them
with "brokerage and research services" (as defined in the 1934 Act) an amount of
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, the Adviser or Portfolio Managers may also consider sales of
shares of the Trust as a factor in the selection of broker-dealers to execute
portfolio transactions for the Trust.
The Adviser or a Portfolio Manager may place orders for the purchase and
sale of exchange-listed portfolio securities with a broker-dealer that is an
affiliate of the Adviser or Portfolio Manager where, in the judgment of the
Adviser or Portfolio Manager, such firm will be able to obtain a price and
execution at least as favorable as other qualified broker-dealers.
Pursuant to rules of the SEC, a broker-dealer that is an affiliate of the
Adviser or a Portfolio Manager may receive and retain compensation for effecting
portfolio transactions for a Fund on a national securities exchange of which the
broker-dealer is a member if the transaction is "executed" on the floor of the
exchange by another broker which is not an "associated person" of the affiliated
broker-dealer, and if there is in effect a
59
<PAGE>
written contract between the Adviser or Portfolio Manager and the Trust
expressly permitting the affiliated broker-dealer to receive and retain such
compensation.
SEC rules further require that commissions paid to such an affiliated
broker-dealer, the Adviser, or Portfolio Manager by a Fund on exchange
transactions not exceed "usual and customary brokerage commissions." The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time."
PORTFOLIO TURNOVER
Except as described in the Prospectuses, the Adviser and Portfolio Managers
manage the portfolios of the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on their ability to engage in short-
term trading by provisions of the federal tax laws, see "Taxation." The use of
futures contracts and other derivative instruments with relatively short
maturities may tend to exaggerate the portfolio turnover rate for some of the
Funds. Trading in fixed income securities does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. The use
of futures contracts may involve the payment of commissions to futures
commission merchants. The higher the rate of portfolio turnover of a Fund, the
higher these transaction costs borne by the Fund generally will be. PIMCO
Advisors does not expect to reallocate the Portfolios' assets among the
Underlying PIMCO Funds on a frequent basis and the portfolio turnover for the
Portfolios is expected to be modest (i.e., less than 25%) in comparison to most
mutual funds.
The portfolio turnover rate of a Fund or Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
particular fiscal year by (b) the monthly average of the value of the portfolio
securities owned by the Fund or Portfolio during the particular fiscal year. In
calculating the rate of portfolio turnover, there is excluded from both (a) and
(b) all securities, including options, whose maturities or expiration dates at
the time of acquisition were one year or less. Proceeds from short sales and
assets used to cover short positions undertaken are included in the amounts of
securities sold and purchased, respectively, during the year.
NET ASSET VALUE
As indicated in the Class A, B and C Prospectus, the Class D Prospectus and
the Retail Portfolio Prospectus under the heading "How Net Asset Value is
Determined", and in the Institutional Prospectus under the heading "Net Asset
Value," the Trust's net asset value per share for the purpose of pricing
purchase and redemption orders is determined on each day the New York Stock
Exchange is open as of the close of regular trading (normally, 4:00 p.m. Eastern
time) on the Exchange. The Trust expects that the holidays upon which the
Exchange will be closed are as follows: New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
The values of portfolio securities that are traded on stock exchanges
outside the United States are based upon the price on the exchange as of the
close of business of the exchange immediately preceding the time of valuation.
Securities traded in over-the-counter markets in European and Pacific Basin
countries are normally completed well before 4:00 p.m. (Eastern time). In
addition, European and Pacific Basin securities trading may not take place on
all business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which net asset value of these Funds is not
calculated. The calculation of the net asset value of certain Funds that invest
in foreign securities may not take place contemporaneously with the
determination of the prices of portfolio securities used in such calculation. If
events materially affecting the values of portfolio securities occur between the
time their prices are determined and 4:00 p.m. (Eastern time), these securities
will be valued at fair value as determined by the Adviser or a Portfolio Manager
and approved in good faith by the Board of Trustees.
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TAXATION
The following discussion is general in nature and should not be regarded as
an exhaustive presentation of all possible tax ramifications. All shareholders
should consult a qualified tax adviser regarding their investment in a Fund or
Portfolio.
Each Fund and Portfolio 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 and Portfolio 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 or Portfolio'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 or Portfolio'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 or Portfolio'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 or Portfolio controls and which are engaged
in the same, similar or related trades or businesses. In order to qualify for
the special tax treatment accorded regulated investment companies, each Fund and
Portfolio 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 or Portfolio 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 assets of the Fund or Portfolio to be
treated as held for less than three months. By qualifying as a regulated
investment company, each Fund and Portfolio 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.
In years when a Fund or Portfolio distributes amounts in excess of its
earnings and profits, such distributions may be treated in part as a return of
capital. A return of capital is not taxable to a shareholder and has the effect
of reducing the shareholder's basis in the shares.
The proper tax treatment of income or loss realized by the Precious Metals
Fund from the retirement or sale of a Metal-Indexed Note is unclear. The
Precious Metals Fund will report such income or loss as capital or ordinary
income or loss in a manner consistent with any Internal Revenue Service position
on the subject following the publication of such a position. Gain or loss from
the sale or exchange of preferred stock indexed to the price of a natural
resource is expected to be capital gain or loss to the Precious Metals Fund.
DISTRIBUTIONS
As a regulated investment company, each Fund and Portfolio 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
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Fund or Portfolio as capital gain dividends, if any, that it distributes to
shareholders on a timely basis. Each Fund and Portfolio intends to distribute to
its shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by a Fund or Portfolio on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To avoid
the tax, each Fund and Portfolio must distribute during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses (and adjusted for
certain ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by a Fund or
Portfolio in October, November or December of that year to shareholders of
record on a date in such a month and paid by the Fund or Portfolio 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 and Portfolio intends to make its distributions in accordance
with the calendar year distribution requirement.
The tax status of each Fund and Portfolio and the distributions which it
may make are summarized in the Class A, B and C Prospectus, the Class D
Prospectus and the Retail Portfolio Prospectus under the captions
"Distributions" and "Taxes", and in the Institutional Prospectus under the
caption "Dividends, Distributions and Taxes." All dividends and distributions
of a Fund or Portfolio, whether received in shares or cash, are taxable and must
be reported on each shareholder's federal income tax return. Distributions
received by tax-exempt shareholders will not be subject to federal income tax to
the extent permitted under the applicable tax exemption. A dividend or capital
gains distribution received after the purchase of shares of a Fund or Portfolio
reduces the net asset value of the shares by the amount of the dividend or
distribution and will be subject to federal income taxes.
A portion of the dividends paid by Funds that invest in stock of U.S.
corporations may qualify for the deduction for dividends received by
corporations (subject generally to a 46-day holding period requirement).
Dividends paid by the other Funds generally are not expected to qualify for the
deduction for dividends received by corporations.
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains (generally subject to a 20%
tax rate), regardless of how long the shareholder has held a Fund's or
Portfolio's shares and are not eligible for the dividends received deduction.
Some 1998 distributions of gains received in 1997 may be subject to a 28% tax
rate in the hands of shareholders. Any distributions that are not from a Fund's
investment company taxable income or net capital gains may be characterized as a
return of capital to shareholders or, in some cases, as capital gain. The tax
treatment of dividends and distributions will be the same whether a shareholder
reinvests them in additional shares or elects to receive them in cash.
SALES OF SHARES
Upon the disposition of shares of a Fund or Portfolio (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. Long-term capital gains
will generally be taxed at a rate of 20% (although some 1998 distributions of
capital gains received in 1997 may be subject to a 28% rate in the hands of
shareholders). 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.
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BACKUP WITHHOLDING
A Fund or Portfolio may be required to withhold 31% of all taxable
distributions payable to shareholders who fail to provide the Fund or Portfolio
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal tax liability.
OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP AGREEMENTS
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Funds may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by a Fund at the end of each taxable year
(and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as ordinary or 60/40 gain or loss.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund, may result in
"straddles" for U.S. federal income tax purposes. In some cases, the straddle
rules also could apply in connection with swap agreements. The straddle rules
may affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because there is relatively little guidance regarding the straddle
rules, the tax consequences of transactions in options, futures, forward
contracts, and swap agreements to a Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging trans actions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Emerging Markets, Structured Emerging Markets, Tax-Efficient Structured Emerging
Markets, Tax-Efficient Equity, International Developed and Balanced Funds intend
to account for such transactions in a manner they deem to be appropriate, the
Internal Revenue Service might not accept such treatment. If it did not, the
status of a Fund as a regulated investment company might be affected. The Trust
intends to monitor developments in this area. Certain requirements that must be
met under the Code in order for a Fund to qualify as a regulated investment
company may limit the extent to which a Fund will be able to engage in swap
agreements.
The 30% limit on gains from the disposition of certain options, futures,
forward contracts, and swap agreements held less than three months and the
qualifying income and diversification requirements applicable to a Fund's assets
may limit the extent to which a Fund will be able to engage in transactions in
options, futures contracts, forward contracts, and swap agreements. The 30%
limit will apply only until the start of a Fund's first tax year beginning after
August 5, 1997.
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PASSIVE FOREIGN INVESTMENT COMPANIES
Certain Funds may invest in the stock of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to stockholders.
In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
stock. A Fund itself will be subject to a U.S. federal income tax (including
interest) on the portion, if any, of an excess distribution that is so allocated
to prior taxable years. Certain distributions from a PFIC as well as gain from
the sale of PFIC stock are treated as excess distributions. Excess distributions
are characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently is available in some
circumstances, a Fund generally would be required to include its share of the
PFIC's income and net capital gain annually, regardless of whether distributions
are received from the PFIC in a given year. If this election were made, the
special rules discussed above relating to the taxation of excess distributions
would not apply. In addition, another election may be available that would
involve marking to market a Fund's PFIC shares at the end of each taxable year
(and on certain other dates prescribed in the Code), with the result that
unrealized gains are treated as though they were realized. If this election
were made, tax at the Fund level under the PFIC rules would generally be
eliminated, but the Fund could, in limited circumstances, incur nondeductible
interest charges. A Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains and the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, and may subject a Fund itself
to tax on certain income from PFIC shares, the amount that must be distributed
to shareholders and will be taxed to shareholders as ordinary income or long-
term capital gain may be increased or decreased substantially as compared to a
fund that did not invest in PFIC shares.
