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PIMCO Funds:
Multi-Manager Series
STATEMENT OF ADDITIONAL INFORMATION
April 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-four separate diversified investment portfolios
(the "Funds"): the Equity Income Fund, the Value Fund, the Renaissance Fund,
the Enhanced Equity Fund, the Growth Fund, the Capital Appreciation Fund, the
Mid-Cap Growth Fund, the Core Equity Fund, the Mid-Cap Equity Fund, the Target
Fund, the Small-Cap Value Fund, the Small-Cap Growth Fund, the Opportunity Fund,
the Micro-Cap Growth Fund, the Innovation Fund, the International Fund, the
International Developed Fund, the International Growth Fund, the Emerging
Markets Fund, the Tax-Managed Structured Emerging Markets Fund, the Structured
Emerging Markets Fund, the Precious Metals Fund, the Balanced Fund and the Tax
Exempt Fund.
The Trust's investment adviser is PIMCO Advisors L.P. ("PIMCO Advisors" or
the "Adviser"), 800 Newport Center Drive, Suite 100, Newport Beach, California
92660.
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with the Prospectuses for the Trust, as supplemented from
time to time. The Trust offers up to six classes of shares of each of its 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 April 1,
1998, Class D shares of certain Funds are offered through the "Class D
Prospectus" to be dated April 8, 1998, and Institutional and Administrative
Class shares of certain Funds are offered through the "Institutional
Prospectus," dated April 1, 1998 (collectively with the Class A, B and C
Prospectus and the Class D Prospectus, the "Prospectuses"). A copy of the
applicable Prospectus may be obtained free of charge at the address and
telephone number(s) listed below.
Class A, B and C
----------------
Institutional Prospectus: and Class D Prospectuses:
------------------------ ------------------------
PIMCO Funds PIMCO Funds Distributors
840 Newport Center Drive 2187 Atlantic Street
Suite 360 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: Class A, B and C - (800) 426-0107
Telephone: (800) 927-4648 Class D - (888) 87-PIMCO
(800) 987-4626 (PIMCO
Infolink Audio
Response Network)
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES........................................................................... 3
U.S. Government Securities.............................................................................. 3
Inflation-Indexed Bonds................................................................................. 3
Borrowing............................................................................................... 4
Preferred Stock......................................................................................... 5
Corporate Debt Securities............................................................................... 5
High Yield Securities ("Junk Bonds").................................................................... 5
Participation on Creditors Committees................................................................... 7
Variable and Floating Rate Securities................................................................... 7
Mortgage-Related and Asset-Backed Securities............................................................ 8
Foreign Securities...................................................................................... 12
Bank Obligations........................................................................................ 13
Commercial Paper........................................................................................ 14
Derivative Instruments.................................................................................. 15
When-Issued, Delayed Delivery and Forward Commitment Transactions....................................... 21
Warrants to Purchase Securities......................................................................... 21
Tax Exempt Bonds........................................................................................ 22
Metal-Indexed Notes and Precious Metals................................................................. 23
Repurchase Agreements................................................................................... 24
Securities Loans........................................................................................ 24
INVESTMENT RESTRICTIONS...................................................................................... 25
Fundamental Investment Restrictions..................................................................... 25
Non-Fundamental Investment Restrictions................................................................. 27
MANAGEMENT OF THE TRUST...................................................................................... 29
Trustees ............................................................................................... 29
Officers ............................................................................................... 30
Trustees' Compensation.................................................................................. 32
Investment Adviser...................................................................................... 33
Fund Administrator...................................................................................... 40
DISTRIBUTION OF TRUST SHARES................................................................................. 43
Distributor and Multi-Class Plan........................................................................ 43
Contingent Deferred Sales Charge and Initial Sales Charge............................................... 44
Distribution and Servicing Plans for Class A, Class B and Class C Shares................................ 45
Distribution and Administrative Services Plans for Administrative Class Shares.......................... 52
Plan for Class D Shares................................................................................. 54
Purchases, Exchanges and Redemptions.................................................................... 55
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................................................... 56
Investment Decisions.................................................................................... 56
Brokerage and Research Services......................................................................... 56
Portfolio Turnover...................................................................................... 59
NET ASSET VALUE.............................................................................................. 59
TAXATION..................................................................................................... 59
Distributions........................................................................................... 61
Sales of Shares......................................................................................... 62
Backup Withholding...................................................................................... 62
Options, Futures, Forward Contracts and Swap Agreements................................................. 62
Passive Foreign Investment Companies.................................................................... 63
Foreign Currency Transactions........................................................................... 64
Foreign Taxation........................................................................................ 64
Original Issue Discount................................................................................. 64
Other Taxation.......................................................................................... 65
OTHER INFORMATION............................................................................................ 66
Capitalization.......................................................................................... 66
Performance Information................................................................................. 66
Calculation of Yield.................................................................................... 66
Calculation of Total Return............................................................................. 67
Voting Rights .......................................................................................... 78
Certain Ownership of Trust Shares....................................................................... 79
Custodian............................................................................................... 97
Independent Accountants................................................................................. 97
Registration Statement.................................................................................. 98
Financial Statements.................................................................................... 98
APPENDIX .................................................................................................... A-1
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INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund are
described in the Prospectuses. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts
issued in connection with so-called trademark zero coupon securities, such as
CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury
securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
Inflation-Indexed Bonds
The Balanced Fund may invest in inflation-indexed bonds, which are fixed
income securities whose principal value is periodically adjusted according to
the rate of inflation. The interest rate on these bonds is generally fixed at
issuance at a rate lower than typical bonds. Over the life of an inflation-
indexed bond, however, interest will be paid based on a principal value which is
adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten years, although it is anticipated that securities
with other maturities will be issued in the future. The securities will pay
interest on a semi-annual basis, equal to a fixed percentage of the inflation-
adjusted principal amount. For example, if an investor purchased an inflation-
indexed bond with a par value of $1,000 and a 3% real rate of return coupon
(payable 1.5% semi-annually), and inflation over the first six months were 1%,
the mid-year par value of the bond would be $1,010 and the first semi-annual
interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year reached 3%, the end-of-year par value of the bond would
be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030
times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the
current market value of the bonds is not guaranteed, and will fluctuate. The
Balanced Fund may also invest in other inflation-related bonds which may or may
not provide a similar guarantee. If such a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal. The value of inflation-indexed bonds is
expected to change in response to changes in real interest rates. Real interest
rates in turn are tied to the relationship between nominal interest rates and
the rate of inflation. Therefore, if inflation were to rise at a faster rate
than nominal interest rates, real interest rates might decline, leading to an
increase in value of inflation-indexed bonds. In contrast, if nominal interest
rates increased
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at a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term 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 temporary administrative purposes in excess of 5%
of the Fund's total assets must maintain continuous asset coverage. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, a Fund may be required to sell some of its portfolio holdings within
three days to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. Borrowing will tend to exaggerate the effect on net asset value of
any increase or decrease in the market value of a Fund's portfolio. Money
borrowed will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased. A Fund also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements if permitted to do so under its investment
restrictions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. The Fund will maintain a segregated
account with its custodian consisting of assets determined to be liquid by the
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Adviser or the Fund's sub-adviser (the Funds' sub-advisers are referred to
herein as "Portfolio Managers") in accordance with procedures established by the
Board of Trustees and equal (on a daily mark-to-market basis) to its obligations
under reverse repurchase agreements with broker-dealers (but not banks).
However, reverse repurchase agreements involve the risk that the market value of
securities retained by the Fund may decline below the repurchase price of the
securities sold by the Fund which it is obligated to repurchase. Reverse
repurchase agreements will be subject to the Funds' limitations on borrowings as
specified under "Investment Restrictions" below.
Preferred Stock
All Funds may invest in preferred stock. Preferred stock is a form of
equity ownership in a corporation. The dividend on a preferred stock is a fixed
payment which the corporation is not legally bound to pay. Certain classes of
preferred stock are convertible, meaning the preferred stock is convertible into
shares of common stock of the issuer. By holding convertible preferred stock, a
Fund can receive a steady stream of dividends and still have the option to
convert the preferred stock to common stock.
Corporate Debt Securities
All Funds may invest in corporate debt securities. The Equity Income,
Value, Capital Appreciation, Mid-Cap Growth, Micro-Cap Growth, Small-Cap Value,
Small-Cap Growth, Core Equity, Mid-Cap Equity, Enhanced Equity, Emerging
Markets, Structured Emerging Markets, Tax-Managed Structured Emerging Markets
and International Developed Funds' investments in corporate debt securities are
limited to short-term corporate debt securities. The investment return of
corporate debt securities reflects interest earnings and changes in the market
value of the security. The market value of a corporate debt obligation may be
expected to rise and fall inversely with interest rates generally. There also
exists the risk that the issuers of the securities may not be able to meet their
obligations on interest or principal payments at the time called for by an
instrument.
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are deemed to
be comparable in quality to corporate debt securities in which the Fund may
invest. The rate of return or return of principal on some debt obligations may
be linked or indexed to the level of exchange rates between the U.S. dollar and
a foreign currency or currencies.
Among the corporate debt securities in which the Funds may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to non-
convertible debt securities. Convertible securities rank senior to common stock
in a corporation's capital structure and, therefore, generally entail less risk
than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party.
High Yield Securities ("Junk Bonds")
Certain of the Funds may invest in debt/fixed income securities of domestic
or foreign issuers that meet minimum ratings criteria set forth for a Fund, or,
if unrated, are of comparable quality in the opinion of the Fund's Portfolio
Manager. A description of the ratings categories used is set forth in the
Appendix to this Statement of Additional Information.
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A security is considered to be below "investment grade" quality if it is
either (1) not rated in one of the four highest rating categories by one of the
Nationally Recognized Statistical Rating Organizations ("NRSROs") (i.e., rated
Ba or below by Moody's Investors Services, Inc. ("Moody's") or BB or below by
Standard & Poor's Corporation ("S&P")) or (2) if unrated, determined by the
relevant Portfolio Manager to be of comparable quality to obligations so rated.
The Renaissance, Growth, Balanced and Tax Exempt Funds may purchase high
yield securities (as defined in the Prospectuses) rated in either the fifth or
(except for the Tax Exempt Fund) sixth highest rating categories by any NRSRO or
comparable unrated securities, and the Renaissance Fund may invest up to 10% of
its total assets in high yield securities rated below the sixth highest rating
category by an NRSRO or comparable unrated securities (but will not purchase any
security in default on the date of acquisition). The Growth Fund will generally
invest no more than 5% of its net assets in high yield securities. Investment
in high yield securities generally provides greater income and increased
opportunity for capital appreciation than investments in higher quality
securities, but it also typically entails greater price volatility as well as
principal and income risk. High yield securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. The market for these securities is relatively new, and
many of the outstanding high yield securities have not endured a major business
recession. A long-term track record on default rates, such as that for
investment grade corporate bonds, does not exist for this market. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt/fixed income securities. Each Fund of
the Trust that may purchase high yield securities may continue to hold such
securities following a decline in their rating if in the opinion of the Adviser
or the Portfolio Manager, as the case may be, it would be advantageous to do so.
Investments in high yield securities that are eligible for purchase by certain
of the Funds are described as "speculative" by both Moody's and S&P.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
While offering a greater potential opportunity for capital appreciation and
higher yields than investments in higher rated debt securities, high yield
securities typically entail greater potential price volatility and may be less
liquid than investment grade debt. High yield securities may be regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and achievement of a Fund's investment objective may,
to the extent of its investments in high yield securities, depend more heavily
on the Portfolio Manager's creditworthiness analysis than would be the case if
the Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities are likely to be sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt/fixed income securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Funds investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in cash.
Prices of high yield/high risk securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to economic downturns or individual corporate developments. The
secondary market on which high yield securities are traded may be less liquid
than the market for higher grade securities. Less liquidity in the secondary
trading market could adversely affect the price at which the Funds could sell a
high yield security, and could adversely affect the daily net asset value of the
shares. Lower liquidity in secondary markets could adversely affect the value
of high yield/high risk securities held by the Renaissance,
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Growth, Tax Exempt and Balanced Funds. While lower rated securities typically
are less sensitive to interest rate changes than higher rated securities, the
market prices of high yield/high risk securities structured as "zero coupon" or
"pay-in-kind" securities may be affected to a greater extent by interest rate
changes. See Appendix A to this Statement of Additional Information for further
information regarding high yield/high risk securities. For instance, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market. When secondary markets for high yield
securities are less liquid than the market for higher grade securities, it may
be more difficult to value the securities because such valuation may require
more research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available.
Debt securities are purchased and sold principally in response to current
assessments of future changes in business conditions and the levels of interest
rates on debt/fixed income securities of varying maturities, the availability of
new investment opportunities at higher relative yields, and current evaluations
of an issuer's continuing ability to meet its obligations in the future. The
average maturity or duration of the debt/fixed income securities in a Fund's
portfolio may vary in response to anticipated changes in interest rates and to
other economic factors. Securities may be bought and sold in anticipation of a
decline or a rise in market interest rates. In addition, a Fund may sell a
security and purchase another of comparable quality and maturity (usually, but
not always, of a different issuer) at approximately the same time to take
advantage of what are believed to be short-term differentials in values or
yields.
Participation on Creditors Committees
A Fund may from time to time participate on committees formed by creditors
to negotiate with the management of financially troubled issuers of securities
held by the Fund. Such participation may subject a Fund to expenses such as
legal fees and may make the Fund an "insider" of the issuer for purposes of the
federal securities laws, and therefore may restrict the Fund's ability to trade
in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by a Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws governing the rights of creditors and debtors. A Fund would
participate on such committees only when the Adviser and the relevant Portfolio
Manager believe that such participation is necessary or desirable to enforce the
Fund's rights as a creditor or to protect the value of securities held by the
Fund.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
Certain of the Funds may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied
to another interest rate, such as a money-market index or U.S. Treasury bill
rate. The interest rate on a floater resets periodically, typically every six
months. Because of the interest rate reset feature, floaters provide a Fund
with a certain degree of protection against rises in interest rates, but
generally do not allow the Fund to participate fully in appreciation resulting
from any general decline in interest rates.
Certain Funds may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security generally will exhibit greater
price volatility than a fixed rate obligation of similar credit quality. See
"Mortgage-Related and Asset-Backed Securities" below.
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Mortgage-Related and Asset-Backed Securities
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations (see "Mortgage Pass-Through
Securities" below). Certain debt securities are also secured with collateral
consisting of mortgage-related securities (see "Collateralized Mortgage
Obligations" below).
Mortgage Pass-Through Securities. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional payments
are caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of mortgages insured by the Federal Housing Administration (the "FHA"), or
guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the FNMA and the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. FNMA purchases conventional
(i.e., not insured or guaranteed by any government agency) residential mortgages
from a list of approved seller/services which include state and federally
chartered savings and loan associations, mutual savings banks, commercial banks,
and credit unions and mortgage bankers. Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by FNMA but are
not backed by the full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the twelve Federal Home Loan Banks and
now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or services of the underlying mortgage loans as
well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of
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interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees, and the creditworthiness of the
issuers thereof, will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. A Fund may buy mortgage-
related securities without insurance or guarantees if, through an examination of
the loan experience and practices of the originator/servicers and poolers, the
Portfolio Manager determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the Portfolio Manager's opinion are illiquid if, as a result,
more than 15% of the value of the Fund's net assets (taken at market value at
the time of investment) will be invested in illiquid securities.
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to a Fund's
industry concentration restrictions, see "Investment Restrictions," by virtue of
the exclusion from that test available to all U.S. Government securities. In
the case of privately issued mortgage-related securities, the Funds take the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real
properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
--------
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B, or
C Bond currently being paid off. When the Series A, B, and C Bonds are paid in
full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
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FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each semi-annual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral
in the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions
on real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
IO class of stripped mortgage-backed securities. See "Other Mortgage-Related
Securities--Stripped Mortgage-Backed Securities." In addition, if a series of a
CMO includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive
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to changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances a Fund may fail to recoup some or all of its initial
investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only recently developed and CMO residuals currently may not
have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not,
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the "IO"
class), while the other class will receive all of the principal (the "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Adviser and Portfolio
Managers expect that other asset-backed securities (unrelated to mortgage loans)
will be offered to investors in the future and may be purchased by the Funds
that may invest in mortgage-related securities. Several types of asset-backed
securities have already been offered to investors, including Certificates for
Automobile Receivables(SM) ("CARS(SM)"). CARS(SM) represent undivided
fractional interests in a trust whose assets consist of a pool of motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on CARS(SM) are
passed through monthly to certificate holders, and are guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the trust.
An investor's return on CARS(SM) may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted, the trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Consistent with a Fund's investment objectives and policies, the Adviser
and Portfolio Manager also may invest in other types of asset-backed securities.
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Foreign Securities
The Emerging Markets, Structured Emerging Markets, Tax-Managed Structured
Emerging Markets, International Developed, International Growth and
International Funds may invest in U.S. dollar or foreign currency-denominated
corporate debt securities of foreign issuers; preferred securities of foreign
issuers; certain foreign bank obligations; and U.S. dollar- or foreign currency-
denominated obligations of foreign governments or their subdivisions, agencies
and instrumentalities, international agencies and supranational entities. Each
of the Funds except for the Tax Exempt Fund may invest in American Depository
Receipts ("ADRs"). The Emerging Markets, Structured Emerging Markets, Tax-
Managed Structured Emerging Markets, International Developed, International
Growth, International and Precious Metals Funds may also invest in common
stocks issued by foreign companies or in securities represented by European
Depository Receipts ("EDRs"), or Global Depository Receipts ("GDRs"). ADRs are
dollar-denominated receipts issued generally by domestic banks and represent the
deposit with the bank of a security of a foreign issuer. The Core Equity and
Mid-Cap Equity Funds may invest in ADRs, EDRs and GDRs. EDRs are foreign
currency-denominated receipts similar to ADRs and are issued and traded in
Europe, and are publicly traded on exchanges or over-the-counter in the United
States. GDRs may be offered privately in the United States and also trade in
public or private markets in other countries. ADRs, EDRs and GDRs may be issued
as sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities trade in the form of ADRs, EDRs or GDRs. In
unsponsored programs, the issuer may not be directly involved in the creation of
the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. The Precious Metals Fund may invest primarily
in securities of foreign issuers, securities denominated in foreign currencies,
securities principally traded on securities markets outside of the United States
and in securities of foreign issuers that are traded on U.S. securities markets.
