<PAGE>
Filed pursuant to Rule 497(c)
Registration Nos. 33-36528
and 811-6161.
PIMCO Funds: Multi-Manager Series
PROSPECTUS
August 31, 1999
PIMCO Funds: Multi-Manager Series (the "Trust"), formerly PIMCO Funds: Equity
Advisors Series, is an open-end series management investment company ("mutual
fund"). This Prospectus describes PIMCO Mega-Cap Fund, a separate diversified
investment portfolio (the "Fund") of the Trust. The Trust is designed to provide
access to the professional investment management services offered by PIMCO
Advisors L.P. ("PIMCO Advisors') and the Fund's Sub-Adviser, Cadence Capital
Management ("Cadence").
This Prospectus describes two classes of shares offered by the Fund: the
"Institutional Class" and the "Administrative Class."
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. It should be read and retained for
ready reference to information about the Fund. Information about the investment
objective of the Fund, along with a detailed description of the types of
securities in which the Fund may invest, and of investment policies and
restrictions applicable to the Fund, are set forth in this Prospectus. There can
be no assurance that the investment objective of the Fund will be achieved.
Because the market value of the Fund's investments will change, the investment
returns and net asset value per share of the Fund will vary.
A Statement of Additional Information, dated August 31, 1999, as amended or
supplemented from time to time, containing additional and more detailed
information about the Fund, has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. The
Securities and Exchange Commission maintains an Internet World Wide Web site (at
www.sec.gov) which contains the Statement of Additional Information, materials
that are incorporated by reference into this Prospectus and the Statement of
Additional Information, and other information about the Fund. The Statement of
Additional Information is available without charge and may be obtained by
writing or calling:
PIMCO Funds
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
Telephone: 1-800-927-4648
1-800-987-4626 (PIMCO Infolink Audio Response Network).
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency, and involve risk, including the possible loss of principal.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUMMARY....................................... 3
EXPENSE INFORMATION...................................... 5
INVESTMENT OBJECTIVES AND POLICIES....................... 6
INVESTMENT RESTRICTIONS.................................. 7
CHARACTERISTICS AND RISKS OF SECURITIES AND
INVESTMENT TECHNIQUES............................... 8
MANAGEMENT OF THE FUND................................... 11
PURCHASE OF SHARES....................................... 14
REDEMPTION OF SHARES..................................... 16
PORTFOLIO TRANSACTIONS................................... 19
NET ASSET VALUE.......................................... 19
DIVIDENDS, DISTRIBUTIONS AND TAXES....................... 20
OTHER INFORMATION........................................ 21
</TABLE>
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PROSPECTUS SUMMARY
PIMCO Funds: Multi-Manager Series (the "Trust") is an open-end management
investment company ("mutual fund") organized as a Massachusetts business trust
on August 24, 1990. This Prospectus describes a separate diversified investment
portfolio (the "Fund") offered by the Trust.
Fund at a Glance
The following chart provides general information about the Fund. It is
qualified in its entirety by the more complete descriptions of the Fund
appearing elsewhere in this Prospectus.
Sub-Adviser and Fund Investment Objective Primary Investments
Cadence Capital Management
Mega-Cap Fund Seeks long-term growth Invests at least 65% of
of capital. its assets in common
stocks of companies with
market capitalizations
of at least $5 billion
at the time of
investment that have
improving fundamentals
and whose stock is
reasonably valued by the
market.
Investment Risks and Considerations
The following are some of the primary risks relevant to an investment in
the Fund and to the securities in which the Fund invests. Investors should read
this Prospectus carefully for a more complete discussion of the risks relating
to an investment in the Fund. The value of all securities and other instruments
held by the Fund vary from time to time in response to a wide variety of market
factors. Consequently, the net asset value per share of the Fund will vary. The
net asset value per share of the Fund may be less at the time of redemption than
it was at the time of investment. It is the policy of the Fund to be as fully
invested as practicable in common stock and the Fund may not invest in debt
securities as a defensive investment posture (although it may invest in such
securities to provide for payment of expenses and to meet redemption requests),
and, therefore, may be particularly vulnerable to general declines in stock
prices.
The Fund's investment techniques may involve a form of borrowing, which may
tend to exaggerate the effect on net asset value of any increase or decrease in
the market value of the Fund's portfolio and may require liquidation of
portfolio positions when it is not advantageous to do so.
The Fund offers its shares to institutional investors. Institutional
shareholders, some of whom also may be investment advisory clients of PIMCO
Advisors L.P. or its affiliates, may hold large positions in the Fund. Such
shareholders may on occasion make large redemptions of their holdings in the
Fund to meet their liquidity needs, in connection with strategic adjustments to
their overall portfolio of investments, or for other purposes. Large redemptions
from the Fund could require liquidation of portfolio positions when it is not
most desirable to do so. Liquidation of portfolio holdings also may cause the
Fund to realize taxable capital gains.
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Investment Adviser and Sub-Adviser
PIMCO Advisors L.P. ("PIMCO Advisors" or the "Adviser") serves as
investment adviser to the Fund. PIMCO Advisors is one of the largest investment
management firms in the U.S. As of June 30, 1999, PIMCO Advisors and its
subsidiary partnerships had approximately $255 billion in assets under
management. Subject to the supervision of the Board of Trustees of the Trust,
the Adviser is responsible for the investment program for the Fund in accordance
with the Fund's investment objective, policies, and restrictions. The Adviser
has engaged its affiliate, Cadence Capital Management ("Cadence"), to serve as
the Fund's Sub-Adviser. Under the supervision of PIMCO Advisors, the Sub-Adviser
makes determinations with respect to the purchase and sale of portfolio
securities, and places, in the name of the Fund, orders for execution of the
Fund's transactions. For its services, the Adviser receives fees based on the
average daily net assets of the Fund. The Adviser (and not the Fund or the
Trust) compensates the Sub-Adviser out of its advisory fees. See "Management of
the Fund."
Purchase of Shares
This Prospectus describes two classes of shares of the Fund: the
"Institutional Class" and the "Administrative Class." Shares of the
Institutional Class are offered primarily for direct investment by institutional
investors (Institutional Class shares may also be offered through certain
financial intermediaries that charge their customers transaction or other fees
with respect to the customers' investments in the Fund). Shares of the
Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers and other intermediaries. The Fund pays service and/or
distribution fees to such entities for services they provide to the Fund's
shareholders of that class.
Shares of the Institutional Class and Administrative Class of the Fund are
offered at the relevant next determined net asset value with no sales charge or
other fee. The minimum initial investment for shares of either class is $5
million, subject to certain exceptions described under "Purchase of Shares."
Shares of either class may also be offered to clients of the Adviser and its
affiliates.
Redemptions and Exchanges
Institutional Class and Administrative Class shares of the Fund may be
redeemed without cost at the relevant net asset value per share of the
particular class next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price.
Institutional Class and Administrative Class shares of the Fund may be
exchanged without cost on the basis of relative net asset values for shares of
the same class of any other series of the Trust offered generally to the public,
or for shares of the same class of a series of PIMCO Funds: Pacific Investment
Management Series, an affiliated mutual fund family composed primarily of fixed
income portfolios managed by Pacific Investment Management Company, an affiliate
of the Adviser. See "Redemption of Shares."
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EXPENSE INFORMATION
Shareholder Transaction Expenses (Institutional Class and Administrative Class):
<TABLE>
<S> <C>
Sales Load Imposed on Purchases................................... None
Sales Load Imposed on Reinvested Dividends........................ None
Redemption Fee.................................................... None
Exchange Fee...................................................... None
</TABLE>
Annual Fund Operating Expenses (as a percentage of average daily net assets):
<TABLE>
<CAPTION>
Service/
Advisory Administrative 12b-1 Total
Fee Fee Fee Expenses
--------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Institutional Class Shares.................. 0.45% 0.25% None 0.70%
Administrative Class Shares................. 0.45% 0.25% 0.25% 0.95%
</TABLE>
For a more detailed discussion of the Fund's fees and expenses, see "Fund
Administrator," "Advisory and Administrative Fees," and "Service and
Distribution Fees" under the caption "Management of the Fund."
Example of Fund Expenses:
An investor would pay the following expenses on a $1,000 investment in the
noted class of shares of the Fund, assuming (1) a hypothetical 5% annual return
and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Class Shares...................... $ 7 $ 22 $ 39 $ 87
Administrative Class Shares..................... 10 30 53 117
</TABLE>
The above tables are provided to assist investors in understanding the
various expenses which may be borne directly or indirectly in connection with an
investment in the Fund. The information is based upon estimated fees and
expenses for the Fund's initial fiscal year. This example should not be
considered a representation of past or future expenses or performance. Actual
expenses may be higher or lower than those shown.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of the Fund are
described below. There can be no assurance that the investment objective of the
Fund will be achieved. Because the market value of the Fund's investments will
change, the net asset value per share of the Fund also will vary. Specific
portfolio securities eligible for purchase by the Fund, investment techniques
that may be used by the Fund, and the risks associated with these securities and
techniques are described more fully under "Characteristics and Risks of
Securities and Investment Techniques" in this Prospectus and "Investment
Objectives and Policies" in the Statement of Additional Information.