FOREIGN CURRENCY TRANSACTIONS
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of certain
other instruments, gains or losses attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
FOREIGN TAXATION
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser and each Portfolio Manager intends to manage
the Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
such Fund will be eligible to elect to "pass-through" to the Fund's shareholders
the amount of eligible foreign income and similar taxes paid by the Fund. If
this election is made, a shareholder generally subject to tax will be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign
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taxes paid by the Fund, and may be entitled either to deduct (as an itemized
deduction) his or her pro rata share of foreign taxes in computing his taxable
income or to use it as a foreign tax credit against his or her U.S. federal
income tax liability, subject to certain limitations. In particular,
shareholders must hold their shares (without protection from risk of loss) on
the ex-dividend date and for at least 15 more days during the 30-day period
surrounding the ex-dividend date to be eligible to claim a foreign tax credit
with respect to a gain dividend. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election
is made, the source of the electing Fund's income will flow through to
shareholders of the Trust. With respect to such Funds, gains from the sale of
securities will be treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency-denominated
debt securities, receiv ables and payables will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income, and to certain other types of
income. Shareholders may be unable to claim a credit for the full amount of
their proportionate share of the foreign taxes paid by the Fund. The foreign tax
credit can be used to offset only 90% of the revised alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
ORIGINAL ISSUE DISCOUNT
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for U.S.
federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. A
Fund may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
OTHER TAXATION
Pursuant to Treasury Department regulations, certain expenses of
nonpublicly offered regulated investment companies, including advisory fees, are
not deductible by those regulated investment companies for purposes of
calculating the income of certain shareholders, generally including individuals
and entities that compute their taxable income in the same manner as an
individual (thus, for example, a qualified pension plan is not subject to this
rule). The shareholder's pro rata portion of such expenses will be treated as
income to the
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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.
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund and Portfolio 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 each Fund and Portfolio qualifies for the
federal income tax treatment described above, it is believed that neither the
Trust nor any Fund or Portfolio 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 or Portfolio.
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 or Portfolio, each
shareholder is entitled to receive his pro rata share of the net assets of that
Fund or Portfolio.
PERFORMANCE INFORMATION
Performance information is computed separately for each class of shares of
a Fund or Portfolio. Each Fund and Portfolio 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. The Renaissance and Balanced
Funds and the 30/70 Portfolio may from time to time include the yield and total
return of each class of their shares in advertisements or information furnished
to present or prospective shareholders. Each Fund and Portfolio may from time
to time include in advertisements the total return of each class (and yield of
each class in the case of the Renaissance and Balanced Funds and the 30/70
Portfolio) 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 or Portfolio's net asset values and public
offering prices will separately present each class of shares. The Funds and
Portfolios 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.
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CALCULATION OF YIELD
Quotations of yield for certain of the Funds and Portfolios will be based
on all investment income per share (as defined by the SEC) during a particular
30-day (or one month) period (including dividends and interest), less expenses
accrued during the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2[( a-b + 1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
For the one month period ended June 30, 1997, the yields of the Balanced
Fund and Renaissance Fund were as follows (Class D shares were not offered
during the period listed):
<TABLE>
<CAPTION>
FUND INSTITUTIONAL CLASS ADMINISTRATIVE CLASS CLASS A CLASS B CLASS C
- ------------------ -------------------- -------------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balanced Fund 3.23% N/A 2.68% 2.10% 2.09%
Renaissance Fund N/A N/A 0.78% 0.10% 0.09%
</TABLE>
The yield of a Fund or Portfolio will vary from time to time depending upon
market conditions, the composition of its portfolio and operating expenses of
the Trust allocated to the Fund or Portfolio or its classes of shares. These
factors, possible differences in the methods used in calculating yield should be
considered when comparing a Fund's or Portfolio's yield to yields published for
other investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's or Portfolio's various
classes of shares. These yields do not take into account any applicable
contingent deferred sales charges.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time
in the future, yields and total return may be higher or lower than past yields
and there can be no assurance that any historical results will continue.
CALCULATION OF TOTAL RETURN
Quotations of average annual total return for a Fund or Portfolio, or a
class or shares thereof, will be expressed in terms of the average annual
compounded rate of return of a hypothetical investment in the Fund, Portfolio or
class over periods of one, five, and ten years (up to the life of the Fund or
Portfolio), 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 proportionate
share of Fund, Portfolio or class expenses on an annual basis, and assume that
(i) the maximum sales load (or other charges deducted from payments) is deducted
from the initial $1,000 payment and that the maximum contingent deferred sales
charge, if any, is deducted at the times, in the amounts, and under the terms
disclosed in the Prospectuses and (ii) all dividends and distributions are
reinvested when paid. Quotations of total return may also be shown for other
periods. The Funds and Portfolios may also, with respect to certain periods of
less than one year, provide total return information for that period that is
unannualized.
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<PAGE>
Under applicable regulations, any such information is required to be accompanied
by standardized total return information.
The table below sets forth the average annual total return of certain
classes of shares of the following Funds for periods ended December 31, 1997.
For periods prior to the "Inception Date" of a particular class of a Fund's
shares, total return presentations for the class are based on the historical
performance of Institutional Class shares of the Fund (the oldest class)
adjusted, as necessary, to reflect any current sales charges (including any
contingent deferred sales charges) associated with the newer class and any
different operating expenses associated with the newer class, such as 12b-1
distribution and servicing fees (which are not paid by the Institutional Class)
and administrative fee charges.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
SINCE
INCEPTION INCEPTION INCEPTION
FUND CLASS** 1 YEAR 5 YEARS OF FUND DATE OF DATE OF
(ANNUALIZED) FUND CLASS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Income Institutional 31.38% 17.85% 17.73% 03/08/91 03/08/91
Administrative 31.03% 17.57% 17.46% 11/30/94
Class A 23.68% 16.07% 16.32% 1/17/97
Class B 24.93% 16.30% 16.42% 1/17/97
Class C 28.90% 16.52% 16.42% 1/17/97
Class D 30.87% 17.39% 17.29% 4/8/98
- ---------------------------------------------------------------------------------------
Value Institutional 26.21% 18.69% 17.86% 12/30/91 12/30/91
Administrative 26.07% 18.47% 17.63% 1/17/97
Class A 18.79% 16.89% 16.31% 1/17/97
Class B 19.81% 17.15% 16.55% 1/17/97
Class C 23.74% 17.34% 16.54% 1/17/97
Class D 25.71% 18.23% 17.41% 4/8/98
- ---------------------------------------------------------------------------------------
Small-Cap Institutional 35.02% 18.86% 19.14% 10/1/91 10/1/91
Value Administrative 34.70% 18.59% 18.87% 11/1/95
Class A 27.07% 17.05% 17.61% 1/17/97
Class B 28.47% 17.30% 17.81% 1/17/97
Class C 32.50% 17.52% 17.81% 1/17/97
- ---------------------------------------------------------------------------------------
Capital Institutional 34.23% 21.34% 20.04% 3/8/91 3/8/91
Appreciation Administrative 34.01% 21.12% 19.81% 1/17/97
Class A 26.37% 19.51% 18.60% 1/17/97
Class B 27.78% 19.79% 18.71% 1/17/97
Class C 31.75% 19.98% 18.71% 1/17/97
Class D 33.70% 20.86% 19.58% 4/8/98
- ---------------------------------------------------------------------------------------
Mid-Cap Institutional 34.17% 20.76% 19.92% 8/26/91 8/26/91
Growth Administrative 33.86% 20.49% 19.65% 11/30/94
Class A 26.27% 18.93% 18.40% 1/17/97
Class B 27.69% 19.21% 18.59% 1/17/97
Class C 31.69% 19.41% 18.59% 1/17/97
Class D 33.65% 20.29% 19.47% 4/8/98
- ---------------------------------------------------------------------------------------
Micro-Cap Institutional 36.69% N/A 25.01% 6/25/93 6/25/93
Growth Administrative 36.37% N/A 24.74% 4/1/96
- ---------------------------------------------------------------------------------------
Small-Cap Institutional 26.72% 17.68% 22.89% 1/7/91 1/7/91
Growth Administrative 27.05% 17.61% 22.77% 9/27/95
- ---------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
SINCE
INCEPTION INCEPTION INCEPTION
FUND CLASS** 1 YEAR 5 YEARS OF FUND DATE OF DATE OF
(ANNUALIZED) FUND CLASS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Enhanced Institutional 30.85% 17.07% 16.11% 2/11/91 2/11/91
Equity Administrative 30.56% 16.84% 15.88% 1/17/97
- ---------------------------------------------------------------------------------------
Emerging Institutional -2.01% N/A 5.82% 6/1/93 6/1/93
Markets Administrative -2.26% N/A 5.54% 11/1/94
Class A -7.73% N/A 4.12% 1/17/97
Class B -7.91% N/A 4.26% 1/17/97
Class C -4.03% N/A 4.64% 1/17/97
- ---------------------------------------------------------------------------------------
International Institutional 1.92% N/A 8.20% 6/8/93 6/8/93
Developed Administrative 1.63% N/A 7.94% 11/30/94
Class A -4.10% N/A 6.44% 1/17/97
Class B -3.92% N/A 6.65% 1/17/97
Class C -0.12% N/A 6.99% 1/17/97
- ---------------------------------------------------------------------------------------
Balanced Institutional 21.93% 13.03% 13.64% 6/25/92 6/25/92
Administrative 21.67% 12.78% 13.39% 6/25/92
Class A 14.64% 11.29% 12.02% 1/17/97
Class B 15.53% 11.49% 12.25% 1/17/97
Class C 19.62% 11.76% 12.37% 1/17/97
- ---------------------------------------------------------------------------------------
Core Equity Institutional 25.32% N/A 23.61% 12/28/94 12/28/94
Administrative 24.93% N/A 23.33% 5/31/95
- ---------------------------------------------------------------------------------------
Mid-Cap Equity Institutional 16.22% N/A 21.46% 12/28/94 12/28/94
Administrative 16.01% N/A 21.23% 1/17/97
- ---------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of shares
assume payment of the current maximum sales charge (if any) applicable to that
class at the time of purchase and assume that the maximum CDSC (if any) for
Class A, Class B and Class C shares was deducted at the times, in the amounts,
and under the terms discussed in the Class A, B and C Prospectus.