The Renaissance, Core Equity, Mid-Cap Equity, Growth, Target, Opportunity and
Innovation Funds each may invest up to 15% of their respective net assets in
securities which are traded principally in securities markets outside the United
States (Eurodollar certificates of deposit are excluded for purposes of these
limitations), and (except for the Core Equity and Mid-Cap Equity Funds) may
invest without limit in securities of foreign issuers that are traded in U.S.
securities markets. The Enhanced Equity Fund may invest in common stock of
foreign issuers if it is included in the index from which stocks are selected.
The Balanced Fund may invest up to 20% of its assets allocated for investment in
fixed income securities in securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities of foreign
issuers.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including taxes withheld from payments on those securities. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar.
The risks of investing in foreign securities are particularly high when
securities of issuers based in developing (or ''emerging market'') countries are
involved. Investing in emerging market countries involves certain risks not
typically associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: greater risks of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; greater social, economic and
political uncertainty and instability (including the risk of war); more
substantial government involvement in the economy; higher rates of inflation;
less government supervision and regulation of the securities markets and
participants in those markets; controls on foreign investment and limitations on
repatriation of invested capital and on the Fund's ability to exchange local
currencies for U.S. dollars; unavailability of currency hedging
12
<PAGE>
techniques in certain emerging market countries; the fact that companies in
emerging market countries may be smaller, less seasoned and newly organized
companies; the difference in, or lack of, auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets.
The Renaissance, Core Equity, Mid-Cap Equity, Growth, Target, Opportunity,
Innovation, International, International Developed, International Growth,
Emerging Markets, Structured Emerging Markets, Tax-Managed Structured Emerging
Markets, Precious Metals and Balanced Funds may enter into forward foreign
currency exchange contracts to reduce the risks of adverse changes in foreign
exchange rates. In addition, the Emerging Markets, Structured Emerging Markets,
Tax-Managed Structured Emerging Markets, International, International Developed,
International Growth, Balanced and Precious Metals Funds may buy and sell
foreign currency futures contracts and options on foreign currencies and foreign
currency futures.
All of the Funds that may buy or sell foreign currencies may enter into
forward foreign currency exchange contracts to reduce the risks of adverse
changes in foreign exchange rates. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. By entering into a
forward foreign currency exchange contract, the fund "locks in" the exchange
rate between the currency it will deliver and the currency it will receive for
the duration of the contract. As a result, a Fund reduces its exposure to
changes in the value of the currency it will deliver and increases its exposure
to changes in the value of the currency it will exchange into. Contracts to
sell foreign currencies would limit any potential gain which might be realized
by a Fund if the value of the hedged currency increases. A Fund may enter into
these contracts for the purpose of hedging against foreign exchange risks
arising from the Funds' investment or anticipated investment in securities
denominated in foreign currencies. Such hedging transactions may not be
successful and may eliminate any chance for a Fund to benefit from favorable
fluctuations in relevant foreign currencies.
The International, International Developed, International Growth, Emerging
Markets, Structured Emerging Markets and Tax-Managed Structured Emerging Markets
Funds may also enter into forward foreign currency exchange contracts for
purposes of increasing exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one currency to another. To the extent that
they do so, the International, International Developed, Emerging Markets,
Structured Emerging Markets and Tax-Managed Structured Emerging Markets Funds
will be subject to the additional risk that the relative value of currencies
will be different than anticipated by the particular Fund's Portfolio Manager.
A Fund may use one currency (or a basket of currencies) to hedge against adverse
changes in the value of another currency (or a basket of currencies) when
exchange rates between the two currencies are positively correlated. A Fund
will segregate assets determined to be liquid by the Portfolio Manager in
accordance with procedures established by the Board of Trustees in a segregated
account to cover forward currency contracts entered into for non-hedging
purposes. The Funds may also use foreign currency futures contracts and related
options on currencies for the same reasons for which forward foreign currency
exchange contracts are used.
Bank Obligations
Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or
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(2) provide for withdrawal penalties upon prepayment (other than overnight
deposits) if, in the aggregate, more than 15% of its net assets (taken at market
value at the time of investment) would be invested in such deposits, repurchase
agreements maturing in more than seven days and other illiquid assets. Each Fund
may also hold funds on deposit with its sub-custodian bank in an interest-
bearing account for temporary purposes.
Each Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Renaissance, Growth, Target, Core Equity, Mid-Cap Equity, Opportunity,
Innovation, International, Emerging Markets, Structured Emerging Markets, Tax-
Managed Structured Emerging Markets, International Developed, International
Growth, Precious Metals and Balanced Funds limit their investments in foreign
bank obligations to obligations of foreign banks (including United States
branches of foreign banks) which at the time of investment (i) have more than
$10 billion, or the equivalent in other currencies, in total assets; (ii) are
among the 75 largest foreign banks in the world in terms of total assets; (iii)
have branches or agencies (limited purpose offices which do not offer all
banking services) in the United States; and (iv) in the opinion of the relevant
Portfolio Manager, are of an investment quality comparable to obligations of
United States banks in which the Funds may invest. Subject to each Fund's
limitation on concentration of no more than 25% of its assets in the securities
of issuers in a particular industry, there is no limitation on the amount of a
Fund's assets which may be invested in obligations of foreign banks which meet
the conditions set forth above.
Obligations of foreign banks involve certain risks associated with
investing in foreign securities described under "Foreign Securities" above,
including the possibilities that their liquidity could be impaired because of
future political and economic developments, that their obligations may be less
marketable than comparable obligations of United States banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
Commercial Paper
All Funds may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Funds consists of U.S. dollar-denominated obligations of
domestic issuers, or, additionally for the Renaissance, Growth, Target, Core
Equity, Mid-Cap Equity, Opportunity, Innovation, Emerging Markets, Structured
Emerging Markets, Tax-Managed Structured Emerging Markets, International,
International Developed and International Growth, Precious Metals and Balanced
Funds, foreign currency-denominated obligations of domestic or foreign issuers
which, at the time of investment, are (i) rated "P-1" or "P-2" by Moody's or "A-
1" or "A-2" or better by S&P, (ii) issued or guaranteed as to principal and
interest by issuers or guarantors having an existing debt security rating of "A"
or better by Moody's or "A" or better by S&P, or (iii) securities which, if not
rated, are, in the opinion of the Portfolio Manager, of an investment quality
comparable to rated commercial paper in which the Fund may invest. The rate of
return on commercial paper may be linked or indexed to the level of exchange
rates between the U.S. dollar and a foreign currency or currencies.
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Derivative Instruments
The following describes certain derivative instruments and products in
which the Funds may invest (to the extent described in the Prospectuses and
under "Investment Restrictions" below) and risks associated therewith.
Options on Securities and Indexes. A Fund may, to the extent specified for
the Fund in the Prospectuses and under "Investment Restrictions" below, purchase
and sell both put and call options on fixed income or other securities or
indexes in standardized contracts traded on foreign or domestic securities
exchanges, boards of trade, or similar entities, or quoted on National
Association of Securities Dealers Automated Quotations ("NASDAQ") or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees in such amount are placed in a segregated account by its custodian)
upon conversion or exchange of other securities held by the Fund. For a call
option on an index, the option is covered if the Fund maintains with its
custodian assets determined to be liquid by the Portfolio Manager in accordance
with procedures established by the Board of Trustees in an amount equal to the
contract value of the index. A call option is also covered if the Fund holds a
call on the same security or index as the call written where the exercise price
of the call held is (i) equal to or less than the exercise price of the call
written, or (ii) greater than the exercise price of the call written, provided
the difference is maintained by the Fund in assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees in a segregated account with its custodian. A put option on a security
or an index is "covered" if the Fund maintains assets determined to be liquid by
the Portfolio Manager in accordance with procedures established by the Board of
Trustees equal to the exercise price in a segregated account with its custodian.
A put option is also covered if the Fund holds a put on the same security or
index as the put written where the exercise price of the put held is (i) equal
to or greater than the exercise price of the put written, or (ii) less than the
exercise price of the put written, provided the difference is maintained by the
Fund in assets determined to be liquid by the Portfolio Manager in accordance
with procedures established by the Board of Trustees in a segregated account
with the Fund's custodian.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund
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will realize a capital gain or, if it is less, the Fund will realize a capital
loss. The principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the option,
the volatility of the underlying security or index, and the time remaining until
the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
OTC Options. The Renaissance, Growth, Target, Opportunity, Innovation,
International, International Growth, Precious Metals and Tax Exempt Funds will
enter into over-the-counter ("OTC") options transactions only with primary
dealers in U.S. Government securities and only pursuant to agreements that will
assure that the relevant Fund will at all times have the right to repurchase the
option written by it from the dealer at a specified formula price. The Funds
will treat the amount by which such formula price exceeds the intrinsic value of
the option (i.e., the amount, if any, by which the market price of the
underlying security exceeds the exercise price of the option) as an illiquid
investment.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Fund forgoes,
during the option's life, the opportunity to profit from increases in the market
value of the security covering the call option above the sum of the premium and
the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Foreign Currency Options. Each of the Funds that may buy or sell foreign
currencies may buy or sell put and call options on foreign currencies either on
exchanges or in the over-the-counter market. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the
exercise price until the option expires. A call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options.
Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified in the
Prospectuses. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time.
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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).
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.
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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-Managed 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 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
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holding a call option permitting the Fund to purchase the same futures contract
at a price no higher than the price of the contract written by the Fund (or at a
higher price if the difference is maintained in liquid assets with the Trust's
custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Portfolio Manager in accordance with procedures established by the
Board of Trustees that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by the Portfolio Manager in accordance with procedures established by the
Board of Trustees that equal the purchase price of the futures contract, less
any margin on deposit. Alternatively, the Fund may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. Some of the risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation.
For example, if the price of the futures contract moves more than the price of
the hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. In addition, there are significant differences between the
securities and futures markets that could result in an imperfect correlation
between the markets, causing a given hedge not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options on
securities, including technical influences in futures trading and futures
options, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of issuers.
To compensate for imperfect correlations, a Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches. A decision as to whether, when and how to hedge involves
the exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures contracts on U.S. Government securities historically have reacted
to an increase or decrease in interest rates in a manner similar to that in
which the underlying U.S. Government securities reacted. To the extent,
however, that the Tax Exempt Fund enters into such futures contracts, the value
of such futures will not vary in direct proportion to the value of the Fund's
holdings of Tax Exempt Bonds. Thus, the anticipated spread between the price of
the futures contract and the hedged security may be distorted due to differences
in the nature of the markets. The spread also may be distorted by differences
in initial and variation margin requirements, the liquidity of such markets and
the participation of speculators in such markets.
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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 Emerging Markets, Structured Emerging Markets, Tax-
Managed Structured Emerging Markets, and International Developed Funds may enter
into equity index swap agreements for purposes of attempting to gain exposure to
the stocks making up an index of securities in a foreign market without actually
purchasing those stocks. The Balanced Fund may enter into swap agreements to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested in a "basket" of securities representing a particular
index.
Most swap agreements entered into by the Funds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counter party will be covered by the maintenance of a
segregated account consisting of assets determined to be liquid by the Portfolio
Manager in accordance with procedures established by the Board of Trustees, to
avoid any potential leveraging of the Fund's portfolio. Obligations under swap
agreements so covered will not be construed to be "senior securities" for
purposes of a Fund's investment restriction concerning senior securities. A
Fund will not enter into
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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 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
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degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a Fund to buy
additional bonds at the favorable rate or to sell the warrants at a profit. If
interest rates rise, the warrants would generally expire with no value.
Tax Exempt Bonds
As noted in the Class A, B and C Prospectus, it is a policy of the Tax
Exempt Fund to have 80% of its net assets invested in debt obligations the
interest on which, in the opinion of bond counsel to the issuer at the time of
issuance, is exempt from federal income tax ("Tax Exempt Bonds") which are rated
Baa or higher by Moody's or BBB or higher by S&P, or in one of the four highest
rating categories of any other NRSRO, or which are unrated and determined by the
Portfolio Manager to be of quality comparable to obligations so rated. Under
such policy, the Fund may invest up to 20% of its net assets in Tax Exempt Bonds
rated in the fifth highest rating category by any NRSRO, or unrated obligations
determined by the Portfolio Manager to be of quality comparable to obligations
so rated. A description of these ratings is set forth in Appendix A hereto.
From time to time, however, the Fund may have less than 80% of its net assets
invested in Tax Exempt Bonds for temporary defensive purposes. The ability of
the Fund to invest in securities other than Tax Exempt Bonds is limited by a
requirement of the Internal Revenue Code that at least 50% of the Fund's total
assets be invested in Tax Exempt Bonds at the end of each calendar quarter. See
"Taxes."
Tax Exempt Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and multi-
state agencies or authorities. The Tax Exempt Bonds which the Tax Exempt Fund
may purchase include general obligation bonds and limited obligation bonds (or
revenue bonds), including industrial development bonds issued pursuant to former
federal tax law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such issuer's general
revenues and not from any particular source. Limited obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Tax-exempt private activity bonds and industrial
development bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user (and/or any
guarantor).
Under the Internal Revenue Code, certain limited obligation bonds are
considered "private activity bonds" and interest paid on such bonds is treated
as an item of tax preference for purposes of calculating federal alternative
minimum tax liability.
Tax Exempt Bonds are subject to credit and market risk. Generally, prices
of higher quality issues tend to fluctuate less with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues.
The Tax Exempt Fund may purchase and sell portfolio investments to take
advantage of changes or anticipated changes in yield relationships, markets or
economic conditions. The Fund may also sell Tax Exempt Bonds due to changes in
the Portfolio Manager's evaluation of the issuer or cash needs resulting from
redemption requests for Fund shares. The secondary market for Tax Exempt Bonds
typically has been less liquid than that for taxable debt/fixed income
securities, and this may affect the Fund's ability to sell particular Tax Exempt
Bonds at then-current market prices, especially in periods when other investors
are attempting to sell the same securities.
Prices and yields on Tax Exempt Bonds are dependent on a variety of
factors, including general money-market conditions, the financial condition of
the issuer, general conditions of the Tax Exempt Bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial
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condition of an issuer of Tax Exempt Bonds may not be as extensive as that which
is made available by corporations whose securities are publicly traded.
Obligations of issuers of Tax Exempt Bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose other constraints upon enforcement of such obligations.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of interest and principal on their Tax Exempt Bonds may be materially
affected or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for Tax Exempt Bonds or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments might affect all or
a substantial portion of the Fund's Tax Exempt Bonds in the same manner.
Metal-Indexed Notes and Precious Metals
The Precious Metals Fund may invest in notes, the principal amount or
redemption price of which is indexed to, and thus varies directly with, changes
in the market price of gold bullion or other precious metals ("Metal-Indexed
Notes"). It is expected that the value of Metal-Indexed Notes will be as
volatile as the price of the underlying metal.
The Precious Metals Fund will only purchase Metal-Indexed Notes which are
rated investment grade or are issued by issuers that have outstanding debt
obligations rated investment grade or commercial paper rated in the top rating
category by any NRSRO, or Metal-Indexed Notes issued by issuers that the
Portfolio Manager has determined to be of similar creditworthiness. Debt
obligations rated in the fourth highest rating category by an NRSRO are
considered to have some speculative characteristics. The Metal-Indexed Notes
might be backed by a bank letter of credit, performance bond or might be
otherwise secured, and any such security, which would be held by the Fund's
custodian, would be taken into account in determining the creditworthiness of
the securities. The Precious Metals Fund might purchase unsecured Metal-Indexed
Notes if the issuer thereof met the Fund's credit standards without any such
security. While the principal amount or redemption price of Metal-Indexed Notes
would vary with the price of the resource, such securities would not be secured
by a pledge of the resource or any other security interest in or claim on the
resource. In the case of Metal-Indexed Notes not backed by a performance bond,
letter of credit or similar security, it is expected that such securities
generally would not be secured by any other specific assets.
The Precious Metals Fund anticipates that if Metal-Indexed senior
securities were to be purchased, such securities would be issued by precious
metals or commodity brokers or dealers, by mining companies, by commercial banks
or by other financial institutions. Such issuers would issue notes to hedge
their inventories and reserves of the resource, or to borrow money at a
relatively low cost (which would include the nominal rate of interest paid on
Metal-Indexed Notes, described below, and the cost of hedging the issuer's
metals exposure). The Precious Metals Fund would not purchase a Metal-Indexed
Note issued by a broker or dealer if as a result of such purchase more than 5%
of the value of the Fund's total assets would be invested in securities of such
issuer. The Precious Metals Fund 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, Enhanced Equity, Capital Appreciation, Mid-Cap Growth,
Small-Cap Value, Small-Cap Growth, Core Equity, Mid-Cap Equity, Target, Micro-
Cap Growth, International Developed, Emerging Markets, Structured Emerging
Markets, Tax-Managed Structured Emerging Markets and Balanced Funds may make
secured loans of its portfolio securities amounting to no more than 33 1/3% of
its total assets, and each of the Renaissance, Growth, Opportunity, Innovation,
International, International Growth, Tax Exempt and Precious Metals Funds may
make such loans amounting to no more than 25% of its total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail 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.