Mega-Cap Fund seeks long-term growth of capital. The Fund invests primarily
in common stocks of companies that have improving fundamentals (such as high and
rising returns on equity and growth of earnings and dividends) and whose stock
is reasonably valued by the market (based on factors such as price to earnings
ratios). Stocks for the Fund are selected from a universe of the approximately
250 largest market capitalization stocks, all of which are those of companies
with market capitalizations of at least $5 billion at the time of investment.
The Fund usually invests in approximately 40 to 60 common stocks. Each issue is
screened and ranked using five distinct computerized models, including: (i) a
dividend growth screen, (ii) a growth of stock price (equity growth) screen,
(iii) an earnings growth screen, (iv) a screen focusing on the relative growth
of earnings over time (earnings momentum), and (v) a screen focusing on the
company's history of meeting earnings targets (earnings surprise). The Sub-
Adviser believes that the models identify the stocks in the universe exhibiting
growth characteristics with reasonable valuations. Stocks are replaced when they
score worse-than-median screen ranks, have negative earnings surprises, or show
poor relative price performance. The universe is rescreened frequently to obtain
a favorable composition of growth and value characteristics for the entire Fund.
The Portfolio Managers for the Fund are David B. Breed, William B. Bannick,
Katherine A. Burdon, and Peter B. McManus of PIMCO Advisors' subsidiary Cadence.
It is the policy of the Fund to be as fully invested in common stocks as
practicable at all times. This policy precludes the Fund from investing in debt
securities as a defensive investment posture (although the Fund may invest in
such securities to provide for payment of expenses and to meet redemption
requests). Accordingly, investors in the Fund bear the risk of general declines
in stock prices and the risk that the Fund's exposure to such declines cannot be
lessened by investment in debt securities. The Fund may maintain a portion of
its assets, which will usually not exceed 10%, in U.S. Government securities,
high quality debt securities (whose maturity or remaining maturity will not
exceed five years), money market obligations, and in cash to provide for payment
of the Fund's expenses and to meet redemption requests.
The Fund may also lend portfolio securities; enter into repurchase
agreements and reverse repurchase agreements (subject to the Fund's investment
limitations described below); purchase and sell securities on a when-issued or
delayed delivery basis; and enter into forward commitments to purchase
securities. The Fund may also invest in American Depository Receipts ("ADRs"),
which are dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer, and
are publicly traded on exchanges or over-the-counter in the United States. For
more information on these and other investment practices, see "Characteristics
and Risks of Securities and Investment Techniques" in this Prospectus and
"Investment Objectives and Policies" in the Statement of Additional Information.
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INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies of the
Fund and may not be changed without shareholder approval by vote of a majority
of the outstanding shares of the Fund. The investment objective of the Fund is
non-fundamental and may be changed without shareholder approval. Under the
following fundamental restrictions, the Fund may not:
(1) Invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (or repurchase agreements with respect thereto).
(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
the 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 the 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 this Prospectus and in the
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
the Fund's assets).
(8) Issue senior securities, except insofar as the 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
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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 the Fund may, consistent
with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures, or other debt securities,
bankers' acceptances and commercial paper, even though the purchase of
such obligations may be deemed to be the making of loans, (b) enter
into repurchase agreements and reverse repurchase agreements, and (c)
lend its portfolio securities in an amount not to exceed one-third of
the value of its total assets, provided such loans are made in
accordance with applicable guidelines established by the Securities
and Exchange Commission ("SEC") and the Trustees of the Trust.
(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.
Unless otherwise noted, the remaining restrictions and policies of the Fund
relating to the investment of its assets and activities are non-fundamental and
may be changed without shareholder approval. Unless otherwise indicated, all
limitations applicable to the Fund's investments apply only at the time a
transaction is entered into.
CHARACTERISTICS AND RISKS OF SECURITIES
AND INVESTMENT TECHNIQUES
The different types of securities and investment techniques used by the
Fund all have attendant risks of varying degrees. For example, with respect to
common stock, there can be no assurance of capital appreciation, and there is a
risk of market decline. Investors should carefully consider the investment
objective, investment policies, and potential risks of the Fund before
investing.
The following describes potential risks associated with different types of
investment techniques that may be used by the Fund. For more detailed
information on these investment techniques, as well as information on the types
of securities in which the Fund may invest, see the Statement of Additional
Information.
Repurchase Agreements
For the purposes of maintaining liquidity and achieving income, the Fund
may enter into repurchase agreements, which entail the purchase of a portfolio-
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Fund's cost plus interest within a specified time (normally one
day). If the party agreeing to repurchase should default, as a result of
bankruptcy or otherwise, the Fund will seek to sell the securities which it
holds, which action could involve procedural costs or delays in addition to a
loss on the securities if their value should fall below their repurchase price.
The Fund will invest in repurchase agreements only as a cash management
technique with respect to that portion of the portfolio maintained in cash. The
Fund will limit its investment in repurchase agreements maturing in more than
seven days consistent with the Fund's policy on investment in illiquid
securities.
Reverse Repurchase Agreements and Other Borrowings
A reverse repurchase agreement may for some purposes be considered
borrowing that involves the sale of a security by the Fund and its agreement to
repurchase the instrument at a specified time and price. The Fund will segregate
assets determined to be liquid by the Adviser or Sub-Adviser in accordance with
procedures established
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<PAGE>
by the Board of Trustees to cover its obligations under reverse repurchase
agreements. Reverse repurchase agreements will be subject to the Fund's
limitations on borrowings. The Fund also may borrow money for investment
purposes subject to any policies of the Fund currently described in this
Prospectus or in the Statement of Additional Information. Such a practice will
result in leveraging of the Fund's assets. Leverage will tend to exaggerate the
effect on net asset value of any increase or decrease in the value of the Fund's
portfolio and may cause the Fund to liquidate portfolio positions when it would
not be advantageous to do so.
Loans of Portfolio Securities
For the purpose of achieving income, the Fund may lend its portfolio
securities to brokers, dealers, and other financial institutions, provided:
(i) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash or cash equivalents (negotiable
certificates of deposit, bankers' acceptances or letters of credit)
maintained on a daily mark-to-market basis in an amount at least
equal to the current market value of the securities loaned;
(ii) the Fund may at any time call the loan and obtain the return of the
securities loaned;
(iii) the Fund will receive any interest or dividends paid on the loaned
securities; and
(iv) the aggregate market value of securities loaned will not at any time
exceed the Fund's limitation on lending its portfolio securities.
The Fund's performance will continue to reflect changes in the value of the
securities loaned and will also reflect the receipt of either interest, through
investment of cash collateral by the Fund in permissible investments, or a fee,
if the collateral is U.S. Government securities. Securities lending involves the
risk of loss of rights in the collateral or delay in recovery of the collateral
should the borrower fail to return the security loaned or become insolvent. The
Fund may pay lending fees to the party arranging the loan.
Short Sales
The Fund may from time to time make short sales involving securities held
in the Fund's portfolio or which the Fund has the right to acquire without the
payment of further consideration. For these purposes, the Fund may also hold or
have the right to acquire securities which, without the payment of any further
consideration, are convertible into or exchangeable for the securities sold
short. Short sales expose the Fund to the risk that it will be required to
acquire, convert or exchange securities to cover its short position at a time
when the securities sold short have appreciated in value, thus resulting in a
loss to the Fund.
When-Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase securities which it is eligible to purchase on a
when-issued basis, may purchase and sell such securities for delayed delivery
and may make contracts to purchase securities for a fixed price at a future date
beyond normal settlement time (forward commitments). When-issued transactions,
delayed delivery purchases and forward commitments involve a risk of loss if the
value of the securities declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the Fund's other assets.
Typically, no income accrues on securities the Fund has committed to purchase
prior to the time delivery of the securities is made, although the Fund may earn
income on securities it has segregated.
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<PAGE>
Investment in Investment Companies
The Fund may invest up to 5% of its assets in other investment companies.
As a shareholder of an investment company, the Fund may indirectly bear service
and other fees which are in addition to the fees the Fund pays its service
providers.
Money Market Instruments
The Fund may hold a portion of its assets in the following kinds of money
market instruments:
(1) short-term U.S. Government securities;
(2) certificates of deposit, bankers' acceptances and other bank
obligations rated in the two highest rating categories by at least two
NRSROs, or, if rated by only one NRSRO, in such agency's two highest
grades, or, if unrated, determined to be of comparable quality by the
Adviser or the Sub-Adviser. Bank obligations must be those of a bank
that has deposits in excess of $2 billion or that is a member of the
Federal Deposit Insurance Corporation. The Fund may invest in
obligations of U.S. branches or subsidiaries of foreign banks ("Yankee
dollar obligations") or foreign branches of U.S. banks ("Eurodollar
obligations");
(3) commercial paper rated in the two highest rating categories by at
least two NRSROs, or, if rated by only one NRSRO, in such agency's two
highest grades, or, if unrated, determined to be of comparable quality
by the Adviser or the Sub-Adviser;
(4) corporate obligations with a remaining maturity of 397 days or less
whose issuers have outstanding short-term debt obligations rated in
the highest rating category by at least two NRSROs, or, if rated by
only one NRSRO, in such agency's highest grade, or, if unrated,
determined to be of comparable quality by the Adviser or the Sub-
Adviser; and
(5) repurchase agreements with domestic commercial banks or registered
broker-dealers.