** For all Funds listed above, Class A, Class B, Class C, Class D and
Administrative Class total return presentations for periods prior to the
Inception Date of a particular class reflect the prior performance of
Institutional Class shares of the Fund (the oldest class) adjusted to reflect
the actual sales charges (none in the case of Class D and the Administrative
Class) of the newer class. The adjusted performance also reflects the higher
Fund operating expenses applicable to Class A, Class B, Class C, Class D and
Administrative Class shares. These include (i) 12b-1 distribution and servicing
fees, which are not paid by the Institutional Class and are paid by Class B and
Class C (at a maximum rate of 1.00% per annum) and Class A and the
Administrative Class (at a maximum rate of .25% per annum), and may be paid by
Class D (at a maximum rate of .25% per annum) and (ii) administrative fee
charges associated with Class A, Class B and Class C shares (a maximum
differential of .15% per annum) and Class D shares (a maximum differential of
0.40% per annum).
The table below sets forth the average annual total return of certain
classes of shares of the following Funds (each of which was a series of PAF
prior to its reorganization as a Fund of the Trust on January 17, 1997) for
periods ended December 31, 1997. Accordingly,"Inception Date of Fund" refers to
the inception date of the PAF predecessor series. Since Class C shares were
offered since the inception of each PAF series, total return presentations for
periods prior to the Inception Date of the other classes (with the exception of
Class D shares of the Innovation Fund) are based on the historical performance
of Class C shares, adjusted to reflect any current sales charges (including any
contingent deferred sales charges) associated with the newer class and any
different operating expenses associated with the newer class, such as 12b-1
distribution and servicing fees and administrative fee charges. As described
below, performance presentations for periods prior to the Inception Date of
Class D shares of the Innovation Fund are based on the historical performance of
Class A shares.
69
<PAGE>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1997*
<TABLE>
<CAPTION>
SINCE INCEPTION INCEPTION INCEPTION
OF FUND DATE OF DATE OF
FUND CLASS*** 1 YEAR 5 YEARS 10 YEARS (ANNUALIZED) FUND CLASS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Renaissance** Class A 28.41% 19.30% N/A 14.04%(#) 4/18/88 2/1/91
Class B 29.85% 19.60% N/A 13.85% 5/22/95
Class C 33.90% 19.77% N/A 13.84% 4/18/88
Class D 35.93%(#) 20.68%(#) N/A 14.69%(#) 4/8/98
Institutional 36.44%(#) 21.13%(#) N/A 15.14%(#) 12/30/97
- -----------------------------------------------------------------------------------------------------------
Growth Class A 16.01% 14.20% 15.96%(#) 16.96%(#) 2/24/84 10/26/90
Class B 16.88% 14.42% 15.77% 16.60% 5/23/95
Class C 20.84% 14.64% 15.77% 16.60% 2/24/84
- -----------------------------------------------------------------------------------------------------------
Target Class A 9.97% 17.01% N/A 17.14% 12/17/92 12/17/92
Class B 11.10% 17.23% N/A 17.45% 5/22/95
Class C 14.58% 17.44% N/A 17.55% 12/17/92
- -----------------------------------------------------------------------------------------------------------
Opportunity Class A -9.32% 13.85% 19.44%(#) 17.94%(#) 2/24/84 12/17/90
Class C -5.64% 14.29% 19.25% 17.56% 2/24/84
- -----------------------------------------------------------------------------------------------------------
Innovation Class A 3.01% N/A N/A 22.50% 12/22/94 12/22/94
Class B 3.16% N/A N/A 23.22% 5/22/95
Class C 7.10% N/A N/A 23.84% 12/22/94
Class D 9.03% N/A N/A 24.80% 4/8/98
- -----------------------------------------------------------------------------------------------------------
International** Class A -3.01% 6.50% 6.79% 6.51% 8/25/86 2/1/91
Class B -2.78% 6.63% 6.60% 6.26% 5/22/95
Class C 0.93% 6.91% 6.59% 6.25% 8/25/86
- -----------------------------------------------------------------------------------------------------------
Precious Metals** Class A -50.47% -4.10% N/A -5.86%(#) 10/10/88 2/1/91
Class B -50.64% -4.11% N/A -5.99% 6/15/95
Class C -48.56% -3.73% N/A -5.99% 10/10/88
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of shares
assume payment of the current maximum sales charge (if any) applicable to that
class at the time of purchase and assume that the maximum CDSC (if any) for
Class A, B and C shares was deducted at the times, in the amounts, and under the
terms discussed in the Class A, B and C Prospectus.
** The investment objective and policies of the Renaissance Fund and
International Fund were changed effective February 1, 1992 and September 1,
1992, respectively. The investment objective and policies of the Precious
Metals Fund were changed effective November 15, 1994. Performance information
for prior periods does not necessarily represent results that would have been
obtained had the current investment objective and policies been in effect for
all periods.
*** Class A, Class B, Class D, Institutional Class and Administrative Class
total return presentations for the Funds listed for periods prior to the
Inception Date of the particular class of a Fund (with the exception of Class D
shares of the Innovation Fund) reflect the prior performance of Class C shares
of the former PAF series, adjusted to reflect the actual sales charges (or no
sales charges in the case of Class D, Institutional Class and Administrative
Class shares) of the newer class. The adjusted performance also reflects any
different operating expenses associated with the newer class. These include (i)
12b-1 distribution and servicing fees, which are paid by Class C and Class B (at
a maximum rate of 1.00% per annum) and Class A and the Administrative Class (at
a maximum rate of .25% per annum), may be paid by Class D (at a maximum rate of
.25% per annum), and are not paid by the Institutional Class and (ii)
administrative fee charges, which are lower than Class C charges for the
Institutional and Administrative Classes (a maximum differential of .15% per
annum) and higher for Class D (a maximum differential of .25% per annum).
(Administrative fee charges are the same for Class A, B and C
70
<PAGE>
shares.) Performance presentations for periods prior to the Inception Date of
Class D shares of the Innovation Fund are based on the historical performance of
Class A shares (which were also offered since the inception of the former PAF
series), adjusted in the manner described above.
Note also that, prior to January 17, 1997, Class A, Class B and Class C shares
of the former PAF Funds were subject to a variable level of expenses for such
services as legal, audit, custody and transfer agency services. As described in
the Class A, B and C Prospectus, for periods subsequent to January 17, 1997,
Class A, Class B and Class C shares of the Trust are subject to a fee structure
which essentially fixes these expenses (along with other administrative
expenses) under a single administrative fee based on the average daily net
assets of a Fund attributable to Class A, Class B and Class C shares. Under the
current fee structure, the Growth Fund, Target Fund, Opportunity Fund and
International Fund are expected to have higher total Fund operating expenses
than their predecessors had under the fee structure for PAF (prior to January
17, 1997). All other things being equal, such higher expenses have an adverse
effect on total return performance for these Funds after January 17, 1997.
(#) WHERE NOTED, THE METHOD OF ADJUSTMENT USED IN THE TABLE ABOVE FOR PERIODS
PRIOR TO THE INCEPTION DATE OF THE NOTED CLASSES OF THE NOTED FUNDS RESULTED IN
PERFORMANCE FOR THE PERIOD SHOWN WHICH IS HIGHER THAN IF THE HISTORICAL CLASS C
SHARE PERFORMANCE (I.E., THE OLDEST CLASS) WERE NOT ADJUSTED TO REFLECT THE
LOWER OPERATING EXPENSES OF THE NEWER CLASS. The following table shows the lower
performance figures that would be obtained if the performance for newer classes
with lower operating expenses were calculated by tacking to such classes actual
performance the actual performance of Class C shares (with their higher
operating expenses) for periods prior to the initial offering date of the newer
class (i.e., the total return presentations below are based, for periods prior
to the Inception Date of the noted classes, on the historical performance of
Class C shares adjusted to reflect the current sales charges (if any) associated
with the newer class, but not reflecting lower operating expenses associated
---
with the newer class, such as lower administrative fee charges and/or 12b-1
distribution and servicing fee charges).
TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1997
(with no adjustment for operating expenses of the noted
classes for periods prior to their inception dates)
<TABLE>
<CAPTION>
SINCE INCEPTION
OF FUND
FUND CLASS 1 YEAR 5 YEARS 10 YEARS (ANNUALIZED)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Renaissance Class A -- -- N/A 13.79%
Class D 34.90% 19.77% N/A 13.84%
Institutional 34.90% 19.77% N/A 13.84%
- -------------------------------------------------------------------------------
Growth Class A -- -- 15.72% 16.56%
- -------------------------------------------------------------------------------
Opportunity Class A -- -- 19.18% 17.51%
- -------------------------------------------------------------------------------
International Class A -- -- 6.54% 6.20%
- -------------------------------------------------------------------------------
Precious Metals Class A -- -- N/A -6.04%
- -------------------------------------------------------------------------------
</TABLE>
Shares of the Portfolios were initially offered on October 1, 1998 and no
performance information is provided in this Statement of Additional Information
for the Portfolios.