24
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The investment restrictions set forth below are fundamental policies of the
Renaissance, Growth, Target, Opportunity, Innovation, International,
International Growth, Precious Metals and Tax Exempt Funds and may not be
changed with respect to any such Fund without shareholder approval by vote of a
majority of the outstanding voting securities of that Fund. Under these
restrictions, none of the above-mentioned Funds may:
----
(1) borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of such Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will be
repaid before any additional investments are purchased;
(2) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of such Fund's total assets (taken at cost) and then only to
secure borrowings permitted by Restriction (1) above. (The deposit of
securities or cash or cash equivalents in escrow in connection with the writing
of covered call or put options, respectively, is not deemed to be pledges or
other encumbrances.) (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, futures contracts, options
on futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are deemed
to be the issuance of a senior security.);
(3) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
(4) purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate, except that the Precious Metals Fund may purchase or sell
agricultural land;
(5) acquire more than 10% of the voting securities of any issuer, both
with respect to any such Fund and to the Funds to which this policy relates, in
the aggregate; or
(6) concentrate more than 25% of the value of its total assets in any one
industry, or, in the case of the Tax Exempt Fund, in industrial development
revenue bonds based, directly or indirectly, on the credit of private entities
in any one industry; except that the Precious Metals Fund will concentrate more
than 25% of its total assets in securities of companies principally engaged in
the extraction, processing, distribution or marketing of precious metals, and
the Innovation Fund will concentrate more than 25% of its assets in companies
which use innovative technologies to gain a strategic, competitive advantage in
their industry as well as companies that provide and service those technologies.
Investments of the Tax Exempt Fund in utilities, gas, electric, water and
telephone companies will be considered as being in separate industries.
The investment objective of each of the above-referenced Funds and the Tax-
Managed Structured Emerging Markets Fund is non-fundamental and may be changed
with respect to each such Fund by the Trustees without shareholder approval.
The investment objective of each of the Equity Income, Value, Enhanced
Equity, Capital Appreciation, Mid-Cap Growth, Small-Cap Value, Small-Cap Growth,
Core Equity, Mid-Cap Equity, Micro-Cap Growth, International Developed, Emerging
Markets, Structured Emerging Markets, and Balanced Funds, as set forth in the
Prospectuses under "Investment Objectives and Policies," together with the
investment restrictions set forth below, are fundamental policies of each such
Fund and may not be changed with respect to any such Fund without shareholder
25
<PAGE>
approval by vote of a majority of the outstanding shares of that Fund. The
following are also fundamental policies of the Tax-Managed Structured Emerging
Markets Fund. Under these restrictions, none of the above-mentioned Funds may:
----
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(4) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(5) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Fund may
engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(6) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures, and except that effecting short sales will be deemed not
to constitute a margin purchase for purposes of this restriction;
(7) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Fund may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts as described in the Prospectuses
and in this Statement of Additional Information (the deposit of assets in escrow
in connection with the writing of covered put and call options and the purchase
of securities on a when-issued or delayed delivery basis and collateral
arrangements with respect to initial or variation margin deposits for futures
contracts, options on futures contracts, and forward foreign currency contracts
will not be deemed to be pledges of such Fund's assets);
(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
26
<PAGE>
amount not to exceed one-third of the value of its total assets, provided such
loans are made in accordance with applicable guidelines established by the SEC
and the Trustees of the Trust; or
(10) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
Notwithstanding the provisions of fundamental investment restrictions (7)
and (8) above, a Fund may borrow money for temporary administrative purposes.
To the extent that borrowings for temporary administrative purposes exceed 5% of
the total assets of a Fund, such excess shall be subject to the 300% asset
coverage requirement of fundamental investment restriction (7).
Non-Fundamental Investment Restrictions
Each Fund is also subject to the following non-fundamental restrictions and
policies (which may be changed without shareholder approval) and, unless
otherwise indicated, may not:
(1) invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities the disposition of which is restricted under
federal securities laws, (c) repurchase agreements maturing in more than seven
days, (d) OTC options (to the extent described above under "Derivative
Instruments -- OTC Options"), and (e) IO/PO SMBS (as described above under
"Mortgage-Related and Asset-Backed Securities -- Stripped Mortgage -Backed
Securities") if, as a result, more than 15% of a Fund's net assets, taken at
current value, would then be invested in securities described in (a), (b), (c),
(d) and (e) above. For the purpose of this restriction, securities subject to a
7-day put option or convertible into readily saleable securities or commodities
are not included with subsections (a) or (b);
(2) with respect to the Tax Exempt Fund, invest less than 80% of such
Fund's net assets in Tax Exempt Bonds rated Baa or higher by Moody's or BBB or
higher by S&P or which are unrated and determined by such Fund's Portfolio
Manager to be of comparable quality;
(3) purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment by a Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.);
(4) make short sales of securities or maintain a short position for the
account of a Fund unless at all times when a short position is open such Fund
owns an equal amount of such securities or owns or has the right to acquire
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
(5) purchase or sell commodities or commodity contracts except that a Fund
may purchase and sell financial futures contracts and related options and the
Precious Metals Fund may purchase and sell precious metals and other commodities
and futures thereon;
(6) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth, Precious Metals and Tax Exempt
Funds, make loans, except by purchase of debt obligations or by entering into
repurchase agreements (in the case of the Tax Exempt Fund, with respect to not
more than 20% of its total assets) or through the lending of the Fund's
portfolio securities with respect to not more than 25% of its total assets (33
1/3% in the case of the Target Fund);
(7) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth, Precious Metals and Tax Exempt
Funds, and in each case with respect to 75% of such Fund's total assets, invest
in securities of any issuer if, immediately after such investment, more than 5%
of the total assets of such Fund
27
<PAGE>
(taken at current value) would be invested in the securities of such issuer;
provided that this limitation does not apply to bank certificates of deposit or
to obligations issued or guaranteed as to interest and principal by the U.S.
government or its agencies or instrumentalities. For the purpose of this
restriction, each state and each separate political subdivision, agency,
authority or instrumentality of such state, each multi-state agency or
authority, and each guarantor, if any, are treated as separate issuers of Tax
Exempt Bonds;
(8) purchase securities the disposition of which is restricted under the
federal securities laws (excluding for purposes of this restriction securities
offered and sold pursuant to Rule 144A of the 1933 Act and Section 4(2)
commercial paper) if, as a result, such investments would exceed 15% of the
value of the net assets of the relevant Fund;
(9) write (sell) or purchase options except that (i) each Fund (other than
the Tax Exempt Fund) may (a) write covered call options or covered put options
on securities that it is eligible to purchase and enter into closing purchase
transactions with respect to such options, and (b) in combination therewith, or
separately, purchase put and call options on securities it is eligible to
purchase, and (c) each Fund may engage in options on securities indexes, options
on foreign currencies, options on futures contracts, and options on other
financial instruments or one or more groups of instruments; (ii) the Tax Exempt
Fund may purchase put options with respect to all or any part of its portfolio
securities and call options with respect to securities that it is eligible to
purchase; provided that the premiums paid by each Fund on all outstanding
options it has purchased do not exceed 5% of its total assets. Each Fund may
enter into closing sale transactions with respect to options it has purchased;
(10) invest more than 15% of the net assets of a Fund (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include repurchase agreements maturing in more than
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide withdrawal penalties upon prepayment (other
than overnight deposits), or other securities which legally or in the Adviser's
or Portfolio Manager's opinion may be deemed illiquid (other than securities
issued pursuant to Rule 144A under the 1933 Act and certain commercial paper
that the Adviser or Portfolio Manager has determined to be liquid under
procedures approved by the Board of Trustees);
(11) borrow money (excluding reverse repurchase agreements which are
subject to such Fund's fundamental borrowing restriction), except for temporary
administrative purposes.
Unless otherwise indicated, all limitations applicable to Fund investments
apply only at the time a transaction is entered into. Any subsequent change in
a rating assigned by any rating service to a security (or, if unrated, deemed to
be of comparable quality), or change in the percentage of Fund assets invested
in certain securities or other instruments resulting from market fluctuations or
other changes in a Fund's total assets will not require a Fund to dispose of an
investment until the Adviser or Portfolio Manager determines that it is
practicable to sell or close out the investment without undue market or tax
consequences to the Fund. In the event that ratings services assign different
ratings to the same security, the Adviser or Portfolio Manager will determine
which rating it believes best reflects the security's quality and risk at that
time, which may be the higher of the several assigned ratings.
The phrase "shareholder approval," as used in the Prospectuses, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or the Trust, as the case may be, or (2) 67% or
more of the shares of the Fund or the Trust, as the case may be, present at a
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
28
<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).
- --------------------------------------------------------------------------------
Name, Address and Age Principal Occupation(s) During the Past Five Years
- --------------------------------------------------------------------------------
E. Philip Cannon Headmaster, St. John's School, Houston, Texas.
2401 Claremont Lane Formerly, Trustee of PIMCO Advisors Funds ("PAF")
Houston, TX 77019 and Cash Accumulation Trust ("CAT"), General
Age 56 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,
434 Stable Lane Executive Vice President and Director, Cunningham
Lake Forest, IL 60045 & Walsh, Inc., Chicago (advertising agency).
Age 70
- --------------------------------------------------------------------------------
Gary A. Childress Private investor. Formerly, Chairman and Director,
11 Longview Terrace Bellefonte Lime Company, Inc. Mr. Childress is a
Madison, CT 06443 partner in GenLime, L.P., a private limited
Age 64 partnership, which has filed a petition in
bankruptcy within the last five years. Formerly,
Trustee of PAF and CAT.
- --------------------------------------------------------------------------------
(*) William D. Cvengros Chairman of the Board of the Trust; Chief
800 Newport Center Drive Executive Officer, President, and member of the
Newport Beach, CA 92660 Management Board, PIMCO Advisors; Director, The
Age 49 Emerging Markets Income Fund, Inc., The Emerging
Markets Income Fund 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).
- --------------------------------------------------------------------------------
Gary L. Light President, E.V.A. Investors, Inc. (private
523 Cornwall Ct. investments); Director, The Somerset Group, Inc.;
Carmel, IN 46032 Consultant to and, prior to March, 1987, Executive
Age 60 Vice President, Mayflower Corporation (trucking
and transportation); Vice Chairman and Chief
Financial Officer, Sofamor Danek (medical
devices). Formerly, Trustee of PAF and CAT.
- --------------------------------------------------------------------------------
Richard L. Nelson President, Nelson Financial Consultants; Director,
8 Cherry Hills Lane Wynn's International, Inc.; Trustee, Pacific
Newport Beach, CA 92660 Select Fund. Formerly, Partner, Ernst & Young.
Age 68
- --------------------------------------------------------------------------------
Lyman W. Porter Professor of Management at the University of
2639 Bamboo Street California, Irvine; Trustee, Pacific Select Fund.
Newport Beach, CA 92660
Age 68
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
Alan Richards President, Alan Richards Consulting, Inc.;
7381 Elegans Place Trustee, Pacific Select Fund; Director, Western
Carlsbad, CA 92009 National Corporation. Formerly, President, Chief
Age 68 Executive Officer and Director, E.F. Hutton
Insurance Group, Inc.; Chairman of the Board,
Chief Executive Officer and President, E.F. Hutton
Life Insurance Company; Director, E.F. Hutton &
Company, Inc.
- --------------------------------------------------------------------------------
Joel Segall Formerly, Trustee of PAF and CAT, President and
11 Linden Shores University Professor, Bernard M. Baruch College,
Branford, CT 06405 The City University of New York; Deputy Under
Age 74 Secretary for International Affairs, United States
Department of Labor; Professor of Finance,
University of Chicago; Board of Managers, Coffee,
Sugar and Cocoa Exchange.
- --------------------------------------------------------------------------------
W. Bryant Stooks President, Bryant Investments, Ltd.; Director,
1530 E. Montebello American Agritec LLC. Formerly, Trustee of PAF and
Phoenix, AZ 85014 CAT, President, Senior Vice President, Director
Age 57 and Chief Executive Officer, Archirodon Group
Inc.; Partner, Arthur Andersen & Co.
- --------------------------------------------------------------------------------
Gerald M. Thorne Director, UPI Inc., Kaytee Inc., and American
5 Leatherwood Lane Orthodontics Corp. Formerly, Trustee of PAF and
Savannah, GA 31414 CAT, President and Director, Firstar National Bank
Age 59 of Milwaukee; Chairman, President and Director,
Firstar National Bank of Sheboygan; Director,
Bando-McGlocklin.
- --------------------------------------------------------------------------------
(*) Stephen J. Treadway President and Chief Executive Officer of the
2187 Atlantic Street Trust; Executive Vice President, PIMCO Advisors;
Stamford, CT 06902 Chairman and President, PIMCO Funds Distributors
Age 50 LLC ("PFDLLC"); Director, Municipal Advantage
Fund, Inc. and The Central European Value Fund,
Inc. Formerly, Trustee, President and Chief
Executive Officer of CAT; Executive Vice
President, Smith Barney Inc.
- --------------------------------------------------------------------------------
* Trustee is an "interested person" of the Trust (as defined in Section
2(a)(19) of the 1940 Act).
Officers
The chart below sets forth the name, address, age, position with the Trust,
and principal occupation during the past five years of each officer of the
Trust. Unless otherwise indicated, the business address of all persons listed
below is 840 Newport Center Drive, Suite 360, Newport Beach, California 92660:
- --------------------------------------------------------------------------------
Name, Address and Age Position(s) with the Principal Occupation(s)
Trust During the Past Five Years
- --------------------------------------------------------------------------------
Stephen J. Treadway Trustee, President and Executive Vice President,
2187 Atlantic Street Chief Executive Officer PIMCO Advisors; Chairman
Stamford, CT 06902 and President, PFDLLC;
Age 50 Director, Municipal
Advantage Fund, Inc. and
The Central European
Value Fund, Inc.
Formerly, Trustee,
President and Chief
Executive Officer of CAT;
Executive Vice President,
Smith Barney Inc.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
R. Wesley Burns Executive Vice Trustee and President,
Age 38 President PIMCO Funds: Pacific
Investment Management
Series; Executive Vice
President, Pacific
Investment Management
Company ("Pacific
Investment Management");
Trustee and President,
PIMCO Variable Insurance
Trust. Formerly, Vice
President, Pacific
Investment Management,
PAF and CAT.
- --------------------------------------------------------------------------------
Newton B. Schott, Jr. Vice President and Executive Vice President
2187 Atlantic Street Secretary and Secretary, PFDLLC.
Stamford, CT 06902 Formerly, Vice President
Age 55 and 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
Age 35 Manager of Fund
Shareholder Servicing,
Pacific Investment
Management; Vice
President of PIMCO Funds:
Pacific Investment
Management Series; Vice
President, PIMCO Variable
Insurance Trust.
Formerly, Project
Specialist, Pacific
Investment Management.
- --------------------------------------------------------------------------------
Richard M. Weil Vice President Senior Vice President -
Age 34 Legal, PIMCO Advisors.
Formerly, Vice President,
Bankers Trust Company;
Associate, Simpson,
Thatcher & Bartlett.
- --------------------------------------------------------------------------------
John P. Hardaway Treasurer Treasurer of PIMCO Funds:
Age 40 Pacific Investment
Management Series;
Treasurer, 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
Age 34 Manager of Fund Taxation,
Pacific Investment
Management; Assistant
Treasurer, PIMCO Funds:
Pacific Investment
Management Series;
Assistant Treasurer of
PIMCO Variable Insurance
Trust. Formerly,
Director of Financial
Reporting, Carl I. Brown
& Co.; Tax Manager, Price
Waterhouse LLP.
- --------------------------------------------------------------------------------
Garlin G. Flynn Assistant Secretary Lead of PIMCO Funds
Age 51 Administration;
Secretary, PIMCO Funds:
Pacific Investment
Management Series;
Secretary, PIMCO Variable
Insurance Trust.
Formerly, Senior Fund
Administrator, Pacific
Investment Management;
Senior Mutual Fund
Analyst, PIMCO Advisors
Institutional Services;
Senior Mutual Fund
Analyst, PFAMCo.
- --------------------------------------------------------------------------------
31
<PAGE>
Trustees' Compensation
Trustees other than those affiliated with PIMCO Advisors, a Portfolio
Manager, or Pacific Investment Management, receive an annual retainer of
$45,000, plus $2,000 for each Board of Trustees meeting attended, and $500 for
each Audit and Performance Committee meeting attended, plus reimbursement of
related expenses. Each Audit and Performance Committee member receives an
additional annual retainer of $1,000, the Chairman of the Audit and Performance
Committees receives an additional annual retainer of $2,000, the Chairman of the
Independent Trustees receives an additional annual retainer of $6,000, and each
Vice Chairman of the entire Board receives an additional annual retainer of
$3,000. Trustees do not currently receive any pension or retirement benefits
from the Trust or the Fund Complex (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:
-------------------------------------------------------------
(1) (2) (3)
Total
Aggregate Compensation
Name of Trustee Compensation from from Trust and
Trust/1/ Fund Complex/2/
-------------------------------------------------------------
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
-------------------------------------------------------------
/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.
32
<PAGE>
-------------------------------------------------------------
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
-------------------------------------------------------------
Investment Adviser
PIMCO Advisors serves as investment adviser to each of the Funds pursuant
to an investment advisory agreement ("Advisory Agreement") between PIMCO
Advisors and the Trust. PIMCO Advisors was organized as a limited partnership
under Delaware law in 1987. PIMCO Partners, G.P. ("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, David H. Edington, 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.
33
<PAGE>
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.
PIMCO Advisors, PGP and PAH are located at 800 Newport Center Drive, Suite
100, Newport Beach, CA 92660. PIMCO Advisors and its subsidiary partnerships had
approximately $200 billion of assets under management as of December 31, 1997.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Funds and for
managing, either directly or through others selected by the Adviser, the
investment of the Funds. PIMCO Advisors also furnishes to the Board of Trustees
periodic reports on the investment performance of each Fund. For all of the
Funds except the Precious Metals Fund, PIMCO Advisors has engaged affiliates to
serve as Portfolio Managers.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Funds in accordance with applicable laws and regulations. The
investment advisory services of PIMCO Advisors to the Trust are not exclusive
under the terms of the Advisory Agreement. PIMCO Advisors is free to, and does,
render investment advisory services to others.