Illiquid Securities
The Fund may invest in securities that are illiquid so long as no more than
15% of the net assets of the Fund (taken at market value at the time of
investment) would be invested in such securities. Certain illiquid securities
may require pricing at fair value as determined in good faith under the
supervision of the Board of Trustees. The Sub-Adviser may be subject to
significant delays in disposing of illiquid securities, and transactions in
illiquid securities may entail registration expenses and other transaction costs
that are higher than those for transactions in liquid securities.
The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Illiquid
securities are considered to include, among other things, repurchase agreements
with maturities in excess of seven days and securities that are subject to legal
or contractual restrictions on resale (such as privately placed securities), and
other securities which legally or in the Adviser's or the Sub-Adviser's opinion
may be deemed illiquid (not including securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper that the Adviser
or the Sub-Adviser has determined to be liquid under procedures approved by the
Board of Trustees).
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Year 2000 Readiness Disclosure
Many of the services provided to the Fund depend on the smooth functioning
of computer systems. Many systems in use today cannot distinguish between the
year 1900 and the year 2000. Should any of the service systems fail to process
information properly, that could have an adverse impact on the Fund's operations
and services provided to shareholders. The Adviser, Distributor, Shareholder
Servicing and Transfer Agent, Custodian, and certain other service providers to
the Fund have reported that each is working toward mitigating the risks
associated with the so-called "year 2000 problem." However, there can be no
assurance that the problem will be corrected in all respects and that the Fund's
operations and services provided to shareholders will not be adversely affected,
nor can there be any assurance that the year 2000 problem will not have an
adverse effect on the entities whose securities are held by the Fund or on
domestic or global equity markets or economies, generally.
"Fundamental" Policies
The investment objective of the Fund described in this Prospectus may be
changed by the Board of Trustees without shareholder approval. If there is a
change in the Fund's investment objective, shareholders should consider whether
the Fund remains an appropriate investment in light of their then current
financial position and needs.
MANAGEMENT OF THE FUND
The business affairs of the Fund are managed under the direction of the
Board of Trustees. Information about the Trustees and the Trust's executive
officers may be found in the Statement of Additional Information under the
heading "Management of the Trust."
Investment Adviser
PIMCO Advisors serves as investment adviser to the Fund pursuant to an
investment advisory agreement with the Trust. PIMCO Advisors is a Delaware
limited partnership organized in 1987. PIMCO Advisors provides investment
management and advisory services to private accounts of institutional and
individual clients and to mutual funds. Total assets under management by PIMCO
Advisors and its subsidiary partnerships as of June 30, 1999 were approximately
$255 billion.
The general partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO
Advisors Holdings L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership
between PIMCO Holding LLC, a Delaware limited liability company and an indirect
wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners
LLC, a California limited liability company controlled by the current Managing
Directors and two former Managing Directors of Pacific Investment Management.
PIMCO Partners, G.P. is the sole general partner of PAH. PIMCO Advisors is
governed by a Management Board, which exercises substantially all of the
governance powers of the general partner and serves as the functional equivalent
of a board of directors.
PIMCO Advisors' address is 800 Newport Center Drive, Newport Beach,
California 92660. PIMCO Advisors is registered as an investment adviser with the
SEC. PIMCO Advisors currently has eight subsidiary investment adviser
partnerships, including Cadence, the Fund's Sub-Adviser.
Under the investment advisory agreement, PIMCO Advisors, subject to the
supervision of the Board of Trustees, is responsible for providing advice and
guidance with respect to the Fund and for managing, either directly or through
others selected by PIMCO Advisors, the investments of the Fund. PIMCO Advisors
also furnishes to the Board of Trustees periodic reports on the investment
performance of the Fund.
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Sub-Adviser
Pursuant to a portfolio management agreement, PIMCO Advisors employs
Cadence, an affiliated firm, to serve as Sub-Adviser for the Fund. PIMCO
Advisors (and not the Fund or the Trust) compensates the Sub-Adviser from its
advisory fee. The Sub-Adviser has full investment discretion and makes all
determinations with respect to the investment of the Fund's assets, and makes
all determinations respecting the purchase and sale of the Fund's securities and
other investments. If Cadence ceases to serve as Sub-Adviser for the Fund, PIMCO
Advisors will either assume full responsibility for the management of the Fund,
or retain a new sub-adviser subject to the approval of the Trustees and, if
required, the Fund's shareholders. The following provides a description of
Cadence and the individual portfolio managers of the Fund.
Cadence is an investment management firm organized as a general
partnership. Cadence has two partners: PIMCO Advisors as the supervisory
partner, and Cadence Capital Management Inc. as the managing partner. Cadence
Capital Management Corporation, the predecessor investment adviser to Cadence,
commenced operations in 1988. Accounts managed by Cadence had combined assets as
of June 30, 1999 of approximately $7.5 billion. Cadence's address is Exchange
Place, 53 State Street, Boston, Massachusetts 02109. Cadence is registered as an
investment adviser with the SEC.
David B. Breed, William B. Bannick, Katherine A. Burdon, and Peter B.
McManus are primarily responsible for the day-to-day management of the Fund. Mr.
Breed is a Managing Director, the Chief Executive Officer, and a founding
partner of Cadence, and has 25 years' investment management experience. He has
been the driving force in developing the firm's growth-oriented stock screening
and selection process and has been with Cadence (or its predecessor) since its
inception. Mr. Breed graduated from the University of Massachusetts and received
his MBA from the Wharton School of Business. He is a Chartered Financial
Analyst. Mr. Bannick is a Managing Director and Executive Vice President of
Cadence and has 13 years' investment management experience. He previously served
as Executive Vice President of George D. Bjurman & Associates and as Supervising
Portfolio Manager of Trinity Investment Management Corporation. Mr. Bannick
joined the predecessor of Cadence in 1992. He graduated from the University of
Massachusetts and received his MBA from Boston University. Mr. Bannik is a
Chartered Financial Analyst. Ms. Burden is a Managing Director and Portfolio
Manager of Cadence and has 10 years' investment management experience. She
previously served as a Vice President and Portfolio Manager of The Boston
Company. Ms. Burdon joined the predecessor of Cadence in 1993. She graduated
from Stanford University and received a Master of Science degree from
Northeastern University. Ms. Burdon is a Chartered Financial Analyst and
Certified Public Accountant. Mr. McManus is Director of Fund Management of
Cadence and has 21 years' investment management experience. He previously served
as a Vice President of Bank of Boston. Mr. McManus joined Cadence in 1994. He
graduated from the University of Massachusetts, and he is certified as a
Financial Planner.
Registration as an investment adviser with the SEC does not involve
supervision by the SEC over investment advice. The portfolio management
agreement is not exclusive, and Cadence may provide, and currently is providing,
investment management services to other clients, including other investment
companies.
Fund Administrator
PIMCO Advisors also serves as administrator (the "Administrator") for the
Fund's Institutional Class and Administrative Class shares pursuant to an
administration agreement with the Trust. The Administrator provides or procures
administrative services for Institutional Class and Administrative Class
shareholders of the Fund, which include clerical help and accounting,
bookkeeping, internal audit services and certain other services required by the
Fund, and preparation of reports to the Fund's shareholders and regulatory
filings. The Administrator has retained Pacific Investment Management to provide
such services as sub-administrator. The Administrator and/or the sub-
administrator may also retain other affiliates to provide certain of these
services. In addition, the Administrator, at its own expense, arranges for the
provision of legal, audit, custody, transfer agency (including sub-transfer
agency
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and other administrative services) and other services necessary for the ordinary
operation of the Fund, and is responsible for the costs of registration of the
Fund's shares and the printing of prospectuses and shareholder reports for
current shareholders.
The Fund (and not the Administrator) is responsible for its share of 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) the costs of
borrowing money, including interest expenses; (v) fees and expenses of the
Trustees who are not "interested persons" of the Adviser, the Sub-Advisor, or
the Trust, and any counsel retained exclusively for their benefit; (vi)
extraordinary expenses, including costs of litigation and indemnification
expenses; (vii) expenses which are capitalized in accordance with generally
accepted accounting principles; and (viii) any expenses allocated or allocable
to a specific class of shares, which include service and/or distribution fees
payable with respect to the Administrative Class shares, and may include certain
other expenses as permitted by the Trust's Multiple Class Plan adopted pursuant
to Rule 18f-3 under the Investment Company Act of 1940 (the "1940 Act"), subject
to review and approval by the Trustees.