Performance information for a Fund or Portfolio may also be compared to:
(i) the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Morgan Stanley Capital International EAFE (Europe,
Australasia, Far East) Index, the Morgan Stanley Capital International Emerging
Markets Free Index, the International Finance Corporation Emerging Markets
Index, the Baring Emerging Markets Index, or other unmanaged indexes that
measure performance of a pertinent group of securities; (ii) other groups of
mutual funds tracked by Lipper Analytical Services ("Lipper"), a widely used
independent research firm which ranks mutual
71
<PAGE>
funds by overall performance, investment objectives, and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Funds. Unmanaged indexes (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs or expenses. The Adviser and
any of the Portfolio Managers may also report to shareholders or to the public
in advertisements concerning the performance of the Adviser and/or the Portfolio
Managers as advisers to clients other than the Trust, and on the comparative
performance or standing of the Adviser and/or the Portfolio Managers in relation
to other money managers. Such comparative information may be compiled or
provided by independent ratings services or by news organizations. Any
performance information, whether related to the Funds or Portfolios, the Adviser
or the Portfolio Managers, should be considered in light of the Funds' or
Portfolios' investment objectives and policies, characteristics and quality, and
the market conditions during the time period indicated, and should not be
considered to be representative of what may be achieved in the future.
The total return of each class (and yield of each class in the case of the
Renaissance and Balanced Funds and the 30/70 Portfolio) may be used to compare
the performance of each class of a Fund's or Portfolio's shares against certain
widely acknowledged standards or indexes for stock and bond market performance,
against interest rates on certificates of deposit and bank accounts, against the
yield on money market funds, against the cost of living (inflation) index, and
against hypothetical results based on a fixed rate of return.
The S&P's Composite Index of 500 Stocks (the "S&P 500") is a market value-
weighted and unmanaged index showing the changes in the aggregate market value
of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 385 industrial, 15 transportation, 45 utilities and 55
financial services concerns. The S&P 500 represents about 77% of the market
value of all issues traded on the New York Stock Exchange.
The S&P's 400 Mid-Cap Index (the "S&P 400 Mid-Cap Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 400 stocks of companies whose capitalization range from $100 million to
over $5 billion and which represent a wide range of industries. As of September
30, 1997, approximately 22% of the 400 stocks were stocks listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") system, 76%
were stocks listed on the New York Stock Exchange and 7% were stocks listed on
the American Stock Exchange. The Standard & Poor's Midcap 400 Index P/TR
consists of 400 domestic stocks chosen for market size (median market
capitalization of $1.52 billion), liquidity and industry group representation.
It is a market value-weighted index (stock price times shares outstanding), with
each stock affecting the index in proportion to its market value. The index is
comprised of industrials, utilities, financials and transportation, in size
order.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market value-weighted
and unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks relative to the base measure of 100.00 on February 5,
1971. The NASDAQ Index is composed entirely of common stocks of companies
traded over-the-counter and often through the NASDAQ system. Only those over-
the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest securities in the Russell 3000 Index, representing approximately 7% of
the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of
the U.S. equity market by capitalization. The Russell 1000 Index is composed of
the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Index
represents the universe of stocks from which most active money managers
typically select. This large cap index is highly correlated with the S&P 500.
The Russell 1000 Value Index contains stocks from the Russell 1000 Index with a
less-than-average growth orientation. It represents the universe of stocks from
which value managers typically select.
The Lehman Government Bond Index (the "SL Government Index") is a measure
of the market value of all public obligations of the U.S. Treasury; all
publicly-issued debt of all agencies of the U.S. Government and all
72
<PAGE>
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.
The Lehman Government/Corporate Bond Index (the "SL Government/Corporate
Index") is a measure of the market value of approximately 5,000 bonds. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher by an NRSRO.
BanXquote Money Market, a service of Masterfund Inc., provides the average
rate of return paid on 3-month certificates of deposit offered by major banks
and the average rate paid by major banks on bank money market funds. The
Donoghue Organization, Inc., a subsidiary of IBC USA Inc., publishes the Money
Fund Report which lists the 7-day average yield paid on money market funds.
From time to time, the Trust may use, in its advertisements or information
furnished to present or prospective shareholders, data concerning the
performance and ranking of certain countries' stock markets, including
performance and ranking data based on annualized returns over one-, three-,
five- and ten-year periods. The Trust may also use data about the portion of
world equity capitalization represented by U.S. securities. As of December 31,
1997, the U.S. equity market capitalization represented approximately 40% of the
equity market capitalization of all the world's markets. This compares with 52%
in 1980 and 70% in 1972.
From time to time, the Trust may use, in its advertisements and other
information relating to certain of the Funds and Portfolios, data concerning the
performance of stocks relative to that of fixed income investments and relative
to the cost of living over various periods of time. The table below sets forth
the annual returns for each calendar year from 1973 through 1997 (as well as a
cumulative return and average annual return for that 25 year period) for the S&P
500 and Treasury bills (using the formula set forth after the table) as well as
the rates of inflation (based on the Consumer Price Index) during such periods.
<TABLE>
<CAPTION>
Consumer Price
Period S&P 500 Treasury Bills Index
- ----------------------- -------- --------------- ---------------
<S> <C> <C> <C>
1973 -14.7 6.9 8.8
1974 -26.5 8.0 12.2
1975 37.2 5.8 7.0
1976 23.8 5.0 4.8
1977 -7.2 5.1 6.8
1978 6.5 7.2 9.0
1979 18.4 10.4 13.3
1980 32.4 11.2 12.4
1981 -4.9 14.7 8.9
1982 21.4 10.5 3.8
1983 22.5 8.8 3.8
1984 6.3 9.9 3.9
1985 32.2 7.7 3.8
1986 18.5 6.1 1.1
1987 5.2 5.5 4.4
1988 16.8 6.3 4.4
1989 31.5 8.4 4.6
1990 -3.2 7.8 6.1
1991 30.5 5.6 3.1
1992 7.7 3.5 2.9
1993 10.1 2.9 2.7
1994 1.3 3.9 2.7
1995 37.4 5.6 2.7
1996 23.1 5.2 3.3
1997 33.4 5.3 1.7
- -------------------------------------------------------------------
Cumulative Return
1973-1997 2,059.4% 464.1% 279.6%
- -------------------------------------------------------------------
Average Annual Return
1973-1997 13.1% 7.1% 5.5%
</TABLE>
73
<PAGE>
The average returns for Treasury bills were computed using the following
method. For each month during a period, the Treasury bill having the shortest
remaining maturity (but not less than one month) was selected. (Only the
remaining maturity was considered; the bill's original maturity was not
considered). The return for the selected Treasury bill was computed based on
the price of the bill as of the last trading day of the previous month and the
price on the last trading day of the current month. The price of the bill (P)
at each time (t) is given by:
P\\t\\ = [ 1- rd ]
---
[ 360 ]
where,
r = decimal yield on the bill at time t (the average of
bid and ask quotes); and
d = the number of days to maturity as of time t.
Advertisements and information relating to the Target Fund may use data
comparing the performance of stocks of medium-sized companies to that of other
companies. The following table sets forth the annual returns for each year from
March 1981 (inception of Mid-Cap Index) through December 31, 1997 (as well as a
cumulative return and average annual return for this period) for stocks of
medium-sized companies (based on the Standard & Poor's Mid-Cap Index), stocks
of small companies (based on the Russell 2000 Index) and stocks of larger
companies (based on the S&P 500).
<TABLE>
<CAPTION>
Small Mid-Size Large
Period Companies Companies Companies
- ----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
1997 22.8 32.3 33.4
- -----------------------------------------------------------
Cumulative Return
2/28/81-12/31/97 731.7% 1,482.1% 1,235.3%
- -----------------------------------------------------------
Average Annual Return
2/28/81-12/31/97 13.4% 17.8% 16.6%
- -----------------------------------------------------------
</TABLE>
From time to time, the Trust may use, in its advertisements and other
information relating to the Precious Metals Fund, data concerning the relevant
performance and volatility of portfolios consisting of all stocks, portfolios
consisting of all bonds and portfolios consisting of stocks and bonds blended
with stocks of companies engaged in the extraction, processing, distribution or
marketing of gold and other precious metals. The following table shows the
annual returns for each calendar year from 1973 through 1997 (as well as
cumulative return and average annual return for that 25 year period) for an all-
stock portfolio (using the S&P 500), an all-bond portfolio (using the Salomon
Brothers Long Term Corporate Bond Index), and for a hypothetical portfolio
74
<PAGE>
with 45% of its assets in stocks comprising the S&P 500, 45% in bonds comprising
the Salomon Brothers Long Term Corporate Bond Index and 10% in stocks comprising
the Philadelphia Gold & Silver Index.
RETURN AND CUMULATIVE VALUES OF STOCKS, BONDS, SAVINGS RATES
VS. BALANCED PORTFOLIO (ASSUMING REBALANCING AT YEAR-ENDS)
----------------------------------------------------------
ANNUAL RETURNS
--------------
<TABLE>
<CAPTION>
Small Co. S&P 500 LT Corp.