The Advisory Agreement will continue in effect with respect to a Fund for
two years from its effective date, and thereafter on a yearly basis, provided
such continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Fund or by the Board of Trustees and (ii)
by a majority of the Trustees who are not "interested persons" of the Trust (as
defined in the 1940 Act) and who have no direct or indirect financial interest
in the Advisory Agreement. The Advisory Agreement may be terminated without
penalty by vote of the Trustees or the shareholders of the Trust, or by the
Adviser, on 60 days' written notice to the other party and will terminate
automatically in the event of its assignment. In addition, the Advisory
Agreement may be terminated with regard to the Renaissance, Growth, Target,
Opportunity, Innovation, Tax Exempt, International and Precious Metals Funds by
vote of a majority of the Trustees who are not interested persons of PIMCO
Advisors, on 60 days' written notice to PIMCO Advisors.
The Adviser currently receives a monthly investment advisory fee from each
Fund at the following annual rates (based on the average daily net assets of the
particular Funds):
Fund Advisory
- ---- Fee Rate
--------
Tax Exempt Fund....................................... .30%
Equity Income, Value, Capital Appreciation,
Mid-Cap Growth, Structured Emerging Markets,
Tax-Managed Structured Emerging Markets,
Enhanced Equity and Balanced Funds.................. .45%
Growth Fund........................................... .50%
International and Target Funds........................ .55%
Core Equity Fund...................................... .57%
34
<PAGE>
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%
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:
Year Period Year
Ended Ended Ended
Fund 6/30/97 6/30/96 10/31/95
- ---- ------- ------- --------
Equity Income Fund $555,146 $425,899 $445,739
Value Fund 463,869 65,873 60,686
Small-Cap Value Fund 249,347 156,721 203,158
Core Equity Fund 234,333 145,931 73,930
Mid-Cap Equity Fund 48,656 35,315 26,276
Capital Appreciation Fund 1,953,374 883,498 881,358
Mid-Cap Growth Fund 1,219,531 617,546 650,017
Micro-Cap Growth Fund 1,390,317 669,726 609,540
Small-Cap Growth Fund 327,245 426,098 594,905
Enhanced Equity Fund 292,187 274,512 319,036
Emerging Markets Fund 568,277 440,978 638,097
International Developed Fund 525,817 294,777 282,055
Balanced Fund 306,756 235,529 417,190
Renaissance Fund * 913,256 N/A N/A
Growth Fund* 3,758,433 N/A N/A
Target Fund* 2,887,743 N/A N/A
Opportunity Fund* 2,324,663 N/A N/A
Innovation Fund* 750,414 N/A N/A
International Fund* 559,353 N/A N/A
Precious Metals Fund* 119,710 N/A N/A
Tax Exempt Fund* 66,977 N/A N/A
----------- ---------- ----------
TOTAL $19,515,404 $4,672,403 $5,201,987
- --------------
* For the period 1/18/97 through 6/30/97
In addition, the predecessors of the Renaissance, Growth, Target,
Opportunity, Innovation, International, Precious Metals and Tax Exempt Funds
(each of which is a former series of PAF which reorganized as a Fund of the
Trust on January 17, 1997) paid the Adviser the following amounts for the fiscal
period ended January 17, 1997 and the fiscal years ended September 30, 1996 and
1995 under separate management contracts between the Adviser and PAF:
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 9/30/96 9/30/95
- ---- ------- ------- -------
Renaissance Fund $653,744 $1,627,632 $1,371,809
35
<PAGE>
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
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 PIMCO Funds:
Pacific Investment Management Series, Harbor Fund, various funds advised by
Frank Russell Investment Management Company, Total Return Bond Portfolio and
Intermediate Term Bond Portfolio of Prudential Securities Target Portfolio
Trust, Total Return Bond and Limited Maturity Bond Portfolios of American
Skandia Trust, Total Return Fund of Fremont Mutual Fund, Inc., Managed Bond and
Government Securities Series of Pacific Select Fund, and the PaineWebber Short-
Term U.S. Government Income Fund, a series of PaineWebber Managed Investments
Trust, all of which are open-end management investment companies. Pacific
Investment Management also advises PIMCO Commercial Mortgage Securities Trust,
Inc. which is a closed-end management investment company, and managed accounts
consisting of proceeds from various pension and profit sharing plans. Pacific
Investment Management had approximately $118 billion of assets under management
as of December 31, 1997.
Parametric
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Parametric, Parametric is the Portfolio Manager and provides investment advisory
services to the Enhanced Equity, Structured Emerging Markets and Tax-Managed
Structured Emerging Markets Funds. For the services provided to each Fund, the
Adviser (not the Trust) pays Parametric a monthly fee for each Fund at the
following annual rates (based on the
36
<PAGE>
average daily net assets of the particular Fund): .35% for the Enhanced Equity
Fund, .35% for the Structured Emerging Markets Fund, and .35% for the Tax-
Managed Structured Emerging Markets Fund.
Parametric is an investment management firm organized as a general
partnership. Parametric is the successor investment adviser to Parametric
Portfolio Associates, Inc., a wholly-owned corporate subsidiary of PFAMCo.
Parametric has two partners: PIMCO Advisors as the supervisory partner, and
Parametric Management Inc. as the managing partner. The predecessor investment
adviser to Parametric commenced operations in 1987. Parametric is located at
7310 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104-7090.
Parametric provides investment management services to a number of institutional
accounts, including employee benefit plans, college endowment funds and
foundations. Accounts managed by Parametric had combined assets, as of December
31, 1997, of approximately $2.6 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 December 31, 1997, of approximately $5.2 billion.
NFJ
- ---
Pursuant to a Portfolio Management Agreement between the Adviser and NFJ,
NFJ provides investment advisory services to the Equity Income Fund, the Value
Fund, the Small-Cap Value Fund, and a portion of the Balanced Fund allocated by
the Adviser for investment in common stocks. For the services provided, the
Adviser (not the Trust) pays NFJ a monthly fee for each Fund at the following
annual rates (based on the average daily net assets of the particular Fund):
.35% for the Equity Income Fund, .35% for the Value Fund, .35% for the portion
of the Balanced Fund allocated to NFJ for investment in common stock, and .50%
for the Small-Cap Value Fund.
NFJ is an investment management firm organized as a general partnership.
NFJ is the successor investment adviser to NFJ Investment Group, Inc., a wholly
owned subsidiary of PFAMCo. NFJ has two partners: PIMCO Advisors as the
supervisory partner, and NFJ Management Inc. as the managing partner. The
predecessor investment adviser to NFJ commenced operations in 1989. NFJ is
located at 2121 San Jacinto, Suite 1840, Dallas, Texas 75201. NFJ provides
investment management services to a number of institutional accounts, including
employee benefit plans, college endowment funds and foundations. Accounts
managed by NFJ had combined assets, as of December 31, 1997, of approximately
$2.5 billion.
37
<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, Tax Exempt, Core Equity,
Mid-Cap Equity, and International Growth Funds. For the services provided, the
Adviser (not the Trust) pays Columbus Circle a monthly fee for each Fund at the
following annual rates (based on the average daily net assets of the particular
Fund): .30% for the Tax Exempt Fund, .34% for the Growth Fund, .36% for the
Target Fund, .38% for the Renaissance Fund, .38% for the Innovation Fund, .47%
for the Core Equity Fund, .48% for the Opportunity Fund, .53% for the Mid-Cap
Equity Fund, and .75% for the International Growth Fund.
Columbus Circle is an investment management firm organized as a general
partnership. Columbus Circle is the successor investment adviser to the Columbus
Circle Investors Division of Thomson Advisory Group L.P. ("TAG"). Columbus
Circle has two partners: PIMCO Advisors as the supervisory partner, and
Columbus Circle 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 December 31, 1997, of $9.3 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 December
31, 1997, of approximately $647 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 December 31, 1997, of approximately $1.4 billion.
38
<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:
Year Period Year
Ended Ended Ended
Fund 06/30/97 06/30/96 10/31/95
- ---- -------- -------- --------
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
- -----------------
*For the period 1/18/97 through 6/30/97.
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:
39
<PAGE>
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 09/30/96 09/30/95
- ---- ------- -------- --------
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
Fund Administrator
In addition to its services as Adviser, PIMCO Advisors serves as
administrator (and is referred to in this capacity as the "Administrator") to
the Funds pursuant to administration agreement (the "Administration Agreement")
with the Trust. The Administrator provides or procures administrative services
to the Funds, which include clerical help and accounting, bookkeeping, internal
audit services and certain other services required by the Funds, and preparation
of reports to the Funds' shareholders and regulatory filings. PIMCO Advisors
has retained Pacific Investment Management as sub-administrator to provide such
services pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"). PIMCO Advisors may also retain other affiliates to provide such
services. In addition, the Administrator arranges at its own expense for the
provision of legal, audit, custody, transfer agency and other services necessary
for the ordinary operation of the Funds, and is responsible for the costs of
registration of the Funds' shares and the printing of prospectuses and
shareholder reports for current shareholders. Under the Administration
Agreement, the Administrator has agreed to provide or procure these services,
and to bear these expenses, at the following annual rates for each Fund (each
expressed as a percentage of the Fund's average daily net assets attributable to
the indicated 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
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
Capital Appreciation Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Institutional Class A, Class B,
Administrative and Class C Class D
Classes* Shares* Shares**
-------- ------- --------
<S> <C> <C> <C>
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 Exempt Fund N/A .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Tax-Managed Structured N/A N/A N/A
Emerging Markets Fund
Structured Emerging .50% N/A N/A
Markets Fund
</TABLE>
* The Administrator receives administrative fees based on a Fund's average daily
net assets attributable in the aggregate to the Funds' Institutional and
Administrative Class shares on the one hand, and to the Funds' Class A, Class B
and Class C shares on the other.
** 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.
41
<PAGE>
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, Tax Exempt, International and Precious Metals Funds, by
a majority of the Trustees who are not interested persons of the Trust or PIMCO
Advisors, on 60 days' written notice to PIMCO Advisors.
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."
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.
42
<PAGE>
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
aggregate amount of the administration fees paid by the Funds was as follows
(Class A, Class B and Class C shares were not offered prior to January 17, 1997
and Class D shares were not offered during the periods listed):
Year Period Year
Ended Ended Ended
Fund 06/30/97 06/30/96 10/31/95
- ---- -------- -------- --------
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
- ------------------------
* For the period from 1/17/97 through 6/30/97
The predecessor series of the Renaissance, Growth, Target, Opportunity,
Innovation, International, Precious Metals and Tax Exempt Funds (each a series
of PAF which reorganized as a Fund of the Trust on January 17, 1997) received
administrative services during fiscal 1997, 1996 and 1995 under separate
management contracts between the Adviser and PAF on behalf of each such series.
See "Investment Adviser" above for the amounts paid to the Adviser by these
series under such management contracts during fiscal 1997, 1996 and 1995.
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds 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 or
43
<PAGE>
class without penalty, at any time, by the Fund or class by not more than 60
days' nor less than 30 days' written notice to the Distributor, or by the
Distributor upon not more than 60 days' nor less than 30 days' written notice to
the Trust. The Distributor is not obligated to sell any specific amount of Trust
shares.
The Distribution Contract will continue in effect with respect to each Fund
and each class of shares thereof for successive one-year periods, provided that
each such continuance is specifically approved (i) by the vote of a majority of
the entire Board of Trustees or by the majority of the outstanding shares of the
Fund or class, and (ii) by a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Trust and who have no direct or
indirect interest financial interest in the Distribution Contract or the
Distribution and/or Servicing Plans described below, by vote cast in person at a
meeting called for the purpose. If the Distribution Contract is terminated (or
not renewed) with respect to one or more Funds or classes, it may continue in
effect with respect to any Fund or class as to which it has not been terminated
(or has been renewed).
The Trust 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.
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
represent an equal pro rata interest in the Fund and, generally, have identical
voting, dividend, liquidation, and other rights preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that:
(a) each class has a different designation; (b) each class of shares bears any
class-specific expenses allocated to it; (c) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution or service arrangements; and (d) each class has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class. In addition, each class may
have a differing sales charge structure, and differing exchange and conversion
features.
Contingent Deferred Sales Charge and Initial Sales Charge
As described in the Class A, B and C 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 Fund-by-Fund basis, shareholders should consider whether to
exchange shares of one Fund for shares of another Fund prior to redeeming an
investment if such an exchange would reduce the contingent deferred sales charge
applicable to such redemption.
44
<PAGE>
During the fiscal year ended June 30, 1997, the Distributor received an
aggregate of $40,456, $789,851, and $533,975, in contingent deferred sales
charges on, respectively, Class A shares, Class B shares and Class C shares of
the Funds.
The Funds did not offer Class A, B and C shares in prior fiscal years.
However, during the fiscal year ended September 30, 1996, the Distributor
received the following amounts in contingent deferred sales charges on shares of
series of PAF which reorganized as the following Funds of the Trust: Class A
-------
shares: Growth -$9,168, Target - $14 and Opportunity - $4,190. Class B shares:
- ------ ---------------
Renaissance - $8,722, Growth - $37,445, Target - $31,670, Innovation - $36,477,
International - $6,359, Precious Metals - $1,179 and Tax Exempt -$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 under the caption
"Alternative Purchase Arrangements -Initial Sales Charge Alternative - Class A
Shares," Class A shares of the Trust are sold pursuant to an initial sales
charge, which declines as the amount of the purchase reaches certain defined
levels. For the fiscal year ended June 30, 1997, the Distributor received an
aggregate of $2,927,636 and retained an aggregate of $369,546, in initial sales
charges paid by Class A shareholders of the Trust.
The Trust did not offer Class A shares in prior fiscal years. However,
during the fiscal year ended September 30, 1996, the Distributor received the
following amounts in initial sales charges paid by shareholders of PAF series
which reorganized as the following Funds of the Trust: Renaissance - $205,419,
Growth -549,330, Target - $852,363, Opportunity - $176,391, Innovation -
$685,093, International - $91,177, Precious Metals - $72,503 and Tax Exempt -
$37,180, and retained the following amounts: Renaissance - $27,477, Growth -
$83,657, Target - $126,693, Opportunity - $29,605, Innovation - $114,091,
International - $13,871, Precious Metals - $7,738 and Tax Exempt - $3,140.
During the fiscal year ended September 30, 1995, the Distributor received an
aggregate of $3,708,105 and retained an aggregate of $366,062 in initial sales
charges paid by shareholders of PAF.
Distribution and Servicing Plans for Class A, Class B and Class C Shares
As stated in the text of the Class A, B and C Prospectus under the caption
"Distributor and Distribution and Servicing Plans," Class A, Class B and Class C
shares of the Trust are continuously offered through participating brokers which
are members of the NASD and which have dealer agreements with the Distributor,
or which have agreed to act as introducing brokers.
Pursuant to separate Distribution and Servicing Plans for Class A, Class B
and Class C shares (the "Retail Plans"), as described in the Class A, B and C
Prospectus, the Distributor receives (i) in connection with the distribution of
Class B and Class C shares of the Trust, certain distribution fees from the
Trust, and (ii) in connection with personal services rendered to Class A, Class
B and Class C shareholders of the Trust and the maintenance of shareholder
accounts, certain servicing fees from the Trust. Subject to the percentage
limitations on these distribution and servicing fees set forth in the Class A, B
and C Prospectus, the distribution and servicing fees may be paid with respect
to services rendered and expenses borne in the past with respect to Class A,
Class B and Class C shares as to which no distribution and servicing fees were
paid on account of such limitations. The Distributor pays (i) all or a portion
of the distribution fees it receives from the Trust to participating and
introducing brokers, and (ii) all or a portion of the servicing fees it receives
from the Trust to participating and introducing brokers, certain banks and other
financial intermediaries.
Each Retail Plan may be terminated with respect to any Fund to which the
Plan relates by vote of a majority of the Trustees who are not interested
persons of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or the Distribution
Contract ("disinterested Retail Plan Trustees"), or by vote of a majority of the
outstanding voting securities of the relevant class of that Fund. Any change in
any Retail Plan that would materially increase the cost to the class of shares
of any Fund to which
45
<PAGE>
the Plan relates requires approval by the affected class of shareholders of that
Fund. The Trustees review quarterly written reports of such costs and the
purposes for which such costs have been incurred. Each Retail Plan may be
amended by vote of the Trustees, including a majority of the disinterested
Retail Plan Trustees, cast in person at a meeting called for the purpose. As
long as the Retail Plans are in effect, selection and nomination of those
Trustees who are not interested persons of the Trust shall be committed to the
discretion of such disinterested Trustees.
The Retail Plans will continue in effect with respect to each Fund and each
class of shares thereof for successive one-year periods, provided that each such
continuance is specifically approved (i) by the vote of a majority of the
disinterested Retail Plan Trustees and (ii) by the vote of a majority of the
entire Board of Trustees cast in person at a meeting called for the purpose of
voting on such approval.
The Retail Plans went into effect for the Funds in January 1997. If a
Retail Plan is terminated (or not renewed) with respect to one or more Funds, it
may continue in effect with respect to any class of any Fund as to which it has
not been terminated (or has been renewed).
The Trustees believe that the Retail Plans will provide benefits to the
Trust. In this regard, the Trustees believe that the Retail Plans will result
in greater sales and/or fewer redemptions of Trust shares, although it is
impossible to know for certain the level of sales and redemptions of Trust
shares that would occur in the absence of the Retail Plans or under alternative
distribution schemes. Although the Funds' expenses are essentially fixed, the
Trustees believe that the effect of the Retail Plans on sales and/or redemptions
may benefit the Trust by reducing Fund expense ratios and/or by affording
greater flexibility to Portfolio Managers. From time to time, expenses of the
Distributor incurred in connection with the sale of Class B and Class C shares
of the Funds, and in connection with the servicing of Class B and Class C
shareholders of the Funds and the maintenance of shareholder accounts, may
exceed the distribution and servicing fees collected by the Distributor. The
Trustees consider such unreimbursed amounts, among other factors, in determining
whether to cause the Funds to continue payments of distribution and servicing
fees in the future with respect to Class B and Class C shares.