Advisory and Administrative Fees
The Fund features fixed advisory and administrative fees. For providing or
arranging for the provision of investment advisory services to the Fund as
described above, PIMCO Advisors receives monthly fees at an annual rate of 0.45%
based on the average daily net assets of the Fund.
For providing or procuring administrative services for the Fund as
described above, the Administrator receives monthly fees at an annual rate of
0.25% based on the average daily net assets attributable in the aggregate to the
Fund's Institutional Class and Administrative Class shares.
The investment advisory, administration, and sub-administration agreements
for the Fund may be terminated on several bases, including by the Trustees,
PIMCO Advisors or Pacific Investment Management (as the case may be) on 60 days'
written notice. Following their initial terms, the agreements will continue from
year to year if approved by the Trustees.
Pursuant to the portfolio management agreement between the Adviser and the
Sub-Adviser, PIMCO Advisors (and not the Fund or the Trust), pays the Sub-
Adviser a fee at the annual rate of 0.35% based on the average daily net assets
of the Fund.
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<PAGE>
Service and Distribution Fees
The Trust has adopted an Administrative Services Plan and a Distribution
Plan (the "Plans") with respect to the Administrative Class shares of the Fund.
Under the terms of the Plans, the Trust is permitted to reimburse, out of the
Administrative Class assets of the Fund, in an amount up to .25% on an annual
basis of the average daily net assets of that class, financial intermediaries
that provide services in connection with the distribution and marketing of
shares and/or the provision of certain shareholder services (in the case of the
Distribution Plan) or the administration of plans or programs that use Fund
shares as their funding medium (in the case of the Administrative Services
Plan), and to reimburse certain other related expenses. Total reimbursement
under the Plans may be paid in an amount up to .25% on an annual basis of the
average daily net assets attributable to the Administrative Class shares of the
Fund. The same entity may not receive both distribution and administrative
services fees with respect to the same assets but may with respect to separate
assets receive fees under each Plan. Fees paid pursuant to either Plan may be
paid for shareholder services and the maintenance of accounts, and therefore may
constitute "service fees" for purposes of applicable rules of the National
Association of Securities Dealers, Inc. Each Plan has been adopted in
accordance with the requirements of Rule 12b-1 under the 1940 Act and will be
administered in accordance with the provisions of that rule, except that
shareholders will not have the voting rights set forth in Rule 12b-1 with
respect to the Administrative Services Plan that they will have with respect to
the Distribution Plan. For more complete disclosure regarding the Plans and
their terms, see the Statement of Additional Information.
Institutional and Administrative Class shares of the Fund may also be
offered through certain brokers and financial intermediaries ("service agents")
that have established a shareholder servicing relationship with the Trust on
behalf of their customers. The Trust pays no compensation to such entities
other than service fees paid with respect to Administrative Class shares.
Service agents may impose additional or different conditions on the purchase or
redemption of Fund shares by their customers and may charge their customers
transaction or other account fees on the purchase and redemption of Fund shares.
Each service agent is responsible for transmitting to its customers a schedule
of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Shareholders who are customers
of service agents should consult their service agents for information regarding
these fees and conditions.
Distributor
Shares of the Fund are distributed through PIMCO Funds Distributors LLC
(the "Distributor"), a wholly owned subsidiary of PIMCO Advisors. The
Distributor, located at 2187 Atlantic Street, Stamford, Connecticut 06902, is a
broker-dealer registered with the SEC.
PURCHASE OF SHARES
The Fund offers Institutional Class and Administrative Class shares in this
Prospectus. Shares of the Institutional Class are offered primarily for direct
investment by investors such as pension and profit sharing plans, employee
benefit trusts, endowments, foundations, corporations, and high net worth
individuals (Institutional Class shares may also be offered through certain
financial intermediaries that charge their customers transaction or other fees
with respect to their customers' investments in the Fund). Shares of the
Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers, and other intermediaries, and the Fund pays service
and/or distribution fees to such entities for services they provide to
shareholders of that class.
Shares of either the Institutional Class or the Administrative Class of the
Fund may be purchased at the relevant net asset value of that class without a
sales charge or other fee. The minimum initial investment for shares of either
class is $5 million, except that the minimum initial investment for a registered
investment adviser purchasing Institutional Class shares for its clients through
omnibus accounts is $250,000 per Fund. Shares may also be offered to clients of
Cadence and other affiliates of PIMCO Advisors, and to the benefit plans of
PIMCO
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<PAGE>
Advisors and its affiliates. In addition, the minimum initial investment does
not apply to shares of the Institutional Class offered through fee-based
programs sponsored and maintained by a registered broker-dealer and approved by
the Distributor pursuant to which each investor pays an asset based fee at an
annual rate of at least .50% of the assets in the account to a financial
intermediary for investment advisory and/or administrative services.
Pension and profit-sharing plans, employee benefit trusts and employee
benefit plan alliances and "wrap account" programs established with broker-
dealers or financial intermediaries may purchase shares of either class only if
the plan or programs for which the shares are being acquired will maintain an
omnibus or pooled account for the Fund and will not require the Fund to pay any
type of administrative payment per participant account to any third party.
The investment minimums discussed in this section and the limitations set
forth in "Investment Limitations" below do not apply to participants in PIMCO
Advisors Portfolio Strategies, a managed product sponsored by PIMCO Advisors.
Initial Investment
An account may be opened by completing and signing a Client Registration
Application and mailing it to PIMCO Funds at the following address: 840 Newport
Center Drive, Suite 300, Newport Beach, California 92660. A Client Registration
Application may be obtained by calling 1-800-800-0952.
Except as provided below, purchases of Institutional Class and
Administrative Class shares can only be made by wiring federal funds to National
Financial Data Services (the "Transfer Agent"), 330 West 9th Street, 4th Floor,
Kansas City, Missouri 64105. Before wiring federal funds, the investor must
first telephone the Trust at 1-800-927-4648 to receive instructions for wire
transfer, and the following information will be requested: name of authorized
person; shareholder name; shareholder account number; name of the Fund and share
class; amount being wired; and wiring bank name.
Shares may be purchased without first wiring federal funds if the proceeds
of the investment are derived from an advisory account maintained by the
investor with PIMCO Advisors or one of its affiliates; from surrender or other
payment from an annuity, insurance, or other contract held by Pacific Life
Insurance Company; or from an investment by broker-dealers, institutional
clients or other financial intermediaries which have established a shareholder
servicing relationship with the Trust on behalf of their customers.
A purchase order, together with payment in proper form, received by the
Transfer Agent prior to the close of regular trading (normally 4:00 p.m.,
Eastern time) on the New York Stock Exchange (the "Exchange"), on a day the
Trust is open for business, will be effected at that day's net asset value. An
order received after the close of regular trading on the Exchange will be
effected at the net asset value determined on the next business day. However,
orders received by certain retirement plans and other financial intermediaries
on a business day prior to the close of regular trading on the Exchange and
communicated to the Transfer Agent prior to 9:00 a.m., Eastern time, on the
following business day will be effected at the net asset value determined on the
prior business day. The Trust is "open for business" on each day the Exchange
is open for trading, which excludes the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Purchase
orders will be accepted only on days on which the Trust is open for business.
Additional Investments
Additional Investments may be made at any time at the relevant net asset
value for the particular class by calling the Trust and wiring federal funds to
the Transfer Agent as outlined above.
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<PAGE>
Other Purchase Information
Purchases of the Fund's Institutional Class and Administrative Class shares
will be made in full and fractional shares. In the interest of economy and
convenience, certificates for shares will not be issued.
The Trust and the Distributor each reserves the right, in its sole
discretion, to suspend the offering of shares of the Fund or to reject any
purchase order, in whole or in part, when, in the judgment of management, such
suspension or rejection is in the best interests of the Trust. The Trust and
the Distributor may also waive the minimum initial investment for certain
investors.
Purchases and sales should be made for long-term investment purposes only.
The Trust and Adviser each reserves the right to restrict purchases of Fund
shares (including exchanges) when a pattern of frequent purchases and sales made
in response to short-term fluctuations in share price appears evident.
Institutional Class and Administrative Class shares of the Fund are not
qualified or registered for sale in all states. Prospective investors should
inquire as to whether shares of the Fund are available for offer and sale in
their state of residence. Shares of the Fund may not be offered or sold in any
state unless registered or qualified in that jurisdiction or unless an exemption
from registration or qualification is available.
Investors may, subject to the approval of the Trust, purchase shares of the
Fund with liquid securities that are eligible for purchase by the Fund
(consistent with the Fund's investment policies and restrictions) and that have
a value that is readily ascertainable in accordance with the Trust's valuation
policies. These transactions will be effected only if the Sub-Adviser intends
to retain the security in the Fund as an investment. Assets so purchased by the
Fund will be valued in generally the same manner as they would be valued for
purposes of pricing the Fund's shares, if such assets were included in the
Fund's assets at the time of purchase. The Trust reserves the right to amend or
terminate this practice at any time.