Stocks Stocks Bonds T-Bills Gold Index Balanced*
-------- ------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1973 - 30.90% - 14.66% 1.14% 6.93% 102.59% 4.18%
1974 - 19.95% - 26.47% - 3.06% 8.00% 23.82% - 10.91%
1975 52.82% 37.20% 14.64% 5.80% - 29.73% 20.36%
1976 57.38% 23.84% 18.65% 5.08% - 41.06% 15.01%
1977 25.38% - 7.18% 1.71% 5.12% 29.15% 0.45%
1978 23.46% 6.56% - 0.07% 7.18% 5.46% 3.47%
1979 43.46% 18.44% - 4.18% 10.38% 149.20% 21.34%
1980 39.88% 32.42% - 2.62% 11.24% 59.41% 19.35%
1981 13.88% - 4.91% - 0.96% 14.71% - 33.76% - 6.02%
1982 28.01% 21.41% 43.79% 10.54% 46.04% 33.94%
1983 39.67% 22.51% 4.70% 8.80% - 3.68% 11.88%
1984 - 6.67% 6.27% 16.39% 9.85% - 30.07% 7.19%
1985 24.66% 32.16% 30.90% 7.72% - 22.23% 26.15%
1986 6.85% 18.47% 19.85% 6.16% 13.44% 18.59%
1987 - 9.30% 5.23% - 0.27% 5.47% 42.54% 6.49%
1988 22.87% 16.81% 10.70% 6.35% - 33.48% 9.03%
1989 10.18% 31.49% 16.23% 8.37% 49.58% 26.43%
1990 - 21.56% - 3.17% 6.78% 7.83% - 25.92% - 0.97%
1991 44.63% 30.55% 19.89% 5.59% - 9.83% 21.71%
1992 23.35% 7.67% 9.39% 3.51% - 26.11% 5.07%
1993 20.98% 9.99% 13.17% 2.89% 130.36% 23.46%
1994 3.11% 1.31% - 5.76% 3.90% - 11.16% - 3.12%
1995 34.46% 37.43% 27.20% 5.60% - 0.78% 29.01%
1996 17.62% 23.07% 1.40% 5.21% - 5.48% 10.46%
1997 22.78% 33.36% 12.95% 5.26% - 36.45% 17.19%
STANDARD
DEVIATION 22.64% 16.77% 12.05% 2.67% 51.31% 11.52%
73-97
CUMULATIVE
73-97 4253% 2052% 862% 451% 176% 1522%
ANNUALIZED
73-97 16.3% 13.1% 9.5% 7.1% 4.1% 11.8%
</TABLE>
- -----------------
*Balanced:
- ----------
Stocks 45%
Bonds 45%
Gold 10%
Small Co. 0%
T-Bills 0%
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1996/1997 costs of college (using tuition and fees only) and an assumed rate of
increase for such costs. For example, the table below sets forth the projected
cost of four years of college
75
<PAGE>
at a public college and a private college assuming a steady increase in both
cases of 3% per year. In presenting this information, the Trust is making no
prediction regarding what will be the actual growth rate in the cost of a
college education, which may be greater or less than 3% per year and may vary
significantly from year to year. The Trust makes no representation that an
investment in any of the Funds will grow at or above the rate of growth of the
cost of a college education.
<TABLE>
<CAPTION>
POTENTIAL COLLEGE COST TABLE
Start Public Private Start Public Private
Year College College Year College College
- --------- --------- -------- ----- ------- -------
<S> <C> <C> <C> <C> <C>
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306 2012 $20,278 $89,061
</TABLE>
Costs assume a steady increase in the annual cost of college of 3% per year from
a 1996-97 base year amount. Actual rates of increase may be more or less than 3%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the 25 years from 1973 through 1997 was:
*Stocks: 13.1%
Bonds: 9.5%
T-Bills: 7.1%
Inflation: 5.5%
*Returns of unmanaged indexes do not reflect past or future
performance of any of the Funds or Portfolios of PIMCO Funds: Multi-Manager
Series. Stocks is represented by Ibbotson's Common Stock Total Return
Index. Bonds are represented by Ibbotson's Long-term Corporate Bond Index.
Treasury bills are represented by Ibbotson's Treasury Bill Index and
Inflation is represented by the Cost of Living Index. These are all
unmanaged indexes, which can not be invested in directly. While Treasury
bills are insured and offer a fixed rate of return, both the principal and
yield of investment securities will fluctuate with changes in market
conditions. Source: Ibbotson, Roger G., and Rex A. Sinquefiled, Stocks,
Bonds, Bill and Inflation (SBBI), 1989, updated in Stocks, Bonds, Bills and
Inflation 1996 Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1973 through 1997, the average annual return of stocks comprising the
Ibbotson's Common Stock Total Return Index ranged from -26.5% to 37.4% while the
annual return of a hypothetical portfolio comprised 40% of such common stocks,
40% of bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1973
through 1997 is set forth in the following table.
76
<PAGE>
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ------ ------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
</TABLE>
Returns of unmanaged indexes do not reflect past or future performance of
any of the Funds or Portfolios of PIMCO Funds: Multi-Manager Series. Stocks
are represented by Ibbotson's Common Stock Total Return Index. Bonds are
represented by Ibbotson's Long-term Corporate Bond Index. Treasury bills
are represented by Ibbotson's Treasury Bill Index and Inflation is
represented by the Cost of Living Index. Treasury bills are all unmanaged
indexes, which can not be invested in directly. While Treasury bills are
insured and offer a fixed rate of return, both the principal and yield of
investment securities will fluctuate with changes in market conditions.
Source: Ibbotson, Roger G., and Rex A. Sinquefiled, Stocks, Bonds, Bill and
Inflation (SBBI), 1989, updated in Stocks, Bonds, Bills and Inflation 1996
Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may use in its advertisements and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
- ---------------- ------------ ------------ --------
<S> <C> <C> <C>
30 Years $ 1,979 $ 59,370 $200,000
25 Years $ 2,955 $ 73,875 $200,000
20 Years $ 4,559 $ 91,180 $200,000
15 Years $ 7,438 $111,570 $200,000
10 Years $13,529 $135,290 $200,000
</TABLE>
77
<PAGE>
This hypothetical example assumes a fixed 7% return compounded annually and
a guaranteed return of principal. The example is intended to show the
benefits of a long-term, regular investment program, and is in no way
representative of any past or future performance of a Fund or Portfolio of
PIMCO Funds: Multi-Manager Series. There can be no guarantee that you will
be able to find an investment that would provide such a return at the times
you invest and an investor in any of the Funds or Portfolios of PIMCO
Funds: Multi-Manager Series should be aware that certain of the Funds and
Portfolios of PIMCO Funds: Multi-Manager Series have experienced and may
experience in the future periods of negative growth.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1997:
% of Income for Individuals
Aged 65 Years and Older in 1997*
-------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
1997 43% 57%
* For individuals with an annual income of at least $51,000. Other
includes personal savings, earnings and other undisclosed sources of
income. Source: Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds and Portfolios may appear in
various national publications and services including, but not limited to: The
Wall Street Journal, Barron's, Pensions and Investments, Forbes, Smart Money,
Mutual Fund Magazine, The New York Times, Kiplinger's Personal Finance, Fortune,
Money Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies
and The Donoghue Organization. Some or all of these publications or reports may
publish their own rankings or performance reviews of mutual funds, including the
Funds, and may provide information relating to the Adviser and the Portfolio
Managers, including descriptions of assets under management and client base, and
opinions of the author(s) regarding the skills of personnel and employees of the
Adviser or the Portfolio Managers who have portfolio management responsibility.
From time to time, the Trust may include references to or reprints of such
publications or reports in its advertisements and other information relating to
the Funds and Portfolios.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Funds or Portfolios over a specified period of time and may
use charts and graphs to display that growth.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
Funds and relevant benchmark market indexes in a variety of market conditions.
Based on its independent research and analysis, Ibbotson may develop, from time
to time, model portfolios of the Funds and series of PIMS which indicate how, in
Ibbotson's opinion, a hypothetical investor with a 5+ year investment horizon
might allocate his or her assets among the Funds and series of PIMS. Ibbotson
bases its model portfolios on five levels of investor risk tolerance which it
developed and defines as ranging from "Very Conservative" (low volatility;
emphasis on capital preservation, with some growth potential) to "Very
Aggressive" (high volatility; emphasis on long-term growth potential). However,
neither Ibbotson nor the Trust offers Ibbotson's model portfolios as
investments. Moreover, neither the Trust, the Adviser, the Portfolio Managers
nor Ibbotson represent or guarantee that investors who allocate their assets
according to Ibbotson's models will achieve their desired investment results.
78
<PAGE>
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. Shareholders may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. In the
event that such a request was made, the Trust has represented that it would
assist with any necessary shareholder communications. Shareholders of a class
of shares have different voting rights with respect to matters that affect only
that class.
All classes of shares of the Funds and Portfolios have identical voting
rights except that each class of shares has exclusive voting rights on any
matter submitted to shareholders that relates solely to that class, and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. These
shares are entitled to vote at meetings of shareholders. Matters submitted to
shareholder vote must be approved by each Fund and Portfolio 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 and
Portfolios, then only shareholders of the Fund(s) or Portfolio(s) affected shall
be entitled to vote on the matter. All classes of shares of a Fund or Portfolio
will vote together, except with respect to the Distribution and Servicing Plan
applicable to Class A, Class B or Class C shares, to the Distribution or
Administrative Services Plans applicable to Administrative Class shares, to the
Administration Agreement as applicable to a particular class or classes, or when
a class vote is required as specified above or otherwise by the 1940 Act.
The Trust's shares do not have cumulative voting rights. Therefore, the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
To avoid potential conflicts of interest, the 90/10 Portfolio, 60/40
Portfolio and 30/70 Portfolio will vote shares of each Underlying PIMCO Fund
which they own in proportion to the votes of all other shareholders in the
Underlying PIMCO Fund.