Payments Pursuant to Class A Plans
For the fiscal year ended June 30, 1997, the Trust paid the Distributor an
aggregate of $1,147,572 pursuant to the Class A Retail Plan. Such payments were
allocated among the operational Funds as follows:
Year Ended
Fund 06/30/97
- ---- --------
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
46
<PAGE>
Opportunity Fund 320,127
Innovation Fund 99,910
International Fund 34,195
Precious Metals Fund 14,218
Tax Exempt Fund 9,965
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:
Sales Material
and Other
Compensation Expenses Total
------------ -------- -----
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
The Trust did not offer Class A shares in prior fiscal years. For the
fiscal years ended September 30, 1996 and 1995, PAF paid the Distributor an
aggregate of $1,556,119 and $1,064,958, respectively, pursuant to a Distribution
and Servicing Plan applicable to the Class A shares of PAF (the "PAF Class A
Plan"), which is similar to the Class A Plan of the Trust. Such payments were
allocated among the predecessors of the following Funds (each of which was
formerly a series of PAF which reorganized as a series of the Trust on January
17, 1997) as follows:
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
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
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<PAGE>
International Fund 42,411 49,788
Precious Metals Fund 21,416 22,178
Tax Exempt Fund 10,288 6,485
The remainder of the total payments made under the PAF Class A Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMCO Funds:
Pacific Investment Management Series, an affiliated mutual fund family, in
transactions which took place on January 17, 1997.
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:
Year Ended
Fund 06/30/97
- ---- --------
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
During the fiscal year ended June 30, 1997, the amounts collected pursuant
to the Class B Retail Plan and the contingent deferred sales charge imposed on
Class B shares were used as follows by the Distributor: sales commissions and
other compensation to sales personnel, $499,840; preparing, printing and
distributing sales material and advertising (including preparing, printing and
distributing prospectuses to non-shareholders), and other expenses (including
data processing, legal and operations), $170,439. The total, if allocated among
the Funds, based on the net assets attributable to their Class B shares at June
30, 1997, would have been as follows:
Sales Material
and Other
Compensation Expenses Total
------------ -------------- -----
Equity Income Fund $ 4,235 $ 1,444 $ 5,679
Value Fund 42,327 14,433 56,760
48
<PAGE>
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
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:
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
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
The remainder of the total payments made under the PAF Class B Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMCO Funds:
Pacific Investment Management Series, an affiliated mutual fund family, in
transactions which took place on January 17, 1997.
49
<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:
Year Ended
Fund 06/30/97
- ---- --------
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
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:
50
<PAGE>
Sales Material
and Other
Compensation Expenses Total
------------ -------- -----
Equity Income Fund $ 10,972 $ 3,741 $ 14,713
Value Fund 106,994 36,484 143,478
Small-Cap Value Fund 34,094 11,626 45,720
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 21,817 7,439 29,256
Mid-Cap Growth Fund 89,419 30,491 119,910
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 3,057 1,043 4,100
International Developed Fund 4,160 1,419 5,579
Balanced Fund 1,470 501 1,971
Renaissance 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
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:
Year Ended Year Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
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
The remainder of the total payments made under the PAF Class C Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMCO Funds:
Pacific Investment Management Series, an affiliated mutual fund family, in
transactions which took place on January 17, 1997.
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<PAGE>
Distribution and Administrative Services Plans for Administrative Class Shares
The Trust has adopted an Administrative Services Plan with respect to the
Administrative Class shares of each Fund. The Trust also has adopted a
Distribution Plan (together with the Administrative Services Plan, the
"Administrative Plans") with respect to the Administrative Class shares of each
Fund except the Emerging Markets, Capital Appreciation and Mid-Cap Growth Funds,
which are not subject to such Distribution Plan.
Under the terms of the Administrative Distribution Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each applicable Fund, in an amount up to 0.25% on an annual
basis of the average daily net assets of that class, financial intermediaries
for costs and expenses incurred in connection with the distribution and
marketing of Administrative Class shares and/or the provision of certain
shareholder services to its customers that invest in Administrative Class shares
of the Funds. Such services may include, but are not limited to, the following:
providing facilities to answer questions from prospective investors about a
Fund; receiving and answering correspondence, including requests for
prospectuses and statements of additional information; preparing, printing and
delivering prospectuses and shareholder reports to prospective shareholders;
complying with federal and state securities laws pertaining to the sale of
Administrative Class shares; and assisting investors in completing application
forms and selecting dividend and other account options.
Under the terms of the Administrative Services Plan, the Trust is permitted
to reimburse, out of the assets attributable to the Administrative Class shares
of each Fund, in an amount up to 0.25% on an annual basis of the average daily
net assets of that class, financial intermediaries that provide certain
administrative services for Administrative Class shareholders. Such services
may include, but are not limited to, the following: receiving, aggregating and
processing shareholder orders; furnishing shareholder sub-accounting; providing
and maintaining elective shareholder services such as check writing and wire
transfer services; providing and maintaining pre-authorized investment plans;
communicating periodically with shareholders; acting as the sole shareholder of
record and nominee for shareholders; maintaining accounting records for
shareholders; answering questions and handling correspondence from shareholders
about their accounts; and performing similar account administrative services.
The same entity may be the recipient of fees under both the Administrative
Distribution Plan and the Administrative Services Plan, but may not receive fees
under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to increase
materially the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (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.
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Each Administrative Plan provides that expenses payable under the Plan may
be carried forward for reimbursement for up to twelve months beyond the date in
which the expense is incurred, subject to the limit that not more than 0.25% of
the average daily net assets of Administrative Class shares may be used in any
month to pay expenses under the Plan. Each Administrative Plan requires that
Administrative Class shares incur no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
Payments Pursuant to Administrative Distribution Plan
For the fiscal year ended June 30, 1997, the Trust made no payments
pursuant to the Administrative Distribution Plan. The Administrative
Distribution Plan was not in effect in prior fiscal years.
Payments Pursuant to Administrative Services Plan
For the fiscal year ended June 30, 1997, the Trust paid qualified service
providers an aggregate of $132,422 pursuant to the Administrative Services Plan.
Such payments were allocated among the operational Funds as follows:
Year Ended
Fund 06/30/97
- ---- --------
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
The Trust has been informed that all of these amounts constituted "service
fees" under applicable NASD rules. The Administrative Services Plan was not in
effect in prior fiscal years.
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Plan for Class D Shares
As described above under "Management of the Trust - Fund Administrator,"
the Funds' 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: 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.
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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 Class A, Class B and Class C shares
are discussed in the Class A, B and C Prospectus under the headings "How to Buy
Shares," "Exchange Privilege," and "How to Redeem." Purchases, exchanges and
redemptions of Class D shares are discussed in the Class D Prospectus under the
headings "How to Buy Shares," "Exchange Privilege," and "How to Redeem."
Purchases, exchanges and redemptions of Institutional Class and Administrative
Class shares are discussed in the Institutional Prospectus under the headings
"Purchase of Shares," "Redemption of Shares," and "Net Asset Value."
Certain clients of the Adviser or a Portfolio Manager whose assets would be
eligible for purchase by one or more of the Funds may purchase shares of the
Trust with such assets. Assets so purchased by a Fund will be valued in
accordance with procedures adopted by the Board of Trustees.
One or more classes of shares of the Funds may not be qualified or
registered for sale in all States. Prospective investors should inquire as to
whether shares of a particular Fund or class are available for offer and sale in
their state of domicile or residence. Shares of a Fund may not be offered or
sold in any State unless registered or qualified in that jurisdiction, unless an
exemption from registration or qualification is available.
As described in the Class A, B, and C Prospectus and in the Class D
Prospectus under the caption "Exchange Privilege," and in the Institutional
Prospectus under the caption "Redemption of Shares," a shareholder may exchange
shares of any Fund for shares of the same class of any other Fund of the Trust
that is available for investment, or any series of PIMCO Funds: Pacific
Investment Management Series, a mutual fund family advised by Pacific Investment
Management, on the basis of their respective net asset values. The original
purchase date(s) of shares exchanged for purposes of calculating any contingent
deferred sales charge will carry over to the investment in the new Fund. For
example, if a shareholder invests in Class C shares of one Fund and 6 months
later (when the contingent deferred sales charge upon redemption would normally
be 1%) exchanges his shares for Class C shares of another Fund, no sales charge
would be imposed upon the exchange, but the investment in the other Fund would
be subject to the 1% contingent deferred sales charge until one year after the
date of the shareholder's investment in the first Fund as described in the Class
A, B and C Prospectus under "Alternative Purchase Arrangements." With respect
to Class B or Class C shares, or Class A shares subject to a contingent deferred
sales charge, if less than all of an investment is exchanged, any portion of the
investment attributable to capital appreciation and/or reinvested dividends or
capital gains distributions will be exchanged first, and thereafter any portions
exchanged will be from the earliest investment made in the Fund from which the
exchange was made.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of regular
trading on the New York Stock Exchange on any business day will be executed at
the respective net asset values determined at the close of the next business
day.
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An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12-month
period or in any calendar quarter. The Trust reserves the right to modify or
discontinue the exchange privilege at any time.
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Funds, limited in amount with respect to each
shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1%
of the net asset value of the Trust at the beginning of such period. Although
the Trust will normally redeem all shares for cash, it may, in unusual
circumstances, redeem amounts in excess of the lesser of (i) or (ii) above by
payment in kind of securities held in the Funds' portfolios.
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, 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 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
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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 Portfolio Manager, having in mind the Trust's best
interests, considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
For the fiscal years ended June 30, 1997, June 30, 1996, and October 31,
1995 (the fiscal year ended June 30, 1996 being an eight-month period), the
following amounts of brokerage commissions were paid by the Funds:
Year Period Year
Ended Ended Ended
Fund 6/30/97 6/30/96 10/31/95
- ---- ----------- ---------- ----------
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.
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For the fiscal period ended January 17, 1997 and the fiscal years ended
September 30, 1996 and 1995, the following amounts of brokerage commissions were
paid by the predecessors of the Funds listed below (each of which was a series
of PAF during such periods and reorganized as a Fund of the Trust on January 17,
1997):
10/1/96 Year Year
to Ended Ended
Fund 1/17/97 9/30/96 9/30/95
- ---- ---------- ----------- -----------
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
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
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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.
The portfolio turnover rate of a Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less. Proceeds from short sales and assets used to
cover short positions undertaken are included in the amounts of securities sold
and purchased, respectively, during the year.
NET ASSET VALUE
As indicated in the Class A, B and C 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.
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.
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Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company,
each Fund generally must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies ("Qualifying
Income Test"); (b) with respect to tax years beginning on or prior to August 5,
1997, derive in each taxable year less than 30% of its gross income from the
sale or other disposition of certain assets held less than three months, namely
(1) stocks or securities, (2) options, futures, or forward contracts (other than
those on foreign currencies), and (3) foreign currencies (or options, futures,
and forward contracts on foreign currencies) not directly related to the Fund's
principal business of investing in stock or securities; and (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of the Fund's total assets is represented by cash, cash items
(including receivables), U.S. Government securities, securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than U.S.
Government securities or the securities of other regulated investment companies)
of any one issuer or of two or more issuers which the Fund controls and which
are engaged in the same, similar or related trades or businesses. In order to
qualify for the special tax treatment accorded regulated investment companies, a
Fund must distribute each taxable year the sum of (i) at least 90% of its
investment company taxable income (which includes dividends, interest and net
short-term capital gains in excess of any net long-term capital losses) and (ii)
90% of its tax exempt interest, net of expenses allocable thereto. Under the
30% of gross income test described above, the Fund will be restricted from
selling certain assets held (or considered under Code rules to have been held)
for less than three months, and in engaging in certain hedging transactions
(including hedging transactions in futures and options) that in some
circumstances could cause certain Fund assets to be treated as held for less
than three months. By qualifying as a regulated investment company, each Fund
will not be subject to federal income taxes to the extent that its net
investment income, net short-term capital gains and net long-term capital gains
are distributed. In addition, the Treasury Department is authorized to
promulgate regulations under which gains from foreign currencies (and options,
futures, and forward contracts on foreign currency) would not constitute
qualifying income for purposes of the Qualifying Income Test if such gains are
not directly related to investing in securities. To date, such regulations have
not been issued.
The Tax Exempt Fund must have at least 50% of its total assets invested in
Tax Exempt Bonds at the end of each calendar quarter so that dividends derived
from its net interest income on Tax Exempt Bonds and so designated by the Fund
will be "exempt-interest dividends," which are exempt from federal income tax
when received by an investor. Certain exempt-interest dividends, as described
in the Class A, B and C Prospectus, may increase alternative minimum taxable
income for purposes of determining a shareholder's liability for the alternative
minimum tax. In addition, exempt-interest dividends allocable to interest from
certain "private activity bonds" will not be tax exempt for purposes of the
regular income tax to shareholders who are "substantial users" of the facilities
financed by such obligations or "related persons" of such "substantial users."
The tax-exempt portion of dividends paid for a calendar year constituting
"exempt-interest dividends" will be designated after the end of that year and
will be based upon the ratio of net tax-exempt income to total net income earned
by the Fund during the entire year. That ratio may be substantially different
than the ratio of net tax-exempt income to total net income earned during a
portion of the year. Thus, an investor who holds shares for only a part of the
year may be allocated more or less tax-exempt interest dividends than would be
the case if the allocation were based on the ratio of net tax-exempt income to
total net income actually earned by the Fund while the investor was a
shareholder. All or a portion of interest on indebtedness incurred or continued
by a shareholder to purchase or carry shares of the Tax Exempt Fund will not be
deductible by the shareholder. The portion of interest that is not deductible
is equal to the total interest paid or accrued on the indebtedness multiplied by
the percentage of the Fund's total distributions (not including distributions of
the excess of net long-term capital gains over net short-term capital losses)
paid to the shareholder that are exempt-interest dividends. Under rules used by
the Internal Revenue Service for determining when borrowed funds are considered
used for the purpose of purchasing or carrying particular assets, the purchase
of shares may be considered to have been made with borrowed funds even though
such funds are not directly traceable to the purchase of shares.
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Shareholders of the Tax Exempt Fund receiving social security or railroad
retirement benefits may be taxed on a portion of those benefits as a result of
receiving tax exempt income (including exempt-interest dividends distributed by
the Fund). The tax may be imposed on up to 50% of a recipient's benefits in
cases where the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits,
exceeds a base amount. In addition, up to 85% of a recipient's benefits may be
subject to tax if the sum of the recipient's adjusted gross income (with certain
adjustments, including tax-exempt interest) and 50% of the recipient's benefits
exceeds a higher base amount. Shareholders receiving social security or
railroad retirement benefits should consult with their tax advisors.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares. Since certain of the Tax Exempt Fund's
expenses attributable to earning tax-exempt income do not reduce such Fund's
current earnings and profits, it is possible that distributions, if any, in
excess of such Fund's net tax-exempt and taxable income will be treated as
taxable dividends to the extent of such Fund's remaining earnings and profits
(i.e., the amount of such expenses).
The proper tax treatment of income or loss realized by the Precious Metals
Fund from the retirement or sale of a Metal-Indexed Note is unclear. The
Precious Metals Fund will report such income or loss as capital or ordinary
income or loss in a manner consistent with any Internal Revenue Service position
on the subject following the publication of such a position. Gain or loss from
the sale or exchange of preferred stock indexed to the price of a natural
resource is expected to be capital gain or loss to the Precious Metals Fund.
Distributions
As a regulated investment company, a Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders on a
timely basis. Each Fund intends to distribute to its shareholders, at least
annually, substantially all of its investment company taxable income and any net
capital gains. In addition, amounts not distributed by a Fund on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the twelve month period
ending on October 31 of the calendar year, and (3) all ordinary income and
capital gains for previous years that were not distributed during such years. A
distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Fund in October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to federal income tax) in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To avoid application of the
excise tax, each Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
The tax status of each Fund and the distributions which it may make are
summarized in the Class A, B and C Prospectus and in the Class D Prospectus
under the captions "Distributions" and "Taxes" and in the Institutional
Prospectus under the caption "Dividends, Distributions and Taxes." Except for
exempt-interest dividends paid by the Tax Exempt Fund, all dividends and
distributions of a Fund, whether received in shares or cash, are taxable and
must be reported on each shareholder's federal income tax return. Distributions
received by tax-exempt shareholders will not be subject to federal income tax to
the extent permitted under the applicable tax exemption. A dividend or capital
gains distribution received after the purchase of a Fund's shares reduces the
net asset value of the shares by the amount of the dividend or distribution and
will be subject to federal income taxes.
A portion of the dividends paid by Funds that invest in stock of U.S.
corporations may qualify for the deduction for dividends received by
corporations (subject generally to a 46-day holding period requirement).
Dividends paid by the other Funds generally are not expected to qualify for the
deduction for dividends received by corporations.
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<PAGE>
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains, regardless of how long the
shareholder has held a Fund's shares and are not eligible for the dividends
received deduction. Under the Taxpayer Relief Act of 1997, long-term capital
gains will generally be taxed at a 28% or 20% rate depending upon the holding
period of the portfolio security. Any distributions that are not from a Fund's
investment company taxable income or net capital gains may be characterized as a
return of capital to shareholders or, in some cases, as capital gain. The tax
treatment of dividends and distributions will be the same whether a shareholder
reinvests them in additional shares or elects to receive them in cash.
Sales of Shares
Upon the disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Under the Taxpayer Relief Act of
1997, long-term capital gains will generally be taxed at a 28% or 20% rate
depending upon the holding period of the portfolio security. Any loss realized
on a disposition will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a shareholder on a disposition of shares held by the shareholder for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the shareholder with respect
to such shares.