Retirement Plans
Shares of the Fund are available for purchase by retirement and savings
plans, including Keogh plans, 401(k) plans, 403(b) custodial accounts, and
Individual Retirement Accounts. The administrator of a plan or employee
benefits office can provide participants or employees with detailed information
on how to participate in the plan and how to elect the Fund as an investment
option. Participants in a retirement or savings plan may be permitted to elect
different investment options, alter the amounts contributed to the plan, or
change how contributions are allocated among investment options in accordance
with the plan's specific provisions. The plan administrator or employee
benefits office should be consulted for details. For questions about
participant accounts, participants should contact their employee benefits
office, the plan administrator, or the organization that provides recordkeeping
services for the plan. Investors who purchase shares through retirement plans
should be aware that plan administrators may aggregate purchase and redemption
orders for participants in the plan. Therefore, there may be a delay between
the time the investor places an order with the plan administrator and the time
the order is forwarded to the Transfer Agent for execution.
REDEMPTION OF SHARES
Redemptions by Mail
Institutional Class and Administrative Class shares may be redeemed by
submitting a written request to PIMCO Funds, 840 Newport Center Drive, Suite
300, Newport Beach, California 92660, stating the name of the Fund, the class of
shares, the number or dollar amount of the shares to be redeemed and the account
number. The request must be signed exactly as the names of the registered
owners appear on the Trust's account records, and the
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request must be signed by the minimum number of persons designated on the Client
Registration Application that are required to effect a redemption.
Redemptions by Telephone or Other Wire Communication
If an election is made on the Client Registration Application (or
subsequently in writing), redemptions of shares may be requested by calling the
Trust at 1-800-927-4648, by sending a facsimile to 1-949-760-4456, or by other
means of wire communication. Investors should state the name of the Fund and
the class of shares to be redeemed, the number or dollar amount of the shares to
be redeemed and the account number. Redemption requests of an amount of $10
million or more may be initiated by telephone, but must be confirmed in writing
by an authorized party prior to processing.
In electing a telephone redemption, the investor authorizes Pacific
Investment Management and the Transfer Agent to act on telephone instructions
from any person representing himself to be the investor, and reasonably believed
by Pacific Investment Management and the Transfer Agent to be genuine. Neither
the Trust nor its Transfer Agent may be liable for any loss, cost or expense for
acting on instructions (whether in writing or by telephone) believed by the
party receiving such instructions to be genuine and in accordance with the
procedures described in this Prospectus. Shareholders should realize that by
electing the telephone or wire redemption option, they may be giving up a
measure of security that they might have if they were to redeem their shares in
writing. Furthermore, interruptions in telephone service may mean that a
shareholder will be unable to effect a redemption by telephone when desired.
The Transfer Agent also provides written confirmation of transactions initiated
by telephone as a procedure designed to confirm that telephone instructions are
genuine (written confirmation is also provided for redemption requests received
in writing). All telephone transactions are recorded, and Pacific Investment
Management or the Transfer Agent may request certain information in order to
verify that the person giving instructions is authorized to do so. If the Trust
or Transfer Agent fails to employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, it may be liable for any
losses due to unauthorized or fraudulent telephone transactions. All
redemptions, whether initiated by letter or telephone, will be processed in a
timely manner, and proceeds will be forwarded by wire in accordance with the
redemption policies of the Trust detailed below. See "Redemption of Shares --
Other Redemption Information."
Shareholders may decline telephone exchange or redemption privileges after
an account is opened by instructing the Transfer Agent in writing at least seven
business days prior to the date the instruction is to be effective.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity. During periods of volatile economic
or market conditions, shareholders may wish to consider transmitting redemption
orders by telegram, facsimile or overnight courier.
Defined contribution plan participants may request redemptions by
contacting the employee benefits office, the plan administrator or the
organization that provides recordkeeping services for the plan.
Other Redemption Information
Redemption requests for Fund shares are effected at the net asset value per
share next determined after receipt in good order of the redemption request by
the Trust or its designee. A redemption request received by the Trust or its
designee prior to the close of regular trading on the Exchange (normally 4:00
p.m., Eastern time), on a day the Trust is open for business, is effective on
that day. A redemption request received after that time becomes effective on
the next business day.
Payment of the redemption price will ordinarily be wired to the investor's
bank within three business days after the redemption request, but may take up to
seven business days. Redemption proceeds will be sent by wire only to the bank
name designated on the Client Registration Application. The Trust may suspend
the right of redemption or postpone the payment date at times when the Exchange
is closed, or during certain other periods as permitted under the federal
securities laws.
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For shareholder protection, a request to change information contained in an
account registration (for example, a request to change the bank designated to
receive wire redemption proceeds) must be received in writing, signed by the
minimum number of persons designated on the Client Registration Application that
are required to effect a redemption, and accompanied by a signature guarantee
from any eligible guarantor institution, as determined in accordance with the
Trust's procedures. Shareholders should inquire as to whether a particular
institution is an eligible guarantor institution. A signature guarantee cannot
be provided by a notary public. In addition, corporations, trusts, and other
institutional organizations are required to furnish evidence of the authority of
the persons designated on the Client Registration Application to effect
transactions for the organization.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem Institutional Class and Administrative Class shares
in any account for their then-current value (which will be promptly paid to the
investor) if at any time, due to redemption by the investor, the shares in the
account do not have a value of at least $100,000. A shareholder will receive
advance notice of a mandatory redemption and will be given at least 30 days to
bring the value of its account up to at least $100,000. This mandatory
redemption policy does not apply to participants in PIMCO Advisors Portfolio
Strategies, a managed product sponsored by PIMCO Advisors.
The Trust agrees to redeem shares of the Fund solely in cash up to the
lesser of $250,000 or 1% of the Fund's net assets during any 90-days period for
any one shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption proceeds
exceeding this amount in whole or in part by a distribution in kind of
securities held by the Fund in lieu of cash. It is highly unlikely that shares
would ever be redeemed in kind. When shares are redeemed in kind, the redeeming
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the distribution.
Exchange Privilege
Shares of the Fund may be exchanged for shares of the same class of any
other series of the Trust based on the respective net asset values of the shares
involved. An exchange may be made by following the redemption procedure
described above under "Redemptions by Mail" or, if the telephone redemption
option has been elected, by calling the Trust at 1-800-927-4648. Shares of the
Fund may also be exchanged for shares of the same class of a series of PIMCO
Funds: Pacific Investment Management Series, an affiliated mutual fund family
composed primarily of fixed income portfolios managed by Pacific Investment
Management. Shareholders interested in such an exchange may request a
prospectus for these other series by contacting PIMCO Funds: Pacific Investment
Management Series at the same address and telephone number as the Trust.
Exchanges may be made only with respect to other eligible series that are
registered in the state of residence of the investor or where an exemption from
registration is available. An exchange order is treated the same for tax
purposes as a redemption followed by a purchase and may result in a capital gain
or loss, and special rules may apply in computing tax basis when determining
gain or loss. See "Taxation" in the Statement of Additional Information.
The Trust reserves the right to refuse exchange purchases if, in the
judgment of the Adviser, the purchase would adversely affect the Fund and its
shareholders. In particular, a pattern of exchanges characteristic of "market-
timing" strategies may be deemed by the Adviser to be detrimental to the Trust
or the Fund. Currently, the Trust limits the number of "round trip" exchanges
an investor may make. An investor makes a "round trip" exchange when the
investor purchases shares of the Fund, subsequently exchanges those shares for
shares of a different series, and then exchanges back into the Fund. The Trust
has the right to refuse any exchange for any investor who completes (by making
the exchange back into the shares of the Fund) more than six round trip
exchanges in any twelve-month period. Although the Trust will attempt to give
shareholders prior notice whenever it is reasonably able to do so, it may impose
additional restrictions on exchanges at any time.
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PORTFOLIO TRANSACTIONS
Pursuant to the portfolio management agreement, the Sub-Adviser places
orders for the purchase and sale of portfolio investments for the Fund's
accounts with brokers or dealers selected by it in its discretion. In effecting
purchases and sales of portfolio securities for the account of the Fund, the
Sub-Adviser will seek the best price and execution of the Fund's orders. In
doing so, the Fund may pay higher commission rates than the lowest available
when the Sub-Adviser believes it is reasonable to do so in light of the value of
the brokerage and research services provided by the broker effecting the
transaction. The Sub-Adviser also may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute portfolio transactions for
the Trust.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the Adviser or the Sub-Adviser. If a
purchase or sale of securities consistent with the investment policies of the
Fund and one or more of these clients is considered at or about the same time,
transactions in such securities will be allocated among the Fund and clients in
a manner deemed fair and reasonable by the Adviser or Sub-Adviser. The Sub-
Adviser may aggregate orders for the Fund with simultaneous transactions entered
into on behalf of its other clients so long as price and transaction expenses
are averaged either for the portfolio transaction or for that day.