79
<PAGE>
CERTAIN OWNERSHIP OF TRUST SHARES
As of September 14, 1998, the Trust believes that the Trustees and officers
of the Trust, as a group, owned less than one percent of each class of each Fund
and Portfolio, and of the Trust as a whole. As of September 14, 1998, the
following persons owned of record or beneficially 5% or more of the noted class
of shares of the following Funds:
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
PIMCO EQUITY INCOME FUND
INSTITUTIONAL
- -------------
Bank of New York Western Trust Co. 1,559,249.465 17.92%*
as Trustee for
Pacific Life Insurance Company R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
AM Castle & Company Employee Equity Seg 819,748.488 9.42%*
A/C #22-39912
P.O. Box 92956
Chicago, Illinois 60675-2956
Santa Barbara Foundation 694,157.454 7.98%
15 East Carrillo Street
Santa Barbara, California 93101-2780
Northern Trust Company as Trustee for 639,712.886 7.35%
Brush Wellman Inc.
P.O. Box 92956
Chicago, Illinois 60675-0001
AM Castle & Company Employee P/S/P Equity Fund 635,437.937 7.30%
A/C #22-39919
P.O. Box 92956
Chicago, Illinois 60675-2956
Bank of America NT&SA as Trustee for 545,324.668 6.27%
Mazda Motor of America
P.O. Box 3577, Terminal Annex
Los Angeles, California 90051-1577
ADMINISTRATIVE
- --------------
First Union National Bank ** 651,911.232 96.49%*
401 S. Tyon Street, FRB-3
CMG Fiduciary Operations Funds Group
Mail Code CMG-2-1151
Charlotte, North Carolina 28288-1151
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS A
- -------
Carn & Co. ** 222,774.313 23.54%
USI Insurance Services Corporation
401(k) Plan
P.O. Box 96211
Washington, D.C. 20090-6211
Merrill Lynch Pierce Fenner & Smith Inc. ** 122,000.760 12.89%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484PIMCO Equity Income Fund
CLASS A
- -------
Khosrow B. Semnani 70,577.211 7.46%
P.O. Box 3508
Salt Lake City, Utah 84110-3508
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 132,286.432 12.71%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 142,191.036 9.83%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO VALUE FUND
INSTITUTIONAL
- -------------
Pacific Life Insurance Company 2,410,711.368 42.53%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
The Northern Trust Company as Trustee for 885,379.859 15.62%
Great Lakes Chemical Corporation
P.O. Box 92956
Chicago, Illinois 00006-0690
CMTA-GMPP & Allied Workers Pension Trust 722,867.614 12.75%
c/o Associated Third Party Administrator
1640 South Loop Road
Alameda, California 94502
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
BAC Local 19 Pension Trust 445,035.777 7.85%
777 Davis Street
San Francisco, California 94126-2500
Pacific Life Foundation 332,383.337 5.86%
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 308,758.461 5.45%
P.O. Box 60014
Arcadia, California 91006-6014
ADMINISTRATIVE
- --------------
Portfolio Strategies ** 856,305.710 71.75%*
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
PIMCO VALUE FUND
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 156,937.959 12.07%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 494,799.366 21.71%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 546,440.675 10.10%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
FTC & Co.** 276,556.070 5.11%
Datalynx House Acct.
P.O. Box 1731736
Denver, Colorado 80217-3736
PIMCO VALUE 25 FUND
INSTITUTIONAL
- -------------
PIMCO Advisors L.P. 18,750.000 100.00%*
Attn: R. M. Fitzgerald
800 Newport Center Drive
Newport Beach, California 92660
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS A
- -------
PIMCO Advisors L.P. 18,750.000 74.68%*
Attn: Vinh Nguyen
800 Newport Center Drive
New port Beach, California 92660
Merrill Lynch Pierce Fenner & Smith Inc. ** 2,819.000 11.22%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Raymond James & Assoc. Inc. CSDN 2,254.791 8.98%
Jennifer L. Elliott IRA
7133 Senton Circle
Arvada, Colorado 80003-3819
CLASS B
- -------
PIMCO Advisors L.P. 18,750.000 99.07%*
Attn: Vinh Nguyen
800 Newport Center Drive
New port Beach, California 92660
PIMCO VALUE 25 FUND
CLASS C
- -------
PIMCO Advisors L.P. 18,750.000 68.67%*
Attn: Vinh Nguyen
800 Newport Center Drive
New port Beach, California 92660
Robert M. Greene Trust UA Jan 791,688.850 6.18%
Berkeley Cardiovascular Group PSP
FBO Robert M. Greene
671 The Alameda
Berkeley, California 94707-1601
Raymond James & Assoc. Inc. CSDN 1,464.704 5.36%
Biruta A. Avotins IRA
3322 Saint Antoine Avenue
Kalamazoo, Michigan 49006-5522
PIMCO SMALL CAP VALUE FUND
INSTITUTIONAL
- -------------
Pacific Mutual Life Insurance Company 490,759.322 15.99%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
FTC & Co. DATAlynx House Account ** 291,732.107 9.50%
P.O. Box 173736
Denver, Colorado 80217-3736
Little Company Of Mary Hospital 282,741.520 9.21%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Lucile Packard Foundation for Children 220,202.390 7.17%
725 Welch Road
Palo Alto, California 94304
Donaldson Lufkin & Jenrette ** 156,366.054 5.09%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
ADMINISTRATIVE
- --------------
First Union National Bank ** 462,977.560 58.39%*
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Portfolio Strategies ** 125,731.640 15.86%
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
PIMCO SMALL CAP VALUE FUND
ADMINISTRATIVE
- --------------
Wells Fargo Bank TTEE FBO 104,364.712 13.16%
Choicemaster (First Interstate)
P. O. Box 9800 Mutual Funds
Calabasas, California 91302-9800
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 737,570.760 14.36%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 1,841,806.845 27.36%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 2,121,317.587 27.67%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
FTC & Co.** 403,163.221 5.25%
Datalynx House Acct
P.O. Box 1731736
Denver, Colorado 80217-3736
PIMCO CAPITAL APPRECIATION FUND
INSTITUTIONAL
- -------------
Donaldson Lufkin & Jenrette** 6,508,315.664 21.00%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Wendel & Co. A/C No. 571246 3,513,743.489 11.34%
c/o The Bank of New York
Coopers & Lybrand Retirement Trust
Mutual Fund Reorg. Department
P. O. Box 1066
Wall Street Station
New York, New York 10286
Charles Schwab & Co., Inc. - Reinvest ** 2,152,108.034 6.94%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
ADMINISTRATIVE
- --------------
Invesco Trust Compnay FBO 2,458,274.076 31.82%*
Reynolds & Reynolds 401k Plan
P. O. Box 77405
Atlanta, Georgia 30357
PIMCO CAPITAL APPRECIATION FUND
ADMINISTRATIVE
- --------------
New York Life Trust Company ** 1,873,653.996 24.25%
51 Madison Avenue, Room 117A
New York, New York 10010
Certain Employee (Fidelity) ** 1,076,903.877 13.94%
100 Magetian KWIC
Covington, Kentucky 41015
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
First Union National Bank ** 1,024,226.043 13.26%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
National Financial Services Corporation for ** 507,913.178 6.57%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 889,837.370 25.09%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Carn & Co. 02087501 406,907.359 11.47%
American Yazaki Employee Savings
and Retirement Plan
Attn: Mutual Funds - Star
P. O. Box 96211
Washington, D.C. 20090-6211
Wachovia Bank FBO VIT Pension Plan 186,154.417 5.25%
Attn: Mutual Fund Department, 5/th/ Floor
P. O. Box 27602
Richmond, Virginia 23261-7602
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 307,592.585 16.40%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 400,903.964 13.41%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO MID CAP GROWTH FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. - Reinvest ** 1,090,504.524 5.97%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
PIMCO MID CAP GROWTH FUND
INSTITUTIONAL
- -------------
Norwest Bank Minnesota NA Custodian FBO 1,079,254.893 5.91%
Parkview Memorial Hospital
c/o Mutual Fund Processing
733 Marquette Avenue MS 0036
Minneapolis, Minnesota 55479-0036
ADMINISTRATIVE
- --------------
Certain Employee (Fidelity) ** 1,261,648.015 33.36%*
100 Magellan KW1C
Covington, Kentucky 41015
National Financial Services Corporation for ** 930,041.949 24.59%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
UMB TTEE FBO 451,923.317 11.95%
Andrew Profit Sharing Trust
c/o American Century Services
4500 Main
Kansas City, Missouri 64111
First Union National Bank ** 281,594.749 7.45%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
New York Life Trust Company ** 204,882.035 5.42%
51 Madison Avenue, Room 117A
New York, New York 10010
CLASS A
- -------
Merrill Lynch Employee Services 1,145,762.715 28.76%*
Merrill Lynch Trust Company FSB FBO
401k Plans Masterworks
P. O. Box 62000
San Francisco, California 94162-0001
Merrill Lynch Pierce Fenner & Smith Inc. ** 694,000.697 17.42%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 870,589.852 23.00%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 1,059,651.065 18.04%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO MICRO CAP GROWTH FUND
INSTITUTIONAL
- -------------
Charles Schwab & Co., Inc. - Reinvest.** 2,654,757.499 21.86%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Donald Lufkin & Jenrette** 2,222,960.360 18.30%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Bost & Co. A/C DOMF 8526562 1,179,579.025 9.71%
Dominion Resources
Attn: Mutual Fund Operations
O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
University of Southern California 1,020,412.993 8.40%
Treasurer's Office
University Park, BKS 402
Los Angeles, California 90089-2541
Mac & Co. A/C 054-024 854,902.601 7.04%
Mellon Bank N.A.