Backup Withholding
A Fund may be required to withhold 31% of all taxable distributions payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
Options, Futures, Forward Contracts and Swap Agreements
Some of the options, futures contracts, forward contracts, and swap
agreements used by the Funds may be "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally considered 60% long-term and 40%
short-term capital gains or losses ("60/40") although certain foreign currency
gains and losses from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by a Fund at the end of each taxable year
(and, for purposes of the 4% excise tax, on certain other dates as prescribed
under the Code) 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.
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<PAGE>
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Emerging Markets, Structured Emerging Markets, International Developed and
Balanced Funds intend to account for such transactions in a manner they deem to
be appropriate, the Internal Revenue Service might not accept such treatment.
If it did not, the status of a Fund as a regulated investment company might be
affected. The Trust intends to monitor developments in this area. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
regulated investment company may limit the extent to which a Fund will be able
to engage in swap agreements.
The 30% limit on gains from the disposition of certain options, futures,
forward contracts, and swap agreements held less than three months and the
qualifying income and diversification requirements applicable to a Fund's assets
may limit the extent to which a Fund will be able to engage in transactions in
options, futures contracts, forward contracts, and swap agreements. The 30%
limit will apply only until the start of a Fund's first tax year beginning after
August 5, 1997.
Passive Foreign Investment Companies
Certain Funds may invest in the stock of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to stockholders.
In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
stock. A Fund itself will be subject to a U.S. federal income tax (including
interest) on the portion, if any, of an excess distribution that is so allocated
to prior taxable years. Certain distributions from a PFIC as well as gain from
the sale of PFIC stock are treated as excess distributions. 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.
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<PAGE>
Foreign Currency Transactions
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of certain
other instruments, gains or losses attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Foreign Taxation
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser and each Portfolio Manager intends to manage
the Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
such Fund will be eligible to elect to "pass-through" to the Fund's shareholders
the amount of eligible foreign income and similar taxes paid by the Fund. If
this election is made, a shareholder generally subject to tax will be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by the Fund, and may be entitled
either to deduct (as an itemized deduction) his or her pro rata share of foreign
taxes in computing his taxable income or to use it as a foreign tax credit
against his or her U.S. federal income tax liability, subject to certain
limitations. In particular, shareholders must hold their shares (without
protection from risk of loss) on the ex-dividend date and for at least 15 more
days during the 30-day period surrounding the ex-dividend date to be eligible to
claim a foreign tax credit with respect to a gain dividend. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Each shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year.
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, receivables and payables will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income, and to certain other types of
income. Shareholders may be unable to claim a credit for the full amount of
their proportionate share of the foreign taxes paid by the Fund. The foreign tax
credit can be used to offset only 90% of the revised alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. A
Fund
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<PAGE>
may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
Other Taxation
Pursuant to Treasury Department regulations, certain expenses of
nonpublicly offered regulated investment companies, including advisory fees, are
not deductible by those regulated investment companies for purposes of
calculating the income of certain shareholders, generally including individuals
and entities that compute their taxable income in the same manner as an
individual (thus, for example, a qualified pension plan is not subject to this
rule). The shareholder's pro rata portion of such expenses will be treated as
income to the shareholder and will be deductible by the shareholder, subject to
the 2% "floor" on miscellaneous itemized deductions and other limitations on
itemized deductions set forth in the Code. A regulated investment company
generally will be classified as nonpublicly offered unless it either has 500
shareholders at all times during a taxable year or continuously offers shares
pursuant to a public offering.
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund will provide information
annually to shareholders indicating the amount and percentage of a Fund's
dividend distribution which is attributable to interest on federal obligations,
and will indicate to the extent possible from what types of federal obligations
such dividends are derived. The Trust is organized as a Massachusetts business
trust. Under current law, so long as each Fund qualifies for the federal income
tax treatment described above, it is believed that neither the Trust nor any
Fund will be liable for any income or franchise tax imposed by Massachusetts.
Shareholders, in any event, are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust as amended and restated on January 14, 1997. The
capitalization of the Trust consists solely of an unlimited number of shares of
beneficial interest. The Board of Trustees may establish additional series
(with different investment objectives and fundamental policies) at any time in
the future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable
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and freely transferable. Shares do not have preemptive rights or subscription
rights. In liquidation of a Fund, each shareholder is entitled to receive his
pro rata share of the net assets of that Fund.
Performance Information
Performance information is computed separately for each class of a Fund's
shares. Each Fund may from time to time include the total return of each class
of its shares in advertisements or in information furnished to present or
prospective shareholders. As noted below, in accordance with SEC rules and
informal guidance, total return presentations for periods prior to the inception
date of a particular class of a Fund are based on the historical performance of
an older class of the Fund (specified below) restated to reflect the current
sales charges (if any) of the newer class, but not reflecting any higher
operating expenses such as distribution and servicing fees and administrative
fees associated with the newer class. All other things being equal, such higher
expenses would have adversely affected (i.e., reduced) total return for the
newer classes (i.e., if they had been offered since the inception of the Fund)
by the amount of such higher expenses compounded over the relevant periods. The
Tax Exempt, Renaissance and Balanced Funds may from time to time include the
yield and total return of each class of their shares in advertisements or
information furnished to present or prospective shareholders. Each Fund may
from time to time include in advertisements the total return of each class (and
yield of each class in the case of the Tax Exempt and Balanced Funds) and the
ranking of those performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services as having the same
investment objectives. Information provided to any newspaper or similar listing
of the Fund's net asset values and public offering prices will separately
present each class of shares. The Funds also may compute current distribution
rates and use this information in their Prospectuses and Statement of Additional
Information, in reports to current shareholders, or in certain types of sales
literature provided to prospective investors.
Calculation of Yield
Quotations of yield for certain of the Funds will be based on all
investment income per share (as defined by the SEC) during a particular 30-day
(or one month) period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[( a-b + 1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
For the one month period ended June 30, 1997, the yields of the Balanced
Fund, Renaissance Fund and Tax Exempt Fund were as follows (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%
Tax Exempt Fund N/A N/A 4.31% 3.77% 3.76%
</TABLE>
The yield of each such Fund will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses of the Trust allocated to the Fund or its classes of
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<PAGE>
shares. These factors, possible differences in the methods used in calculating
yield (and the tax exempt status of distributions for the Tax-Exempt Fund)
should be considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's various classes of
shares. These yields do not take into account any applicable contingent deferred
sales charges.
The Tax Exempt Fund may advertise a tax equivalent yield of each class of
its shares, calculated as described above except that, for any given tax
bracket, net investment income of each class will be calculated using as gross
investment income an amount equal to the sum of (i) any taxable income of each
class of the Fund plus (ii) the tax exempt income of each class of the Fund
divided by the difference between 1 and the effective federal income tax rates
for taxpayers in that tax bracket. For example, taxpayers with the marginal
federal income tax rates indicated in the following table would have to earn the
tax equivalent yields shown in order to realize an after-tax return equal to the
corresponding tax-exempt yield shown.
<TABLE>
<CAPTION>
Filing Status Marginal tax rate* A tax-exempt yield of
is equivalent to a taxable yield of
Taxable income
Single (Married filing jointly) 3% 4% 5% 6% 7%
<S> <C> <C> <C> <C> <C> <C> <C>
$23,350 or less $39,000 or less 15% 3.53% 4.71% 5.88% 7.06% 8.24%
Over $23,350 but Over $39,000 but 28% 4.17% 5.56% 6.94% 8.33% 9.72%
not over $56,550 not over $94,250
Over $56,550 but Over $94,250 but 31% 4.35% 5.80% 7.25% 8.70% 10.14%
not over $117,950 not over $143,600
Over $117,950 but Over $143,600 but 36% 4.69% 6.25% 7.81% 9.38% 10.94%
not over $256,500 not over $256,500
Over $256,500 Over $256,500 39.6% 4.97% 6.62% 8.28% 9.93% 11.59%
</TABLE>
- -------------------
* These marginal tax rates do not take into account the effect of the phaseout
of itemized deductions and personal exemptions.
As is shown in the above table, the advantage of tax-exempt investing
becomes more advantageous to an investor as his or her marginal tax rate
increases.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time
in the future, yields and total return may be higher or lower than past yields
and there can be no assurance that any historical results will continue.
Calculation of Total Return
Quotations of average annual total return for a Fund or class will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, five, and ten
years (up to the life of the Fund), calculated pursuant to the following
formula: P (1 + T)/n/ = ERV (where P = a hypothetical initial payment of
$1,000, T = the average annual total return, n = the number of years, and ERV =
the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). Except as noted below, all total return figures
reflect the deduction of a proportional share of Fund or class expenses on an
annual basis, and assume that (i) the maximum sales load (or other charges
deducted from payments) is deducted from the initial $1,000 payment and that the
maximum contingent deferred sales charge, if any, is deducted at the times, in
the amounts, and under the terms disclosed in the Prospectuses and (ii) all
dividends and distributions are reinvested when paid. Quotations of total
return may also be shown for other periods. The Funds may also, with respect to
certain periods of less than one year, provide total return information for that
period that is unannualized. Any such information would be accompanied by
standardized total return information.
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<PAGE>
The table below sets forth the average annual total return of certain
classes of shares of the following Funds for the periods ended December 31,
1997. As noted below, consistent with SEC rules and informal guidance, total
return presentations for periods prior to the inception date of a particular
class are based on the historical performance of Institutional Class shares
restated to reflect the current sales charges (if any) of the newer class, but
not reflecting any higher operating expenses such as 12b-1 distribution and
servicing fees, which may be paid by all classes except the Institutional Class
(at a maximum rate of 1.00% per annum), and the higher administrative fee
charges associated with Class A, Class B and Class C shares (a maximum
differential of .15% per annum). All other things being equal, such higher
expenses would have adversely affected (i.e., reduced) total return for the
newer classes (i.e., if they had been offered since the inception of the Fund)
by the amount of such higher expenses, compounded over the relevant period.
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% 17.67% 17.60% 11/30/94
Class A 23.71% 16.44% 16.72% 1/17/97
Class B 24.99% 17.39% 17.57% 1/17/97
Class C 28.97% 17.60% 17.57% 1/17/97
- --------------------------------------------------------------------------------------
Value Institutional 26.21% 18.69% 17.86% 12/30/91 12/30/91
Administrative 26.20% 18.69% 17.86% 1/17/97
Class A 18.80% 17.27% 16.70% 1/17/97
Class B 19.85% 18.23% 17.67% 1/17/97
Class C 23.78% 27.77% 17.66% 1/17/97
- --------------------------------------------------------------------------------------
Small-Cap Institutional 35.02% 18.86% 19.14% 10/1/91 10/1/91
Value Administrative 34.70% 18.73% 19.03% 11/1/95
Class A 27.09% 17.43% 18.01% 1/17/97
Class B 28.55% 18.40% 18.95% 1/17/97
Class C 32.57% 18.60% 18.95% 1/17/97
- --------------------------------------------------------------------------------------
Capital Institutional 34.23% 21.34% 20.04% 3/8/91 3/8/91
Appreciation Administrative 34.01% 21.27% 19.99% 1/17/97
Class A 26.37% 19.88% 19.01% 1/17/97
Class B 27.84% 20.90% 19.88% 1/17/97
Class C 31.82% 21.08% 19.88% 1/17/97
- --------------------------------------------------------------------------------------
Mid-Cap Institutional 34.17% 20.76% 19.92% 8/26/91 8/26/91
Growth Administrative 33.86% 20.57% 19.77% 11/30/94
Class A 26.29% 19.31% 18.80% 1/17/97
Class B 27.73% 20.31% 19.74% 1/17/97
Class C 31.73% 20.50% 19.74% 1/17/97
- --------------------------------------------------------------------------------------
Micro-Cap Institutional 36.69% N/A 25.01% 6/25/93 6/25/93
Growth Administrative 36.37% N/A 24.89% 4/1/96
- --------------------------------------------------------------------------------------
Small-Cap Institutional 26.72% 17.68% 22.89% 1/7/91 1/7/91
Growth Administrative 27.05% 18.04% 22.89% 9/27/95
- --------------------------------------------------------------------------------------
Enhanced Institutional 30.85% 17.07% 16.11% 2/11/91 2/11/91
Equity Administrative 30.69% 17.04% 16.09% 1/17/97
- --------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Emerging Institutional -2.01% N/A 5.82% 6/1/93 6/1/93
Markets Administrative -2.26% N/A 5.60% 11/1/94
Class A -7.71% N/A 4.45% 1/17/97
Class B -7.86% N/A 5.23% 1/17/97
Class C -3.98% N/A 5.59% 1/17/97
- --------------------------------------------------------------------------------------
International Institutional 1.92% N/A 8.20% 6/8/93 6/8/93
Developed Administrative 1.63% N/A 8.02% 11/30/94
Class A -4.08% N/A 6.78% 1/17/97
Class B -4.09% N/A 7.63% 1/17/97
Class C -0.11% N/A 7.97% 1/17/97
- --------------------------------------------------------------------------------------
Balanced Institutional 21.93% 13.03% 13.64% 6/25/92 6/25/92
Administrative 21.93% 13.03% 13.64% 6/25/92
Class A 14.67% 11.65% 12.39% 1/17/97
Class B 15.59% 19.39% 13.32% 1/17/97
Class C 19.68% 12.80% 13.44% 1/17/97
- --------------------------------------------------------------------------------------
Core Equity Institutional 25.32% N/A 23.61% 12/28/94 12/28/94
Administrative 24.93% N/A 23.36% 5/31/95
- --------------------------------------------------------------------------------------
Mid-Cap Institutional 16.22% N/A 21.46% 12/28/94 12/28/94
Equity Administrative 16.14% N/A 21.43% 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, consistent with SEC rules and informal guidance, Class A,
Class B, Class C and Administrative Class total return presentations for
periods prior to the Inception Date of a particular class reflect the prior
performance of Institutional Class shares of the Fund adjusted to reflect the
actual sales charges (none in the case of the Administrative Class) of the
newer class. The adjusted Institutional Class performance does not, however,
reflect the higher Fund operating expenses applicable to Class A, Class B,
Class C, and Administrative Class shares, such as 12b-1 distribution and
servicing fees, which may be paid by all classes except the Institutional
Class (at a maximum rate of 1.00% per annum), and the higher administrative
fee charges associated with Class A, Class B and Class C shares (a maximum
differential of .15% per annum). All other things being equal, such higher
expenses would have adversely affected (i.e., reduced) total return for the
newer classes by the amount of such higher expenses, compounded over the
relevant period.
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 the
periods ended December 31, 1997. The table presents total return information
from the inception of the PAF predecessor series through December 31, 1997.
Consistent with SEC rules and informal guidance, total return presentations for
periods prior to the inception date of a particular class are based on the
historical performance of Class A or Class C shares (the particular class used
in each case is noted below) restated to reflect the current sales charges (if
any) of the newer class, but not reflecting possibly lower operating expenses
such as 12b-1 distribution and servicing fees or lower administrative fee
charges associated with the newer class.
69
<PAGE>
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 28.44% 19.31% N/A 13.81% 4/18/88 2/1/91
Class B 29.85% 19.32% N/A 13.88% 5/22/95
Class C 33.90% 19.77% N/A 13.84% 4/18/88
Institutional 35.92% 20.67% N/A 20.40% 1/17/97
Administrative 35.92% 20.67% N/A 20.40% 1/17/97
- -------------------------------------------------------------------------------------------------------
Growth Class A 16.01% 14.20% 15.71% 16.59% 2/24/84 10/26/90
Class B 16.88% 14.19% 15.78% 16.63% 5/23/95
Class C 20.84% 14.64% 15.77% 16.59% 2/24/84
- -------------------------------------------------------------------------------------------------------
Target Class A 9.97% 17.02 N/A 17.13% 12/17/92 12/17/92
Class B 10.44% 17.40 N/A 17.56% 5/22/95
Class C 14.44% 17.44 N/A 17.55% 12/17/92
- -------------------------------------------------------------------------------------------------------
Opportunity Class A -9.32% 13.85% 19.17% 17.51% 2/24/84 12/17/90
Class C -5.71% 14.56% 19.25% 17.56% 2/24/84
- -------------------------------------------------------------------------------------------------------
Innovation Class A 3.03% N/A N/A 22.49% 12/22/94 12/22/94
Class B 3.17% N/A N/A 23.64% 5/22/95
Class C 7.10% N/A N/A 23.84% 12/22/94
Institutional 9.03% N/A N/A 24.80% 1/17/97
Administrative 9.03% N/A N/A 24.80% 1/17/97
- -------------------------------------------------------------------------------------------------------
International** Class A -3.01% 6.49% 6.54% 6.19% 8/25/86 2/1/91
Class B -3.15% 6.48% 6.59% 6.23% 5/22/95
Class C 0.85% 6.91% 6.59% 6.25% 8/25/86
- -------------------------------------------------------------------------------------------------------
Precious Class A -50.47% -4.01% N/A -5.80% 10/10/88 2/1/91
Metals** Class B -50.64% -4.40% N/A -5.74% 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
then been in effect.
*** With the exception of the Target Fund and Innovation Fund, Class A,
Class B, Class C, Institutional Class and Administrative Class total return
presentations for the Funds listed for periods prior to the Inception Date
of the particular class reflect the prior performance of Class C shares of
the former relevant PAF Fund adjusted to reflect the actual sales charges
(or no sales charges in the case of Administrative Class and
70
<PAGE>
Institutional Class shares) of the newer class. Consistent with SEC rules
and informal guidance, the adjusted performance does not, however, reflect
possibly different operating expenses, such as lower 12b-1 distribution and
servicing fees or lower administrative fee charges associated with the
newer class. For the Target (for Class B only) and Innovation Funds, (i)
Institutional Class and Administrative Class total return presentations for
periods prior to the Inception Date of a particular class reflect the prior
performance of Class A shares of the former PAF Fund adjusted in the manner
described above and (ii) Class B total return presentations for periods
prior to the Inception Date of that class reflect the prior performance of
Class C shares of the former PAF Fund adjusted in the manner described
above. Note also that, prior to January 17, 1997, Class A, Class B and
Class C shares of the former PAF Funds were subject to a variable level of
expenses for such services as legal, audit, custody and transfer agency
services. As described in the 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 should adversely affect future total
return performance for these Funds compared to historical periods.