A change in the securities held by the Fund is known as "portfolio
turnover." The Sub-Adviser manages the Fund without regard generally to
restrictions on portfolio turnover, except those imposed on its ability to
engage in short-term trading by provisions of the federal tax laws. High
portfolio turnover (e.g., over 100%) involves correspondingly greater expenses
to the Fund, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and reinvestment in other
securities. Such sales may result in realization of taxable capital gains
(including short-term capital gains which are generally taxed to shareholders at
ordinary income tax rates). See "Dividends, Distributions and Taxes." It is
estimated that the annual portfolio turnover rate for the Fund will be
approximately 70%.
NET ASSET VALUE
The net asset values of Institutional and Administrative Class shares of
the Fund will be determined once on each day on which the Exchange is open (a
"Business Day"), as of the close of regular trading (normally 4:00 p.m., Eastern
time) on the Exchange. Net asset value will not be determined on days which the
Exchange is closed.
Portfolio securities and other assets for which market quotations are
readily available are stated at market value. Fixed income securities are
normally valued on the basis of quotations obtained from brokers and dealers or
pricing services, which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Certain fixed income securities for which daily market quotations are not
readily available may be valued, pursuant to guidelines established by the Board
of Trustees, with reference to fixed income securities whose prices are more
readily obtainable and whose durations are comparable to the securities being
valued. Short-term investments having a maturity of 60 days or less are valued
at amortized cost, when the Board of Trustees determines that amortized cost is
their fair value. All other securities and assets are valued at their fair
value as determined in good faith by the Trustees or by persons acting at their
direction.
The Fund's liabilities are allocated among its classes. The total of such
liabilities allocated to a class plus that class's distribution and/or servicing
fees and any other expenses specially allocated to that class are then deducted
from the class's proportionate interest in the Fund's assets, and the resulting
amount for each class is divided by the number of shares of that class
outstanding to produce the class's "net asset value" per share. Under
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certain circumstances, the per share net asset value of the Administrative Class
shares of the Fund may be lower than the per share net asset value of the
Institutional Class shares as a result of the daily expense accruals of the
service and/or distribution fees applicable to the Administrative Class shares.
To the extent that the Fund pays income dividends, those dividends are expected
to differ over time by approximately the amount of the expense accrual
differential between the Fund's classes.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shares begin earning dividends on the effective date of purchase, provided
notification deadlines are met. See "Purchase of Shares." Net investment
income from interest and dividends, if any, will be declared and paid at least
annually to shareholders of record by the Fund. Any net capital gains from the
sale of portfolio securities will be distributed no less frequently than once
annually. Net short-term capital gains may be paid more frequently. Dividend
and capital gain distributions of the Fund will be reinvested in additional
shares of the Fund unless the shareholder elects to have them paid in cash.
Dividends from net investment income with respect to Administrative Class shares
will be lower than those paid with respect to Institutional Class shares,
reflecting the payment of service and/or distribution fees by that class.
The Fund intends to qualify as a regulated investment company annually and
to elect to be treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). As such, the Fund generally will
not pay federal income tax on the income and gains it pays as dividends to its
shareholders. In order to avoid a 4% federal excise tax, the Fund intends to
distribute each year substantially all of its net income and gains.
Shareholders subject to U.S. federal income tax will be subject to tax on
dividends received from the Fund, regardless of whether received in cash or
reinvested in additional shares. Distributions received by tax-exempt
shareholders generally will not be subject to federal income tax to the extent
permitted under applicable tax law. All shareholders must treat dividends,
other than capital gain dividends, exempt-interest dividends, if any, and
dividends that represent a return of capital to shareholders, as ordinary
income. In particular, distributions derived from short-term gains will be
treated as ordinary income. Dividends, if any, derived from interest on certain
U.S. Government securities may be exempt from state and local taxes, although
interest on mortgage-backed U.S. Government securities is generally not so
exempt.
Dividends designated by the Fund as capital gain dividends derived from the
Fund's net capital gains (that is, the excess of its net long-term capital gains
over its net short-term capital losses) are taxable to shareholders as long-term
capital gain (generally subject to a 20% tax rate for shareholders who are
individuals) except as provided by an applicable tax exemption. Any
distributions that are not from the Fund's net investment income or net capital
gain may be characterized as a return of capital to shareholders or, in some
cases, as capital gain. Certain dividends declared in October, November or
December of a calendar year are taxable to shareholders (who otherwise are
subject to tax on dividends) as though received on December 31 of that year if
paid to shareholders during January of the following calendar year. The Fund
will advise shareholders annually of the amount and nature of the dividends paid
to them.
Taxable shareholders should note that the timing of their investment or
redemptions could have undesirable tax consequences. Dividends and
distributions on the Fund's shares are generally subject to federal income tax
as described herein to the extent they do not exceed the Fund's realized income
and gains, even though such dividends and distributions may economically
represent a return of a particular shareholder's investment. Such distributions
are likely to occur in respect of shares purchased at a time when the Fund's net
asset value reflects gains that are either unrealized or realized but not
distributed. Such realized gains may be required to be distributed even when
the Fund's net asset value also reflects unrealized losses.
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As discussed above under "Characteristics and Risks of Securities and
Investment Techniques--Investment in Investment Companies," the Fund may invest
in the securities of other investment companies. Investments in other
investment companies may increase the amount of taxes payable by shareholders of
the Fund. For more information on the tax consequences of such investments, see
"Taxation" in the Statement of Additional Information.
The preceding discussion relates only to federal income tax; the
consequences under other tax laws may differ. Shareholders should consult their
tax advisers as to the possible application of foreign, state and local income
tax laws to Fund dividends and capital gain distributions. For additional
information relating to the tax aspects of investing in a Fund, see the
Statement of Additional Information.
OTHER INFORMATION
Capitalization
The Trust was organized as a Massachusetts business trust on August 24,
1990, and currently consists of twenty-seven portfolios that are operational,
one of which is described in this Prospectus. Other portfolios may be offered
by means of a separate prospectus. The Board of Trustees may establish
additional portfolios in the future. The capitalization of the Trust consists
of an unlimited number of shares of beneficial interest. When issued, shares of
the Trust are fully paid, non-assessable and freely transferable.
Under Massachusetts law, shareholders could, under certain circumstances,
be held liable for the obligations of the Trust. However, the Second Amended
and Restated Agreement and Declaration of Trust (the "Declaration of Trust") of
the Trust disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Declaration of Trust also provides for indemnification out of the Fund's
property for all loss and expense of any shareholder of the Fund held liable on
account of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which such disclaimer is inoperative or the Fund is unable to
meet its obligations, and thus should be considered remote.
Multiple Classes of Shares
Institutional Class and Administrative Class shares of the Fund represent
interests in the assets of the Fund, and each class has identical dividend,
liquidation and other rights and the same terms and conditions, except that
expenses related to the distribution and/or shareholder servicing of
Administrative Class shares are borne solely by such class, and each class may,
at the Trustees' discretion, also pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the management
of the Fund's assets, if these expenses are actually incurred in a different
amount by that class, or if the class receives services of a different kind or
to a different degree than the other classes. All other expenses are allocated
to each class on the basis of the net asset value of that class in relation to
the net asset value of the Fund.
Voting
Each class of shares of the Fund has identical voting rights, except that
each class of shares has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class. The Administrative Class shares
have exclusive voting rights with respect to matters pertaining to any
Distribution Plan applicable to that class. These shares are entitled to vote
at meetings of shareholders. Matters submitted to shareholder vote must be
approved by the Fund separately except (i) when required by the 1940 Act, shares
shall be voted together with other series at the Trust, and (ii) when the
Trustees have determined that the
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matter does not affect all Series, then only shareholders of the Series affected
shall be entitled to vote on the matter. All classes of shares of the Fund will
vote together, except with respect to a Distribution Plan or agreement
applicable to a class of shares or when a class vote is required as specified
above or otherwise by the 1940 Act. Shares are freely transferable, are entitled
to dividends as declared by the Trustees and, in liquidation of the Trust, are
entitled to receive the net assets of their Series, but not of the other Series.
The Trust does not generally hold annual meetings of shareholders and will do so
only when required by law. Shareholders may remove Trustees from office by votes
cast in person or by proxy at a meeting of shareholders or by written consent.
Such a meeting will be called at the written request of the holders of 10% of
the Trust's outstanding shares.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As used in this Prospectus, the phrase "vote of
a majority of the outstanding shares" of the Fund (or the Trust) means the vote
of the lesser of: (1) 67% of the shares of the Fund (or the Trust) present at a
meeting, if the holders of more than 50% of the outstanding shares are present
in person or by proxy; or (2) more than 50% of the outstanding shares of the
Fund (or the Trust).
Performance Information
From time to time the Trust may make available certain information about
the performance of the Institutional Class and Administrative Class shares of
the Fund. Information about the Fund's performance is based on the Fund's
record to a recent date and is not intended to indicate future performance.