Public Service of New Mexico
P. O. Box 3198
Mutual Funds Operations
Pittsbirgh, Pennsylvania 15230-3198
Mac & Co. A/C OBRF 3331012 FBO 681,890.401 5.61%
Oberlin College
Attn: Mutual Fund Operations
O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
ADMINISTRATIVE
- --------------
Northern Trust as Trustee for 134,418.291 86.14%*
Sunday School Board
P.O. Box 92956
Chicago, Illinois 60675
New York Life Trust Company ** 14,677.337 9.41%
51 Madison Avenue, Room 117A
New York, New York 10010
PIMCO SMALL CAP GROWTH FUND
INSTITUTIONAL
- -------------
The Jewish Federation of 921,718.855 20.97%
Metropolitan Chicago
One South Franklin Street, Room 625
Chicago, Illinois 60606-4609
DMNH Foundation 655,850.090 14.92%
2001 Colorado Blvd.
City Park
Denver, Colorado 00008-0205
ESOR & Co. 453,722.992 10.32%
Associated Bank Green Bay
Trust Operations Department
P. O. Box 19006
Green Bay, Wisconsin 54307-9006
Employees Retirement System of Jersey City 449,432.298 10.22%
325 Palisade Avenue
Jersey City, New Jersey 07307-1714
Berklee College of Music, Inc. 417,256.011 9.49%
1140 Boylston Street
Boston, Massachusetts 02215-3693
Auburn Theological Seminary 316,630.017 7.20%
3041 Broadway
New York, New York 10027-5710
Pacific Mutual Life Insurance Company 255,877.271 5.82%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
ADMINISTRATIVE
- --------------
Portfolio Strategies ** 92,411.060 75.51%*
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
PIMCO CORE EQUITY FUND
INSTITUTIONAL
- -------------
Pacific Life Foundation 35,876.402 37.85%*
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 30,878.396 32.57%*
P. O. Box 60014
Arcadia, California 91006-6014
Mac & Co. A/C #080-435 19,879.614 20.97%
Fine Quaker L.P.
P. O. Box 3198
Mutual Fund Operations
Pittsburgh, Pennsylvania 15230-3198
PIMCO CORE EQUITY FUND
ADMINISTRATIVE
- --------------
The Bank of New York as Trustee for 6,378,402.897 92.52%*
Melville Corporation
One Wall Street, 7th Floor MT/MC
New York, New York 10286-0001
PIMCO MID CAP EQUITY FUND
INSTITUTIONAL
- -------------
Pacific Mutual Life Insurance Company 361,856.905 57.01%*
700 Newport Center Drive
Newport Beach, California 92660
Pacific Life Foundation 93,665.140 14.76%
700 Newport Center Drive
Newport Beach, California 92660
IFTC as Custodian for 81,186.220 12.79%
John W. Barnum
5175 Tilden Street, N.W.
Washington, D.C. 20016-1961
California Race Track Association 79,292.203 12.49%
P.O. Box 60014
Arcadia, California 91006-6014
ADMINISTRATIVE
- --------------
Portfolio Strategies ** 228,237.020 74.05%*
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
PIMCO ENHANCED EQUITY FUND
INSTITUTIONAL
- -------------
Pacific Mutual Life Insurance Company 1,467,121.114 51.32%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
CMTA-GMPP & Allied Workers Pension 468,000.811 16.37%
c/o Associated Third Party Administrator
1640 South Loop Road
Alameda, California 94502
BAC Local 19 Pension Trust Fund 288,132.960 10.08%
777 Davis Street
San Francisco, California 94126-2500
Pacific Life Foundation 218,308.645 7.64%
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 189,415.835 6.63%
P.O. Box 60014
Arcadia, California 91006-6014
PIMCO ENHANCED EQUITY FUND
ADMINISTRATIVE
- --------------
Portfolio Strategies ** 1,060,750.650 73.40%*
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
PIMCO EMERGING MARKETS FUND
INSTITUTIONAL
- -------------
Pacific Mutual Life Insurance Company 575,190.664 26.75%*
700 Newport Center Drive ,
Newport Beach, California 92660
Pacific Mutual Life Insurance Company 573,738.616 26.69%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc. - Reinvest ** 476,315.147 22.15%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
Donaldson Lufkin & Jenrette** 142,451.427 6.63%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Pacific Life Foundation 115,918.172 5.39%
700 Newport Center Drive
Newport Beach, California 92660-6307
ADMINISTRATIVE
- --------------
Portfolio Strategies ** 170,278.73 74.90%*
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
CLASS A
- -------
PaineWebber FBO 14,459.406 28.56%*
Donald A. Gill as Trustee for
Joseph W. Gill Irrev. Trust
U/A DTD 11-08-94
9992 Mackey Circle
Overland Park, Kansas 66212-3458
PaineWebber FBO 6,407.993 12.65%
Donald A. Gill CDN
For Timothy P. Gill
UTMA-KS
9992 Mackey Circle
Overland Park, Kansas 66212-3458
PIMCO EMERGING MARKETS FUND
CLASS B
- -------
RPSS Trust IRA FBO
Gregory D. McDonald 3,103.74 8.97%
15618 Gettysburg Drive
Tomball, Texas 77375-8609
PAF Sales Inc. 2,347.418 6.79%
Profit Sharing Plan
P.O. Box 307
Scarborough, New York 10510-0807
PaineWebber CDN FBO 1,740.644 5.03%
Ray G. Gross
P. O. Box 3321
Weehawken, New Jersey 07087-8154
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 6,333.000 5.93%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO INTERNATIONAL DEVELOPED FUND
INSTITUTIONAL
- -------------
Pacific Life Insurance Company 1,545,723.324 20.04%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc. - Reinvest ** 1,281,738.155 16.61%
Attn: Mutual Fund Operations
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Wachovia Bank NA as Trustee for the 1,030,330.936 13.36%
Atlanta Gas Light Company Retirement Plan
301 N. Main Street - MC NC 31057
Winston-Salem, North Carolina 27150
Citibank, N.A., Trustee for the benefit of 877,871.070 11.38%
Nissan Motor Mfg. Corp. U.S.A
983 Nissan Drive
Smyrna, Tennessee 37167-4400
Pacific Asset Management LLC 667,985.181 8.66%
700 Newport Center Drive
Newport Beach, California 92660-6307
FTC & Co. Datalynx House Account ** 527,706.810 6.84%
P.O. Box 173736
Denver, Colorado 80217-3736
PIMCO INTERNATIONAL DEVELOPED FUND
ADMINISTRATIVE
- --------------
Portfolio Strategies ** 532,603.240 75.97%*
PIMCO Advisors L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
CLASS A
- -------
Prudential Securities Inc. FBO 119,808.307 27.22%*
Millenco L.P.
111 Broadway Floor 20
New York, New York 10006-1901
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
American National Bank of Chicago TR 104,596.645 23.76%
UT #36307007
FBO Lincoln Group LP
40 Skokie Boulevard, Suite 105
Northbrook, Illinois 60062-1614
Prudential Securities FBO 103,128.390 23.43%
FBO International Trading Partners
2 Northfield Plaza, Suite 260
Northfield, Illinois 60093-1217
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 14,879.847 7.09%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO BALANCED FUND
INSTITUTIONAL
- -------------
Bank of New York Western Trust Co. 1,166,219.752 36.10%*
as Trustee for
Pacific Life Insurance Company R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
Redlands Community Hospital Retirement Plan 634,986.331 19.66%
350 Terracina Boulevard
Redlands, California 92373-4850
Dominguez Services Corporation 621,930.124 19.25%
21718 South Alameda Street
Long Beach, California 90810-0351
Bank of America as Trustee for 304,129.795 9.41%
The Music Center Operating Co.
P.O. Box 2788
Los Angeles, California 90051-0788
The Northern Trust Company as Trustee for 270,373.223 8.37%
Ameron 401(k)
P.O. Box 92956
Chicago, Illinois 60675
PIMCO BALANCED FUND
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 383,202.068 48.56%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
Prudential Securities Inc. FBO 134,012.364 16.98%
R.K. for D.C. Clients as Trustee for
MSSA-ILA Local 1985 401k
P. O. Box 15040
New Brunswick, New Jersey 08906-5040
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 276,603.684 32.64%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 154,592.526 18.09%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO TARGET FUND
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,534,688.978 15.70%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,688,385.373 35.20%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 15,759,055.167 26.52*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO PRECIOUS METALS FUND
CLASS A
- -------
Sidney M. Yachter 94,653.962 16.04%
21451 Highland Lakes Boulevard
Miami, Florida 33179-1660
Merrill Lynch Pierce Fenner & Smith Inc.** 72,292.717 12.25%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
PIMCO PRECIOUS METALS FUND
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 359,053.332 15.69%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO RENAISSANCE FUND
INSTITUTIONAL CLASS
- -------------------
Seymour S. Fiskind 42,768.781 90.62%*
c/o Columbus Circle Investors
Metro Center
One Station Place, 8/th/ Floor
Stamford, Connecticut 06902
Donaldson, Lufkin & Jenrette ** 4,427.330 9.38%
P. O. Box 2052
Jersey City, New Jersey 07303-2052
ADMINISTRATIVE
- --------------
PIMCO Advisors L.P. 6,506.181 100.00%*
800 Newport Center Drive
Newport Beach, California 92660
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 542,739.499 10.70%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,345,474.280 21.83%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 3,970,443.487 15.98%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO GROWTH FUND
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 354,401.803 6.60%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 776,336.647 27.87%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO GROWTH FUND
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 7,810,183.955 13.04%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO OPPORTUNITY FUND
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,150,602.693 20.24%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
American Express Trust Company 315,606.617 5.55%
FBO WESCO Distribution Inc.
Retirement Savings Plan
733 Marquette Avenue
Minneapolis, Minnesota 55402-2309
American Express Trust Company 315,606.617 5.55%
FBO WESCO Distribution Inc.