Performance information for a Fund may also be compared to: (i) the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, the Morgan Stanley Capital International EAFE (Europe, Australasia, Far
East) Index, the Morgan Stanley Capital International Emerging Markets Free
Index, the International Finance Corporation Emerging Markets Index, the Baring
Emerging Markets Index, or other unmanaged indexes that measure performance of a
pertinent group of securities; (ii) other groups of mutual funds tracked by
Lipper Analytical Services ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank mutual funds on overall performance or other criteria; and (iii) the
Consumer Price Index (measure for inflation) to assess the real rate of return
from an investment in the Funds. Unmanaged indexes (i.e., other than Lipper)
generally do not reflect deductions for administrative and management costs or
expenses. The Adviser and any of the Portfolio Managers may also report to
shareholders or to the public in advertisements concerning the performance of
the Adviser and/or the Portfolio Managers as advisers to clients other than the
Trust, and on the comparative performance or standing of the Adviser and/or the
Portfolio Managers in relation to other money managers. Such comparative
information may be compiled or provided by independent ratings services or by
news organizations. Any performance information, whether related to the Funds,
the Adviser or the Portfolio Managers, should be considered in light of the
Funds' investment objectives and policies, characteristics and quality of the
Funds, and the market conditions during the time period indicated, and should
not be considered to be representative of what may be achieved in the future.
The total return of each class (and yield of each class in the case of
the Tax Exempt, Renaissance and Balanced Funds) may be used to compare the
performance of each class of a Fund's shares against certain widely acknowledged
standards or indexes for stock and bond market performance, against interest
rates on certificates of deposit and bank accounts, against the yield on money
market funds, against the cost of living (inflation) index, and against
hypothetical results based on a fixed rate of return.
The S&P's Composite Index of 500 Stocks (the "S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 385 industrial, 15 transportation, 45 utilities and 55
financial services concerns. The S&P 500 represents about 77% of the market
value of all issues traded on the New York Stock Exchange.
The S&P's 400 Mid-Cap Index (the "S&P 400 Mid-Cap Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 400 stocks of companies whose capitalization range from $100 million to
over $5 billion and which represent a wide range of industries. As of
71
<PAGE>
September 30, 1997, approximately 22% of the 400 stocks were stocks listed on
the National Association of Securities Dealers Automated Quotations ("NASDAQ")
system, 76% were stocks listed on the New York Stock Exchange and 7% were stocks
listed on the American Stock Exchange. The Standard & Poor's Midcap 400 Index
P/TR consists of 400 domestic stocks chosen for market size (median market
capitalization of $1.52 billion), liquidity and industry group representation.
It is a market value-weighted index (stock price times shares outstanding), with
each stock affecting the index in proportion to its market value. The index is
comprised of industrials, utilities, financials and transportation, in size
order.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market value-weighted
and unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks relative to the base measure of 100.00 on February 5,
1971. The NASDAQ Index is composed entirely of common stocks of companies
traded over-the-counter and often through the NASDAQ system. Only those over-
the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest securities in the Russell 3000 Index, representing approximately 7% of
the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of
the U.S. equity market by capitalization. The Russell 1000 Index is composed of
the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Index
represents the universe of stocks from which most active money managers
typically select. This large cap index is highly correlated with the S&P 500.
The Russell 1000 Value Index contains stocks from the Russell 1000 Index with a
less-than-average growth orientation. It represents the universe of stocks from
which value managers typically select.
The Lehman Government Bond Index (the "SL Government Index") is a measure
of the market value of all public obligations of the U.S. Treasury; all
publicly-issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the SL Government Index.
The Lehman Government/Corporate Bond Index (the "SL Government/Corporate
Index") is a measure of the market value of approximately 5,000 bonds. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher by an NRSRO.
BanXquote Money Market, a service of Masterfund Inc., provides the average
rate of return paid on 3-month certificates of deposit offered by major banks
and the average rate paid by major banks on bank money market funds. The
Donoghue Organization, Inc., a subsidiary of IBC USA Inc., publishes the Money
Fund Report which lists the 7-day average yield paid on money market funds.
From time to time, the Trust may use, in its advertisements or information
furnished to present or prospective shareholders, data concerning the
performance and ranking of certain countries' stock markets, including
performance and ranking data based on annualized returns over one-, three-,
five- and ten-year periods. The Trust may also use data about the portion of
world equity capitalization represented by U.S. securities. As of December 31,
1996, the U.S. equity market capitalization represented approximately 35% of the
equity market capitalization of all the world's markets. This compares with 52%
in 1980 and 70% in 1972.
From time to time, the Trust may use, in its advertisements and other
information relating to certain of the Funds, data concerning the performance of
stocks relative to that of fixed income investments and relative to the cost of
living over various periods of time. The table below sets forth the annual
returns for each calendar year from 1972 through 1996 (as well as a cumulative
return and average annual return for that 25 year period) for the S&P 500 and
Treasury bills (using the formula set forth after the table) as well as the
rates of inflation (based on the Consumer Price Index) during such periods.
Consumer Price
Period S&P 500 Treasury Bills Index
- ------ ------- -------------- --------------
1972 18.9 3.8 3.4
1973 -14.7 6.9 8.8
72
<PAGE>
1974 -26.5 8.0 12.2
1975 37.2 5.8 7.0
1976 23.8 5.0 4.8
1977 -7.2 5.1 6.8
1978 6.5 7.2 9.0
1979 18.4 10.4 13.3
1980 32.4 11.2 12.4
1981 -4.9 14.7 8.9
1982 21.4 10.5 3.8
1983 22.5 8.8 3.8
1984 6.3 9.9 3.9
1985 32.2 7.7 3.8
1986 18.5 6.1 1.1
1987 5.2 5.5 4.4
1988 16.8 6.3 4.4
1989 31.5 8.4 4.6
1990 -3.2 7.8 6.1
1991 30.5 5.6 3.1
1992 7.7 3.5 2.9
1993 10.1 2.9 2.7
1994 1.3 3.9 2.7
1995 37.4 5.6 2.7
1996 23.1 5.2 3.3
- -------------------------------------------------------------------------------
Cumulative Return
1972-1996 1,826.8% 458.5% 285.9%
- -------------------------------------------------------------------------------
Average Annual Return
1972-1996 12.6% 7.1% 5.6%
- -------------------------------------------------------------------------------
The average returns for Treasury bills were computed using the following
method. For each month during a period, the Treasury bill having the shortest
remaining maturity (but not less than one month) was selected. (Only the
remaining maturity was considered; the bill's original maturity was not
considered). The return for the selected Treasury bill was computed based on
the price of the bill as of the last trading day of the previous month and the
price on the last trading day of the current month. The price of the bill (P)
at each time (t) is given by:
P\t\ = [ 1- rd ]
--
360
where,
r = decimal yield on the bill at time t (the average of
bid and ask quotes); and
d = the number of days to maturity as of time t.
Advertisements and information relating to the Target Fund may use data
comparing the performance of stocks of medium-sized companies to that of other
companies. The following table sets forth the annual returns for each year from
March 1981 (inception of Mid-Cap Index) through December 31, 1996 (as well as a
cumulative return and average annual return for this period) for stocks of
medium-sized companies (based on the Standard & Poor's Mid-Cap Index), stocks
of small companies (based on the Russell 2000 Index) and stocks of larger
companies (based on the S&P 500).
73
<PAGE>
Small Mid-Sized Large
Period Companies Companies Companies
- ------ --------- --------- ---------
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
- --------------------------------------------------------------------------------
Cumulative Return
2/28/81-12/31/96 579.7% 1096.3% 901.3%
- --------------------------------------------------------------------------------
Average Annual Return
2/28/81-12/31/96 12.9% 17.0% 15.7%
- --------------------------------------------------------------------------------
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 1972 through 1996 (as well as
cumulative return and average annual return for that 25 year period) for an all-
stock portfolio (using the S&P 500), an all-bond portfolio (using the Salomon
Brothers Long Term Corporate Bond Index), and for a hypothetical portfolio with
45% of its assets in stocks comprising the S&P 500, 45% in bonds comprising the
Salomon Brothers Long Term Corporate Bond Index and 10% in stocks comprising the
Morgan Stanley Capital International Gold Mining Index.
Stocks 45%
All All Bonds 45%
Period Stocks Bonds Gold Stocks 10%
- ------ ------ ----- ---------------
1972 19.0 7.3 15.5
1973 -14.7 1.1 4.2
1974 -26.5 -3.1 -10.9
1975 37.5 14.6 20.4
1976 23.8 18.6 15.0
1977 -7.2 1.7 .5
1978 6.5 0.00 3.4
1979 18.4 -4.2 21.3
1980 32.4 -2.6 19.3
1981 -4.9 -0.1 -6.0
1982 21.4 43.8 33.9
1983 22.5 4.7 12.0
1984 6.3 16.4 7.2
74
<PAGE>
1985 32.2 30.9 26.2
1986 18.5 19.8 18.5
1987 5.2 -0.02 6.6
1988 16.8 10.7 9.1
1989 31.5 16.2 26.4
1990 -3.2 6.8 -1.0
1991 30.5 19.9 21.8
1992 7.7 9.4 4.9
1993 10.1 13.2 23.5
1994 1.3 -5.8 -3.1
1995 37.4 27.2 29.0
1996 23.1 1.4 10.5
- --------------------------------------------------------------------------------
Cumulative Return
1972-1996 1819.9% 813.1% 1497.7%
- --------------------------------------------------------------------------------
Average Annual Return
1972-1996 12.6% 9.3% 11.7%
- --------------------------------------------------------------------------------
The Trust may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1996/1997 costs of college (using tuition and fees only) and an assumed rate of
increase for such costs. For example, the table below sets forth the projected
cost of four years of college at a public college and a private college assuming
a steady increase in both cases of 3% per year. In presenting this information,
the Trust is making no prediction regarding what will be the actual growth rate
in the cost of a 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.
Potential College Cost Table
Start Public Private Start Public Private
Year College College Year College College
- ----- ------- ------- ----- ------- -------
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306
Costs assume a steady increase in the annual cost of college of 7% per year from
a 1993-94 base year amount. Actual rates of increase may be more or less than 7%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the 25 years from 1972 through 1996 was:
*Stocks: 12.5%
Bonds: 9.2%
75
<PAGE>
T-Bills: 7.0%
Inflation: 5.6%
*Returns of unmanaged indexes do not reflect past or future
performance of any of the Funds of PIMCO Funds: Multi-Manager Series.
Stocks is represented by Ibbotson's Common Stock Total Return Index. Bonds
are represented by Ibbotson's Long-term Corporate Bond Index. Treasury
bills are represented by Ibbotson's Treasury Bill Index and Inflation is
represented by the Cost of Living Index. These are all unmanaged indexes,
which can not be invested in directly. While Treasury bills are insured
and offer a fixed rate of return, both the principal and yield of
investment securities will fluctuate with changes in market conditions.
Source: Ibbotson, Roger G., and Rex A. Sinquefiled, Stocks, Bonds, Bill
and Inflation (SBBI), 1989, updated in Stocks, Bonds, Bills and Inflation
1996 Yearbook, Ibbotson Associates, Chicago. All rights reserved.
The Trust may also compare the relative historic returns and range of
returns for an investment in each of common stocks, bonds and treasury bills to
a portfolio that blends all three investments. For example, over the 25 years
from 1972 through 1996, the average annual return of stocks comprising the
Ibbotson's Common Stock Total Return Index ranged from -26.5% to 37.4% while the
annual return of a hypothetical portfolio comprised 40% of such common stocks,
40% of bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.1% over the same period. The
average annual returns of each investment for each of the years from 1972
through 1996 is set forth in the following table.
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------ ----- ------- --------- ---------
1972 18.98% 7.26% 3.84% 3.41% 11.26%
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
Returns of unmanaged indexes do not reflect past or future performance of
any of the Funds of PIMCO Funds: Multi-Manager Series. Stocks are
represented by Ibbotson's Common Stock Total Return
76
<PAGE>
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:
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
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
This hypothetical example assumes a fixed 7% return compounded annually and
a guaranteed return of principal. The example is intended to show the
benefits of a long-term, regular investment program, and is in no way
representative of any past or future performance of a Fund of PIMCO Funds:
Multi-Manager Series. There can be no guarantee that you will be able to
find an investment that would provide such a return at the times you invest
and an investor in any of the Funds of PIMCO Funds: Multi-Manager Series
should be aware that certain of the Funds of PIMCO Funds: Multi-Manager
Series have experienced periods of negative growth in the past and may
again in the future.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1996:
% of Income for Individuals
Aged 65 Years and Older in 1996*
-------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
1996 43% 57%
* For individuals with an annual income of at least $51,000. Other includes
personal savings, earnings and other undisclosed sources of income. Source:
Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds may appear in various national
publications and services including, but not limited to: The Wall Street
Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual Fund
Magazine, The New York Times, Kiplinger's Personal Finance, Fortune, Money
Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies and The
Donoghue Organization. Some or all of these publications or reports may publish
their own rankings or performance reviews of mutual funds, including the Funds,
and may provide information relating to the Adviser and the Portfolio Managers,
including descriptions of assets under management and client base, and opinions
of the author(s) regarding the skills of personnel and employees of the Adviser
or the
77
<PAGE>
Portfolio Managers who have portfolio management responsibility. From time to
time, the Trust may include references to or reprints of such publications or
reports in its advertisements and other information relating to the Funds.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Funds over a specified period of time and may use charts and
graphs to display that growth.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
Funds and relevant benchmark market indexes in a variety of market conditions.
Based on its independent research and analysis, Ibbotson may develop, from time
to time, model portfolios of the Funds and series of PIMCO Funds: Pacific
Investment Management Series ("PIMS") which indicate how, in Ibbotson's opinion,
a hypothetical investor with a 5+ year investment horizon might allocate his or
her assets among the Funds and series of PIMS. Ibbotson bases its model
portfolios on five levels of investor risk tolerance which it developed and
defines as ranging from "Very Conservative" (low volatility; emphasis on capital
preservation, with some growth potential) to "Very Aggressive" (high volatility;
emphasis on long-term growth potential). However, neither Ibbotson nor the
Trust offers Ibbotson's model portfolios as investments. Moreover, neither the
Trust, the Adviser, the Portfolio Managers nor Ibbotson represent or guarantee
that investors who allocate their assets according to Ibbotson's models will
achieve their desired investment results.
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. Shareholders may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. In the
event that such a request was made, the Trust has represented that it would
assist with any necessary shareholder communications. Shareholders of a class
of shares have different voting rights with respect to matters that affect only
that class.
All classes of shares of the Funds have identical voting rights except that
each class of shares has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class. These shares are entitled to vote
at meetings of shareholders. Matters submitted to shareholder vote must be
approved by each Fund separately except (i) when required by the 1940 Act shares
shall be voted together and (ii) when the Trustees have determined that the
matter does not affect all Funds, then only shareholders of the Fund or Funds
affected shall be entitled to vote on the matter. All classes of shares of a
Fund will vote together, except with respect to the Distribution and Servicing
Plan applicable to Class A, Class B or Class C shares, to the Distribution or
Administrative Services Plans applicable to Administrative Class shares, 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.
78
<PAGE>
Certain Ownership of Trust Shares
As of February 28, 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 of the Trust as a whole. As of February 28, 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. 1,802,276.253 20.69%
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 ** 965,105.843 11.08%
A/C #22-39912
P.O. Box 92956
Chicago, Illinois 60675-2956
Santa Barbara Foundation 733,897.570 8.43%
15 East Carrillo Street
Santa Barbara, California 93101-2780
AM Castle & Company Employee P/S/P Equity Fund ** 720,865.381 8.28%
A/C #22-39919
P.O. Box 92956
Chicago, Illinois 60675-2956
Northern Trust Company as Trustee for 647,650.161 7.44%
Brush Wellman Inc.