Performance information is computed separately for the Fund's Institutional
Class and Administrative Class shares in accordance with the formulas described
below. Because Administrative Class shares bear the expense of service and/or
distribution fees, it is expected that, under normal circumstances, the level of
performance of the Fund's Administrative Class shares will be lower than that of
the Fund's Institutional Class shares.
The total return of Institutional Class and Administrative Class shares of
the Fund may be included in advertisements or other written material. When the
Fund's total return is advertised with respect to its Institutional Class and
Administrative Class shares, it will be calculated for the past year, the past
five years, and the past ten years (or if the Fund has been offered for a period
shorter than one, five or ten years, that period will be substituted) since the
establishment of the Fund, as more fully described in the Statement of
Additional Information.
Total return for each class is measured by comparing the value of an
investment in the Fund at the beginning of the relevant period to the redemption
value of the investment in the Fund at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions at net asset
value). Total return may be advertised using alternative methods that reflect
all elements of return, but that may be adjusted to reflect the cumulative
impact of alternative fee and expense structures.
The Fund may also provide current distribution information to its
shareholders in shareholder reports or other shareholder communications, or in
certain types of sales literature provided to prospective investors. Current
distribution information for a particular class of the Fund will be based on
distributions for a specified period (i.e., total dividends from net investment
income), divided by the relevant class net asset value per share on the last day
of the period and annualized. Current distribution rates differ from
standardized yield rates in that they represent what a class of the Fund has
declared and paid to shareholders as of the end of a specified period rather
than the Fund's actual net investment income for that period.
The Adviser and Sub-Adviser may also report to shareholders or to the
public in advertisements concerning its performance as adviser to clients other
than the Fund, and on its comparative performance or standing in relation to
other money managers. Such comparative information may be compiled or provided
by independent ratings services or by news organizations. Any performance
information, whether related to the Fund, the Adviser, or the Sub-Adviser,
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the Fund, and the market conditions during the
time period indicated, and should not be considered to be representative of what
may be achieved in the future.
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Investment results of the Fund will fluctuate over time, and any
representation of the Fund's total return for any prior period should not be
considered as a representation of what an investor's total return may be in any
future period.
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-------------------------------------------------------
PIMCO Funds: Multi- INVESTMENT ADVISER AND ADMINISTRATOR
Manager Series PIMCO Advisors L.P., 800 Newport Center Drive,
Newport Beach, CA 92660
-------------------------------------------------------
CUSTODIAN
Investors Fiduciary Trust Company, 801 Pennsylvania,
Kansas City, MO 64105
-------------------------------------------------------
TRANSFER AGENT
National Financial Data Services, 330 West 9th St.,
4th Floor, Kansas City, MO 64105
-------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas
City, MO 64105
-------------------------------------------------------
LEGAL COUNSEL
Ropes & Gray, One International Place, Boston, MA 02110
-------------------------------------------------------
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<TABLE>
<S> <C> <C>
For More Information Statement of Additional Information about the Trust
Information (SAI). The SAI (including the SAI) can be
The following documents are or contains additional reviewed and copied at the
will be available that offer information about the Fund. A Securities and Exchange
further information on the current SAI has been filed Commission's Public Reference
Fund and other series of with the Securities and Room in Washington, D.C.
PIMCO Funds: Multi-Manager Exchange Commission, and is Information on the operation
Series. incorporated into this of the public reference room
prospectus by reference. may be obtained by calling the
Annual/Semi-Annual Reports to Commission at 1-800-SEC-0330.
Shareholders. The Trust's To request a free copy of Reports and other information
annual and semi-annual these documents or to make about the Trust are available
reports include a discussion inquiries about the Fund or on the Commission's Internet
of the market conditions and other series of the Trust, site at www.sec.gov, and
investment strategies that please write or call: copies of that information may
significantly affected the be obtained, upon payment of a
performance of its series PIMCO Funds: duplicating fee, by writing
during the last fiscal year Multi-Manager Series the Public Reference Section
or other period. Because the 840 Newport Center Drive of the Commission, Washington,
Fund is a new series, it is Suite 300 D.C. 20549-6009.
not included in the most Newport Beach, CA 92660
recent reports.
Telephone:
1-800-927-4648
1-800-987-4626 (PIMCO
Infolink Audio Response
Network)
</TABLE>
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<PAGE>
Filed pursuant to Rule 497(c).
Registration Nos. 33-36521 and
811-6161.
PIMCO Funds:
Multi-Manager Series
PIMCO Mega-Cap Fund
STATEMENT OF ADDITIONAL INFORMATION
Institutional and Administrative Class Shares
August 31, 1999
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-seven separate diversified investment series.
This Statement of Additional Information relates to PIMCO Mega-Cap Fund, a
separate series of the Trust.
The Fund's investment adviser is PIMCO Advisors L.P. ("PIMCO Advisors" or
the "Adviser"), 800 Newport Center Drive, Newport Beach, California 92660.
The Fund currently offers Institutional and Administrative Class shares
through a prospectus dated August 31, 1999 (the "Prospectus"). This Statement
of Additional Information is not a Prospectus, and should be used in conjunction
with the Prospectus for the Fund, as supplemented from time to time. A copy of
the Prospectus may be obtained free of charge at the address and telephone
number(s) listed below.
PIMCO Funds
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Telephone: 1-800-927-4648
1-800-987-4626 (PIMCO Infolink Audio
Response Network)
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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PAGE
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES......................................................... 1
U.S. Government Securities............................................................ 1
Borrowing............................................................................. 1
Preferred Stock....................................................................... 2
Corporate Debt Securities............................................................. 2
Participation on Creditors Committees................................................. 2
Variable and Floating Rate Securities................................................. 3
Foreign Securities.................................................................... 3
Bank Obligations...................................................................... 3
Commercial Paper...................................................................... 4
When-Issued, Delayed Delivery and Forward Commitment Transactions..................... 4
Warrants to Purchase Securities....................................................... 5
Repurchase Agreements................................................................. 5
Securities Loans...................................................................... 5
INVESTMENT RESTRICTIONS.................................................................... 6
Fundamental Investment Restrictions................................................... 6
Non-Fundamental Investment Restrictions............................................... 7
MANAGEMENT OF THE FUND..................................................................... 8
Trustees and Officers................................................................. 8
Trustees' Compensation................................................................ 12
Investment Adviser.................................................................... 13
Portfolio Management Agreement........................................................ 14
Fund Administrator.................................................................... 15
DISTRIBUTION OF FUND SHARES................................................................ 16
Distributor and Multi-Class Plan...................................................... 16
Distribution and Administrative Services Plans for Administrative Class Shares........ 16
Purchases, Exchanges and Redemptions.................................................. 18
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................................... 19
Investment Decisions.................................................................. 19
Brokerage and Research Services....................................................... 19
Portfolio Turnover.................................................................... 20
NET ASSET VALUE............................................................................ 21
TAXATION................................................................................... 21
Distributions......................................................................... 21
Sales of Shares....................................................................... 22
Backup Withholding.................................................................... 22
Original Issue Discount............................................................... 23
Other Taxation........................................................................ 23
OTHER INFORMATION.......................................................................... 24
Capitalization........................................................................ 24
Performance Information............................................................... 24
Calculation of Total Return........................................................... 24
Year 2000 Readiness Disclosure........................................................ 30
Compliance Efforts Related to the Euro................................................ 31
Voting Rights......................................................................... 31
Certain Ownership of Trust Shares..................................................... 31
</TABLE>
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<S> <C>
Custodian............................................................................. 31
Independent Accountants............................................................... 32
Registration Statement................................................................ 32
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of the Fund are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's investments are 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 Fund's shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan 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.
Borrowing
Subject to the limitations described under "Investment Restrictions" below,
the Fund may be permitted to borrow for temporary purposes and/or for investment
purposes. Such a practice will result in leveraging of the Fund's assets and
may cause the Fund to liquidate portfolio positions when it would not be
advantageous to do so. This borrowing may be unsecured. Provisions of the
Investment Company Act of 1940, as amended ("1940 Act"), require the Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed, with
an exception for borrowings not in excess of 5% of the Fund's total assets made
for temporary administrative purposes. As noted under "Investment
Restrictions," the Fund is 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, the Fund may be required to sell
some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. Borrowing will tend to
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased. The Fund also may be required to maintain minimum average
balances in connection with such borrowing or to pay a commitment or other fee
to maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
In addition to borrowing for temporary purposes, the Fund may enter into
reverse repurchase agreements if permitted to do so under its investment
restrictions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by the Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. The Fund will segregate assets
determined to be liquid by the Adviser or Cadence Capital Management, the Fund's
sub-adviser (the "Sub-Adviser") 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.
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Reverse repurchase agreements will be subject to the Fund's limitations on
borrowings as specified under "Investment Restrictions" below.
Preferred Stock
The Fund may invest in preferred stock. Preferred stock is a form of
equity ownership in a corporation. The dividend on a preferred stock is a fixed
payment which the corporation is not legally bound to pay. Certain classes of
preferred stock are convertible, meaning the preferred stock is convertible into
shares of common stock of the issuer. By holding convertible preferred stock,
the Fund can receive a steady stream of dividends and still have the option to
convert the preferred stock to common stock.