Retirement Savings Plan
733 Marquette Avenue
Minneapolis, Minnesota 55402-2309
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 4,115,244.193 25.57%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO INNOVATION FUND
CLASS A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 450,754.467 12.78%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 848,268.734 22.42%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,399,949.359 14.59%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO INTERNATIONAL FUND
CLASS A
- -------
CIBC Oppenheimer Corporation 200,620.208 13.25%
FBO 033-32132-13
P. O. Box 3484
Church Street Station
New York, New York 10008-8484
American National Bank TR 191,936.098 12.68%
FBO Emerald Investments #36062008
40 Skokie Boulevard, Suite 105
Northbrook, Illinois 60062-1614
CIBC Oppenheimer Corporation 126,535.820 8.36%
FBO 033-90774-14
P. O. Box 3484
Church Street Station
Church Street Station
New York, New York 10008-8484
ORPI 104,076.323 6.87%
A Partnership
P. O. Box 5430
Incline Village, Nevada 89450-5430
Merrill Lynch Pierce Fenner & Smith Inc.** 96,802.108 6.39%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Bear Stearns Securities Corporation 85,581.526 5.65%
FBO 220-82582-24
1 Metrotech Center North
Brooklyn, New York 11201-3859
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
CLASS B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 136,443.066 19.51%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,422,550.703 14.74%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO INTERNATIONAL GROWTH FUND
INSTITUTIONAL
- -------------
Pacific Asset Management LLC 500,000.000 99.02%*
700 Newport Center Drive
Newport Beach, California 92660-6307
PIMCO STRUCTURED EMERGING MARKETS FUND
INSTITUTIONAL
- -------------
Rhode Island Foundation 861,818.340 24.30%
Attn: Robert Rosendale
150 Royall Street
Canton, Massachusetts 02021
Berklee College of Music, Inc. 507,144.599 14.30%
1140 Boylston Street
Boston, Massachusetts 02215-3693
Hartford Foundation 325,959.222 9.19%
159 E. Main Street
Rochester, New York 14638
Munsen-Williams-Proctor Institute 286,820.745 8.09%
Attn: Anthony Spiridigloizzi
310 Genesee Street
Utica, New York 13502
The Reeves Foundation 258,740.474 7.30%
115 Summit Avenue
Summit, New Jersey 07901
Deseret Mutual Retiree Med. & Life Pl. Tr. 231,885.531 6.54%
c/o Doug Burton
60 East South Temple Street
Salt Lake City, Utah 84147
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
Brockton Health Corp. Endowment 200,487.790 5.65%
Attn: Steven Connolly
680 Centre Street
Brockton, Massachusetts 02402-3395
PIMCO TAX-EFFICIENT EQUITY FUND
- -------------------------------
CLASS A
- -------
PIMCO Advisors L.P. 75,000.000 72.08%*
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Merrill Lynch Pierce Fenner & Smith Inc.** 8,566.000 8.23%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CLASS B
- -------
PIMCO Advisors L.P. 75,000.000 54.18%*
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Merrill Lynch Pierce Fenner & Smith Inc.** 25,512.663 18.43%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO TAX-EFFICIENT EQUITY FUND
- -------------------------------
CLASS B
- -------
PaineWebber FBO 10,706.638 7.73%
Evan Kaplan & Elissa Kaplan JTWROS
1850 Muttontown Road
Muttontown, New York 11791-9652
Patricia M. Fayad Trust 7,952.231 5.74%
UA May 22 97
Patricia M. Fayad Living Trust
18397 Manorwood South
Clinton Township, Michigan 48038-4813
CLASS C
- -------
PIMCO Advisors L.P. 75,000.000 50.31%*
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED SHARES OWNED
----- ------------
<S> <C> <C>
Merrill Lynch Pierce Fenner & Smith Inc.** 11,355.540 7.61%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Michael Holoka & Joann Holoka 9,527.027 6.39%
JT TEN WROS NOT TC
6958 Wicksbury Lane
Rockford, Illinois 61114-8149
CLASS D
- -------
PIMCO Advisors L.P. 75,000.000 100.00%*
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
PIMCO TAX-EFFICIENT STRUCTURED EMERGING MARKETS FUND
INSTITUTIONAL
- -------------
Alscott Investments, LLC 988,077.548 21.69%
501 Baybrook Court
Boise, Idaho 83706
Verb & Company (Weyerhaeuser) 805,503.178 17.68%
4380 S.W. Macadam, Suite 450
Portland, Oregon 97201
Waycrosse, Inc./International Equity Fund II 620,642.769 13.62%
P. O. Box 9300, MS 28
Minneapolis, Minnesota 55440-9300
Ruby Trust 584,956.501 12.84%
499 Park Avenue
New York, New York 10022
Topaz Trust 346,011.851 7.59%
499 Park Avenue
New York, New York 10022
PIMCO TAX-EFFICIENT STRUCTURED EMERGING MARKETS FUND
INSTITUTIONAL
- -------------
Alscott investments, LLC 262,948.208 5.77%
501 Baybrook Court
Boise, Idaho 83706
</TABLE>
- -------------------------------------
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Fund, and therefore may be presumed to "control" the Fund, as that term is
defined in the 1940 Act.
** Shares are believed to be held only as nominee.
101
<PAGE>
CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas City,
Missouri 64105, serves as custodian for assets of all Funds and Portfolios.
Pursuant to separate sub-custody agreements between IFTC and The Chase Manhattan
Bank, N.A. ("Chase") and IFTC and State Street Bank and Trust Company ("State
Street"), Chase and State Street serve as subcustodians of the Trust for the
custody of the foreign securities acquired by those Funds that invest in foreign
securities. Under the agreements, Chase and State Street may hold foreign
securities at their principal offices and their branches, and subject to
approval by the Board of Trustees, at a foreign branch of a qualified U.S. bank,
with an eligible foreign subcustodian, or with an eligible foreign securities
depository.
Pursuant to rules or other exemptions under the 1940 Act, the Trust may
maintain foreign securities and cash in the custody of certain eligible foreign
banks and securities depositories. Selection of these foreign custodial
institutions is currently made by the Board of Trustees following a
consideration of a number of factors, including (but not limited to) the
reliability and financial stability of the institution; the ability of the
institution to perform capably custodial services for the Trust; the reputation
of the institution in its national market; the political and economic stability
of the country in which the institution is located; and further risks of
potential nationalization or expropriation of Trust assets, although the
Trustees reserve the right to delegate their selection responsibilities in light
of recent amendments to Rule 17f-5 under the 1940 Act, in which case the factors
for consideration would differ from those referenced above. Currently, the
Board of Trustees reviews annually the continuance of foreign custodial
arrangements for the Trust, but reserves the right to discontinue this practice
as permitted by the recent amendments to Rule 17f-5. No assurance can be given
that the Trustees' appraisal of the risks in connection with foreign custodial
arrangements will always be correct or that expropriation, nationalization,
freezes, or confiscation of assets that would impact assets of the Funds will
not occur, and shareholders bear the risk of losses arising from these or other
events.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP (formerly, Price Waterhouse LLP), 1055 Broadway,
Kansas City, Missouri 64105, serves as the independent public accountants for
the Funds and Portfolios. PricewaterhouseCoopers LLP provides audit services,
accounting assistance, and consultation in connection with SEC filings. As
noted under "Financial Highlights" in the Class A, B and C Prospectus, the
Renaissance, Growth, Target, Opportunity, International, Innovation and Precious
Metals Funds were reorganized as series of the Trust on January 17, 1997, and
certain financial information for these Funds appearing in the Registration
Statement for each of the five fiscal periods ended prior to October 1, 1996 was
audited by Coopers & Lybrand L.L.P., the former independent accountants for
these Funds. Coopers & Lybrand L.L.P.'s opinion and consent to the use of such
information in the Registration Statement is incorporated by reference into the
Registration Statement.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectuses do not contain
all of the information included in the Trust's registration statements filed
with the SEC under the 1933 Act with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statements, including the exhibits
filed therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the relevant registration statement, each such statement
being qualified in all respects by such reference.
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FINANCIAL STATEMENTS
Audited financial statements for the Funds, as of June 30, 1997, for the
fiscal year then ended, including notes thereto, and the reports of Price
Waterhouse LLP thereon, each dated August 15, 1997, are incorporated by
reference from the Trust's two June 30, 1997 Annual Reports. One Annual Report
(the "Retail Report") corresponds to the Class A, B and C Prospectus and the
other (the "Institutional Report") corresponds to the Institutional Prospectus.
The Trust's 1997 Annual Reports are on file electronically with the SEC (Retail
Report -filed on September 3, 1997, Accession No. 0001017062-97-001680;
Institutional Report - filed on September 3, 1997, Accession No. 0001017062-97-
001678).
Unaudited financial statements for the Funds, as of December 31, 1997, for the
semi-annual period then ended, including notes thereto, are incorporated by
reference from the Trust's December 31, 1997 Semi-Annual Report. The Trust's
Semi-Annual Report is on file electronically with the SEC (filed on March 6,
1998, Accession No. 0001017062-98-000487).
The Portfolios were not operational during these reporting periods.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Certain of the Funds make use of average portfolio credit quality standards to
assist institutional investors whose own investment guidelines limit their
investments accordingly. In determining a Fund's overall dollar-weighted
average quality, unrated securities are treated as if rated, based on the
Adviser's or Portfolio Manager's view of their comparability to rated
securities. A Fund's use of average quality criteria is intended to be a guide
for those investors whose investment guidelines require that assets be invested
according to comparable criteria. Reference to an overall average quality
rating for a Fund does not mean that all securities held by the Fund will be
rated in that category or higher. A Fund's investments may range in quality from
securities rated in the lowest category in which the Fund is permitted to invest
to securities rated in the highest category (as rated by Moody's or S&P or, if
unrated, determined by the Adviser or a Portfolio Manager to be of comparable
quality). The percentage of a Fund's assets invested in securities in a
particular rating category will vary. Following is a description of Moody's and
S&P's ratings applicable to fixed income securities.
MOODY'S INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS SERVICES
CORPORATE AND MUNICIPAL BOND RATINGS
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are
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more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional ratings: The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities.
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The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from A for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
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