P.O. Box 92956
Chicago, Illinois 60675-0001
Bank of America NT&SA as Trustee for 539,650.434 6.20%
Mazda Motor of America
P.O. Box 3577, Terminal Annex
Los Angeles, California 90051-1577
Administrative
- --------------
First Union National Bank ** 686,950.909 96.58%*
401 S. Tyon Street, FRB-3
CMG Fiduciary Operations Funds Group
Mail Code CMG-2-1151
Charlotte, North Carolina 28288-1151
Class A
- -------
Carn & Co. ** 254,785.089 37.41%*
USI Insurance Services Corporation
401(k) Plan
P.O. Box 96211
Washington, D.C. 20090-6211
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Equity Income Fund
Class A
- -------
Khosrow B. Semnani 69,961.411 10.27%
P.O. Box 3508
Salt Lake City, Utah 84110-3508
Merrill Lynch Pierce Fenner & Smith Inc. ** 34,591.275 5.08%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 64,001.993 9.92%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 82,458.004 7.73%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Value Fund
Institutional
- -------------
Pacific Life Insurance Company 1,944,112.986 39.68%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
The Northern Trust Company as Trustee for 895,215.208 18.27%
Great Lakes Chemical Corporation
P.O. Box 92956
Chicago, Illinois 00006-0690
CMTA-GMPP & Allied Workers Pension Trust 582,712.709 11.89%
c/o Associated Third Party Administrator
1640 South Loop Road
Alameda, California 94502
BAC Local 19 Pension Trust 354,552.947 7.24%
777 Davis Street
San Francisco, California 94126-2500
Pacific Life Foundation 276,282.067 5.64%
700 Newport Center Drive
Newport Beach, California 92660
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Value Fund
Institutional
- -------------
California Race Track Association 250,325.772 5.11%
P.O. Box 60014
Arcadia, California 91006-6014
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 159,968.115 12.45%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 443,144.113 20.54%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 583,976.070 10.56%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Small Cap Value Fund
Institutional
- -------------
Pacific Life Insurance Company 287,314.628 11.47%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
FTC & Co. Datalynx House Account ** 275,412.871 10.99%
P.O. Box 173736
Denver, Colorado 80217-3736
Trust Company of America ** 251,472.850 10.04%
P.O. Box 6503
Englewood, Colorado 80155
Lucile Packard Foundation for Children 220,202.390 8.79%
725 Welch Road
Palo Alto, California 94304
Pickles Investors, LLC 194,660,734 7.77%
4201 North 24th Street, Suite 120
Phoenix, AZ 85016
Donaldson Lufkin & Jenrette ** 136,046.330 5.43%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Small Cap Value Fund
Administrative
- --------------
First Union National Bank ** 484,826.039 81.83%*
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 304,493.408 11.34%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 1,346,101.877 30.81%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 1,540,712.153 26.46%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
FTC & Co.** 350,207.581 6.01%
Datalynx House Acct
P.O. Box 1731736
Denver, Colorado 80217-3736
PIMCO Capital Appreciation Fund
Institutional
- -------------
Donaldson Lufkin & Jenrette** 6,219,479.198 21.97%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Wendel & Co. A/C No. 571246 3,513,743.489 12.41%
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 ** 1,559,660.540 5.51%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Capital Appreciation Fund
Administrative
- --------------
First Union National Bank ** 881,097.893 32.50%*
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Certain Employee (Fidelity) ** 880,407.426 32.48%*
100 Magetian KWIC
Covington, Kentucky 41015
New York Life Trust Company ** 320,591.290 11.83%
51 Madison Avenue, Room 117A
New York, New York 10010
National Financial Services Corporation for ** 275,442.739 10.16%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
The Northern Trust company as Trustee FBO 142,107.267 5.24%
OEA, Inc. Retirement Savings Plan
P.O. Box 92956
DV 2247126
Chicago, Illinois 60675
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 747,574.249 42.28%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
FTC & Co.** 173,031.324 9.79%
Datalynx House Acct
P.O. Box 1731736
Denver, Colorado 80217-3736
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 132,107.542 15.02%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 242,852.461 11.54%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Mid Cap Growth Fund
Institutional
- -------------
State Street Bank & Trust Company as Trustee for 1,421,531.485 8.18%
Dayton Hudson Retirement Savings Plan
One Enterprise Drive
North Quincy, Massachusetts 02171
Caremark International, Inc. 1,096,666.645 6.31%
c/o State Street Bank & Trust
1 Enterprise Drive
North Quincy, Massachusetts 02171-2126
Administrative
- --------------
Certain Employee (Fidelity) ** 728,638.743 50.26%*
100 Magellan KW1C
Covington, Kentucky 41015
National Financial Services Corporation for ** 306,726.864 21.16%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
First Union National Bank ** 116,243.977 8.02%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Wells Fargo Bank as Trustee for 96,628.884 6.67%
ChoiceMaster
P.O. Box 9800
Calabasas, California 91302-9800
New York Life Trust Company 94,123.184 6.49%
51 Madison Avenue, Room 117A
New York, New York 10010
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 134,223.595 8.82%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 677,263.578 25.49%*
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>
PIMCO Mid Cap Growth Fund
Class C
- --------
Merrill Lynch Pierce Fenner & Smith Inc. ** 851,225.064 17.37%
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.** 2,164,970.088 21.42%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Donald Lufkin & Jenrette** 1,289,272.417 12.75%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Bost & Co. A/C DOMF 8526562 1,072,912.358 10.61%
Dominion Resources
Attn: Mutual Fund Operations
A. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
University of Southern California 1,020,412.993 10.09%
Treasurer's Office
University Park, BKS 402
Los Angeles, California 90089-2541
Mac & Co. A/C OBRF 3331012 FBO 681,890.401 6.75%
Oberlin College
Attn: Mutual Fund Operations
A. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
St. Paul Foundation 605,854.422 5.99%
P.O. Box 64010
St. Paul, Minnesota 55164-0010
Administrative
- --------------
Northern Trust as Trustee for 147,153.881 77.62%*
Sunday School Board
P.O. Box 92956
Chicago, Illinois 60675
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Micro Cap Growth Fund
National Financial Services Corporation for ** 24,276.346 12.81%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
New York Life Trust Company ** 15,522.220 8.19%
51 Madison Avenue, Room 117A
New York, New York 10010
PIMCO Small Cap Growth Fund
Institutional
- -------------
The Jewish Federation of 972,699.835 29.53%*
Metropolitan Chicago
One South Franklin Street, Room 625
Chicago, Illinois 60606-4609
ESOR & Co. ** 453,722.992 13.77%
Associated Bank Green Bay
P.O. Box 19006
Green Bay, Wisconsin 54307-9006
Pacific Life Insurance Company 379,247.066 11.51%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Auburn Theological Seminary 334,745.959 10.16%
3041 Broadway
New York, New York 10027-5710
Bessemer Trust Company for ** 210,399.696 6.39%
Naidot & Co.
100 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Employees Retirement System of Jersey City 168,181.206 5.11%
325 Palisade Avenue
Jersey City, New Jersey 07307-1714
Administrative
- --------------
Cody Kondo 970.430 6.82%
354 Sturbridge Road
Wyckoff, New Jersey 07481
Gary P. Dukewits 752.783 5.29%
6321 South Farm Road 189
Rogersville, Missouri 65742
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Small Cap Growth Fund
Administrative
- --------------
John Chandler 903.609 6.35%
12414 Barbury Road
Philadelphia, Pennsylvania 19154
PIMCO Core Equity Fund
Institutional
- -------------
Pacific Life Foundation 37,651.560 32.29%*
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 34,200.327 29.33%*
P.O. Box 60014
Arcadia, California 91006-6014
Mac & Co. A/C #080-435 19,879.614 17.05%
Fine Quaker L.P.
A. O. Box 3198
Mutual Fund Operations
Pittsburgh, Pennsylvania 15230-3198
Administrative
- --------------
The Bank of New York as Trustee for 5,437,843.230 92.53%*
Melville Corporation
One Wall Street, 7th Floor MT/MC
New York, New York 10286-0001
PIMCO Mid Cap Equity Fund
Institutional
- -------------
Pacific Life Insurance Company 361,856.905 55.69%*
700 Newport Center Drive
Newport Beach, California 92660
Pacific Life Foundation 97,773.532 14.43%
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 85,001.294 13.08%
P.O. Box 60014
Arcadia, California 91006-6014
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Mid Cap Equity Fund
Institutional
- -------------
IFTC as Custodian for 81,186.220 12.50%
John W. Barnum
5175 Tilden Street, N.W.
Washington, D.C. 20016-1961
PIMCO Enhanced Equity Fund
Institutional
- -------------
Pacific Life Insurance Company 1,522,647.021 50.24%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
CMTA-GMPP & Allied Workers Pension 457,174.781 15.09%
c/o Associated Third Party Administrator
1640 South Loop Road
Alameda, California 94502
BAC Local 19 Pension Trust Fund 277,910.742 9.17%
777 Davis Street
San Francisco, California 94126-2500
Pacific Life Foundation 216,691.791 7.15%
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 196,333.996 6.48%
P.O. Box 60014
Arcadia, California 91006-6014
Administrative
- --------------
Susan Johnson 22,246.819 5.45%
490 Celtic Court
Colorado Springs, Colorado 80921
PIMCO Emerging Markets Fund
Institutional
- -------------
Charles Schwab & Co., Inc. - Reinvest ** 768,017.091 29.84%*
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Pacific Life Insurance Company 575,190.664 22.35%
700 Newport Center Drive ,
Newport Beach, California 92660
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Emerging Markets Fund
Institutional
- -------------
Pacific Life Insurance Company 407,491.280 15.83%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Donaldson Lufkin & Jenrette** 207,319.165 8.06%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Administrative
- --------------
Susan Johnson 13,397.052 17.39%
490 Celtic Court
Colorado Springs, Colorado 80921
Class A
- -------
RPSS TR IRA 1,785.714 8.24%
Dale V. Kelman
5100 Poplar Avenue, Suite 3105
Memphis, Tennessee 38137-3101
Donald Lufkin & Jenrette** 1,544.734 7.12%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Howard Nusbaum Trust 1,530.303 7.06%
Howard Nusbaum DDS
Profit Sharing Plan
1145 Bordentown Avenue
Parlin, New Jersey 08859-1851
Merrill Lynch Pierce Fenner & Smith Inc. ** 1,153.000 5.32%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Raymond James & Assoc Inc. Custodian 1,118.360 19.68%
Doty R. Nicolaus
2208 Ivy TRCE
Birmingham, Alabama 35243-4639
Donald Lufkin & Jenrette** 1,203.209 5.32%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Emerging Markets Fund
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc. ** 2,475.000 6.46%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PAF Sales Inc. 2,347.418 6.12%
Profit Sharing Plan
P.O. Box 307
Scarborough, New York 10510-0807
Carolyn Lecompte 2,180.233 5.69%
231 Lyles Street
Houma, Louisiana
Class C
- -------
Raymond James & Assoc Inc. Custodian 24,940.178 24.00%
James F. Riopelle IRA
1 Foxhill Road
Englewood, Colorado 80110-4923
Merrill Lynch Pierce Fenner & Smith Inc.** 19,598.000 18.86%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO International Developed Fund
Institutional
- -------------
Pacific Life Insurance Company 1,467,904.784 17.49%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc. - Reinvest ** 1,149,098.973 13.69%
Attn: Mutual Fund Operations
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Wachovia Bank NA as Trustee for the 1,133,282.206 13.50%
Atlanta Gas Light Company Retirement Plan
301 N. Main Street - MC NC 31057
Winston-Salem, North Carolina 27150
Pacific Asset Management LLC 930,797.270 11.09%
700 Newport Center Drive
Newport Beach, California 92660-6307
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO International Developed Fund
Institutional
- -------------
Citibank, N.A., Trustee for the benefit of 768,019.009 9.15%
Nissan Motor Mfg. Corp. U.S.A
983 Nissan Drive
Smyrna, Tennessee 37167-4400
FTC & Co. Datalynx House Account ** 750,745.089 8.94%
P.O. Box 173736
Denver, Colorado 80217-3736
Administrative
- --------------
FTC & Co. - Attn: Datalynx #165 ** 13,068.116 6.78%
First Trust (Multi Financial Group)
P.O. Box 173736
Denver, Colorado 80217-3736
Class A
- -------
American National Bank TR 71,068.200 35.38%*
FBO Emerald Investments
40 Skokie Boulevard, Suite 105
Northbrook, Illinois 60062-1614
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 23,742.000 13.74%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 17,510.076 5.21%
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. 1,236,869.681 35.82%*
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 763,005.072 22.10%
350 Terracina Boulevard
Redlands, California 92373-4850
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Balanced Fund
Institutional
- -------------
Dominguez Services Corporation 614,687.378 17.80%
21718 South Alameda Street
Long Beach, California 90810-0351
Bank of America as Trustee for 316,121.708 9.16%
The Music Center Operating Co.
P.O. Box 2788
Los Angeles, California 90051-0788
The Northern Trust Company as Trustee for 276,072.404 8.00%
Ameron 401(k)
P.O. Box 92956
Chicago, Illinois 60675
Class A
- -------
Merrill Lynch Trust Co. as Trustee FBO ** 406,855.493 69.75%*
Qualified Retirement Plans
265 Davidson Avenue
Somerset, New Jersey 08873-4120
Class B
- -------
MLPF&S for the sole benefit of its Customers ** 150,786.328 31.05%*
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
Class C
- -------
MLPF&S for the sole benefit of its Customers ** 65,466.975 13.84%
4800 Deer Lake Drive East, Floor 3
Jacksonville, Florida 32246-6484
PIMCO Target Fund
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,867,778.604 17.19%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
J.C. Bradford & Company FBO 830,870.113 7.65%
RCIP Limited Partnership I
330 Commerce Street
Nashville, Tennessee 37201-1899
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,840,560.761 35.39%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Target Fund
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 19,121,755.440 28.02%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Precious Metals Fund
Class A
- -------
Nationsbanc Montgomery Secs 260,130.747 16.16%
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, California 94111
Woodland Investments Limited 230,594.263 14.33%
c/o Lyle Schlyer
30101 Agoura Ct., Suite 4311
Agoura Hills, California 91031-4300
J.C. Bradford & Company FBO 152,443.750 9.47%
RCIP Limited Partnership I
330 Commerce Street
Nashville, Tennessee 37201-1899
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 407,537.407 14.46%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Renaissance Fund
Institutional
- -------------
Richard Fiskind, Gregory A. Fiskind Co. TTEES 42,768.781 100.00%*
of the Seymour S. Finkind Martical Trust FBO
Selma Fiskind
One Station Place, 8th Floor
Stamford, Connecticut 06902
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 313,876.243 9.44%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 845,548.843 23.05%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Renaissance Fund
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 3,556,753.117 15.45%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO Tax Exempt Fund
Class A
BT Alex Brown Incorporated 162,400.998 30.13%*
P.O. Box 1346
Baltimore, Maryland 21203
Merrill Lynch Pierce Fenner & Smith Inc.** 142,131.425 26.37%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Nationsbanc Montgomer Secs. 39,745.628 7.37%
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, California 94111
Joseph R. White 33,033.610 6.13%
P.O. Box 572
Waltham, Massachusetts 02254-0572
Class B
- -------
Dain Rauscher Inc. FBO 48,167.954 15.87%
K. K. Kinsey Trustee
2801 NE 14th Street
Ft. Lauderdale, Florida 33304
Merrill Lynch Pierce Fenner & Smith Inc.** 45,676.769 15.05%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PaineWebber FBO 17,783.885 5.86%
William H. Hoehn
2906 S.W. 130th Terr.
Archer, Florida 32618-2124
Robert A. Fish & Susan Beville Fish Co-Trustees 17,654.543 5.82%
The Fish Family Trust
300 Tolak Road
Aptos, California 95003-2737
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Tax Exempt Fund
Class B
- -------
Prudential Securities FBO 40,396.587 13.31%
Ruth G. Battel
6 Willowbank Ct.
Mahawah, New Jersey 07430-2909
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 380,676.855 12.04%
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.** 369,512.144 5.98%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 803,982.137 30.82%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 8,248,518.647 12.99%
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.** 1,515,100.237 20.77%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 5,351,044.157 26.98%*
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Outstanding
Owned Shares Owned
----- ------------
<S> <C> <C>
PIMCO Innovation Fund
Class A
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 429,779.850 13.74%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 754,389.958 22.85%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,344,094.050 14.50%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO International Fund
Class A
- -------
PaineWebber FBO 129,915.639 10.56%
Bakerrubine LLC
575 Madison Avenue, 10th Floor
New York, New York 10022-2511
Marin Sector Limited 129,259.964 10.51%
A Partnership
150 Great Neck Road
Great Neck, New York 11021-3309
Merrill Lynch Pierce Fenner & Smith Inc.** 118,301.441 9.62%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
American National Bank TR 70,725.703 5.75%
FBO Emerald Investments
40 Skokie Boulevard, Suite 105
Northbrook, Illinois 60062-1614
Class B
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 152,146.798 22.14%
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>
PIMCO International Fund
Class C
- -------
Merrill Lynch Pierce Fenner & Smith Inc.** 1,674,720.957 15.37%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
PIMCO International Growth Fund
Institutional
- -------------
Pacific Asset Management LLC 500,000.000 100.00%*
700 Newport Center Drive
Newport Beach, California 92660-6307
</TABLE>
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Fund, and therefore may be presumed to "control" the Fund, as that term is
defined in the 1940 Act.
** Shares are believed to be held only as nominee.
Custodian
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas
City, Missouri 64105, serves as custodian for assets of all Funds. Pursuant to
separate sub-custody agreements between IFTC and The Chase Manhattan Bank, N.A.
("Chase") and IFTC and State Street Bank and Trust Company ("State Street"),
Chase and State Street serve as subcustodians of the Trust for the custody of
the foreign securities acquired by those Funds that invest in foreign
securities. Under the agreements, Chase and State Street may hold foreign
securities at their principal offices and their branches, and subject to
approval by the Board of Trustees, at a foreign branch of a qualified U.S. bank,
with an eligible foreign subcustodian, or with an eligible foreign securities
depository.
Pursuant to rules or other exemptions under the 1940 Act, the Trust may
maintain foreign securities and cash in the custody of certain eligible foreign
banks and securities depositories. Selection of these foreign custodial
institutions is currently made by the Board of Trustees following a
consideration of a number of factors, including (but not limited to) the
reliability and financial stability of the institution; the ability of the
institution to perform capably custodial services for the Trust; the reputation
of the institution in its national market; the political and economic stability
of the country in which the institution is located; and further risks of
potential nationalization or expropriation of Trust assets, although the
Trustees reserve the right to delegate their selection responsibilities in light
of recent amendments to Rule 17f-5 under the 1940 Act, in which case the factors
for consideration would differ from those referenced above. Currently, the Board
of Trustees reviews annually the continuance of foreign custodial arrangements
for the Trust, but reserves the right to discontinue this practice as permitted
by the recent amendments to Rule 17f-5. No assurance can be given that the
Trustees' appraisal of the risks in connection with foreign custodial
arrangements will always be correct or that expropriation, nationalization,
freezes, or confiscation of assets that would impact assets of the Funds will
not occur, and shareholders bear the risk of losses arising from these or other
events.
Independent Accountants
Price Waterhouse LLP, 1055 Broadway, Kansas City, Missouri 64105,
serves as the independent public accountants for the Funds. Price Waterhouse LLP
provides audit services, accounting assistance, and consultation in connection
with SEC filings. As noted under "Financial Highlights" in the Class A, B and C
Prospectus, the
97
<PAGE>
Renaissance, Growth, Target, Opportunity, International, Innovation, Precious
Metals and Tax Exempt Funds were reorganized as series of the Trust on January
17, 1997, and certain financial information for these Funds appearing in the
Registration Statement for each of the five fiscal 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.
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, dated August 15,
1997, 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).
98
<PAGE>
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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<PAGE>
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Corporation
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
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
100
<PAGE>
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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<PAGE>
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.
102