Corporate Debt Securities
The Fund may invest in 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.
The Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are deemed to
be comparable in quality to corporate debt securities in which the Fund may
invest. The rate of return or return of principal on some debt obligations may
be linked or indexed to the level of exchange rates between the U.S. dollar and
a foreign currency or currencies.
Among the corporate debt securities in which the Fund may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to non-
convertible debt securities. Convertible securities rank senior to common stock
in a corporation's capital structure and, therefore, generally entail less risk
than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by the Fund is
called for redemption, the Fund 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.
Participation on Creditors Committees
The Fund may from time to time participate on committees formed by
creditors to negotiate with the management of financially troubled issuers of
securities held by the Fund. Such participation may subject the Fund to
expenses such as legal fees and may make the Fund an "insider" of the issuer for
purposes of the federal securities laws, and therefore may restrict the Fund's
ability to trade in or acquire additional positions in a particular security
when it might otherwise desire to do so. Participation by the Fund on such
committees also may expose the Fund to potential liabilities under the federal
bankruptcy laws or other laws governing the rights of creditors and debtors.
The Fund would participate on such committees only when the Adviser and the Sub-
Adviser 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.
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Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or U.S. Treasury bill rate. The interest
rate on a floater resets periodically, typically every six months. Because of
the interest rate reset feature, floaters provide the 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.
Foreign Securities
The Fund may invest in American Depository Receipts ("ADRs"). ADRs are
dollar-denominated receipts issued generally by domestic banks and represent the
deposit with the bank of a security of a foreign issuer. ADRs 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. 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.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include: differences in accounting, auditing and financial reporting standards,
generally higher commission rates on foreign portfolio transactions, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including taxes withheld from payments on those securities. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar.
The risks of investing in foreign securities are particularly high when
securities of issuers based in developing (or ''emerging market'') countries are
involved. Investing in emerging market countries involves certain risks not
typically associated with investing in U.S. securities, and imposes risks
greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: greater risks of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; greater social, economic and
political uncertainty and instability (including the risk of war); more
substantial government involvement in the economy; higher rates of inflation;
less government supervision and regulation of the securities markets and
participants in those markets; controls on foreign investment and limitations on
repatriation of invested capital and on the Fund's ability to exchange local
currencies for U.S. dollars; unavailability of currency hedging techniques in
certain emerging market countries; the fact that companies in emerging market
countries may be smaller, less seasoned and newly organized companies; the
difference in, or lack of, auditing and financial reporting standards, which may
result in unavailability of material information about issuers; the risk that it
may be more difficult to obtain and/or enforce a judgment in a court outside the
United States; and greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets.
Bank Obligations
Bank obligations in which the Fund may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial
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bank for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. The Fund will not invest
in fixed time deposits which (1) are not subject to prepayment or (2) provide
for withdrawal penalties upon prepayment (other than overnight deposits) if, in
the aggregate, more than 15% of its net assets (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. The Fund may also
hold funds on deposit with its sub-custodian bank in an interest-bearing account
for temporary purposes.
The Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $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. The
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.
Commercial Paper
The Fund may invest in commercial paper. Commercial paper represents short-
term unsecured promissory notes issued in bearer form by banks or bank holding
companies, corporations and finance companies. The commercial paper purchased
by the Fund consists of U.S. dollar-denominated obligations of domestic issuers
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 Sub-Adviser, 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.
When-Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. These transactions involve a commitment by the Fund to purchase
or sell securities for a predetermined price or yield, with payment and delivery
taking place more than seven days in the future, or after a period longer than
the customary settlement period for that type of security. When delayed
delivery purchases are outstanding, the Fund will segregate until the settlement
date assets determined to be liquid by the Adviser or the Sub-Adviser 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 the Fund may earn income on segregated
securities. When purchasing a security on a delayed delivery basis, the Fund
assumes the rights and risks of ownership of the security, including the risk of
price and yield fluctuations, and takes such fluctuations into account when
determining its net asset value. Because the Fund is not required to pay for
the security until the delivery date, these risks are in addition to the risks
associated with the Fund's other investments. If the Fund remains substantially
fully invested at a time when delayed delivery purchases are outstanding, the
delayed delivery purchases may result in a form of leverage. When the Fund has
sold a security on a delayed delivery basis, the Fund does not participate in
future gains or losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the securities, the
Fund could miss a favorable price or yield opportunity or could suffer a loss.
The Fund may dispose of or renegotiate a delayed delivery transaction after it
is entered into, and may sell when-issued securities before they are delivered,
which may result in a capital gain or loss. There is no percentage limitation
on the extent to which the Fund may purchase or sell securities on a delayed
delivery basis.
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The Fund may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the Fund
either (i) segregates until the settlement date assets determined to be liquid
by the Adviser or the Sub-Adviser 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. Forward commitments may be considered securities in
themselves. They involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. The Fund may dispose
of a commitment prior to settlement and may realize short-term profits or losses
upon such disposition.
Warrants to Purchase Securities
The Fund may invest in warrants to purchase securities. Bonds with
warrants attached to purchase equity securities have many characteristics of
convertible bonds and their prices may, to some degree, reflect the performance
of the underlying stock. Bonds also may be issued with warrants attached to
purchase additional fixed income securities at the same coupon rate. A decline
in interest rates would permit the Fund to buy additional bonds at the favorable
rate or to sell the warrants at a profit. If interest rates rise, the warrants
would generally expire with no value.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic commercial
banks or registered broker/dealers. A repurchase agreement is a contract under
which the 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 Sub-Adviser will monitor the creditworthiness of the counter
parties.
Securities Loans
Subject to certain conditions described in the Prospectus, the Fund may
make secured loans of its portfolio securities amounting to no more than 33a% 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 Sub-Adviser 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.
-5-
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The investment restrictions set forth below are fundamental policies of the
Fund and may not be changed without shareholder approval by vote of a majority
of the outstanding shares of the Fund. Under the following restrictions, the
Fund may not:
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(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 the 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 the 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 the Fund's assets);
(8) issue senior securities, except insofar as the 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;
-6-
<PAGE>
(9) lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans, (b) enter into repurchase agreements and reverse
repurchase agreements, and (c) lend its portfolio securities in an amount not to
exceed one-third of the value of its total assets, provided such loans are made
in accordance with applicable guidelines established by the SEC and the Trustees
of the Trust; or
(10) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
Notwithstanding the provisions of fundamental investment restrictions (7)
and (8) above, the Fund may borrow money for temporary administrative purposes.
To the extent that borrowings for temporary administrative purposes exceed 5% of
the total assets of the Fund, such excess shall be subject to the 300% asset
coverage requirement of fundamental investment restriction (7).
The investment objective of the Fund is non-fundamental and may be changed
by the Trustees without shareholder approval.
Non-Fundamental Investment Restrictions
The 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 the Fund's net assets, taken at
current value, would then be invested in securities described in (a), (b), (c),
(d) and (e) above. For the purpose of this restriction, securities subject to a
7-day put option or convertible into readily saleable securities or commodities
are not included with subsections (a) or (b);
(2) purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment by the 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.);
(3) make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the Fund
owns an equal amount of such securities or owns or has the right to acquire
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
(4) purchase or sell commodities or commodity contracts except that the
Fund may purchase and sell financial futures contracts and related options;
(5) 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 Fund;
(6) write (sell) or purchase options except that the 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) the Fund may engage in
options on securities indexes, options on foreign currencies, options on
-7-
<PAGE>
futures contracts, and options on other financial instruments or one or more
groups of instruments; provided that the premiums paid by the Fund on all
outstanding options it has purchased do not exceed 5% of its total assets. The
Fund may enter into closing sale transactions with respect to options it has
purchased;
(7) borrow money (excluding reverse repurchase agreements which are
subject to the Fund's fundamental borrowing restriction), except for temporary
administrative purposes.
Unless otherwise indicated, all limitations applicable to the Fund's
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
the Fund's assets invested in certain securities or other instruments resulting
from market fluctuations or other changes in the Fund's total assets will not
require the Fund to dispose of an investment until the Adviser or Sub-Adviser
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 Sub-
Adviser 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 Prospectus, 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.
MANAGEMENT OF THE FUND
Trustees and Officers
The Trustees and officers 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 and officer'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). Unless otherwise indicated, the business address of the persons
listed below is 840 Newport Center Drive, Suite 300, Newport Beach, California
92660.
-8-
<PAGE>
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
-------------------- --------------------------------------------
Name, Address and Age Trust Years
- --------------------- ----- -----
<S> <C> <C>
E. Philip Cannon Trustee Proprietor, Cannon & Company, an affiliate
3838 Olympia of Inverness Management LLC, a private
Houston, TX 77019 equity investment firm. Formerly,
Age 58 Headmaster, St. John's School, Houston,
Texas; Trustee of PIMCO Advisors Funds
("PAF") and Cash Accumulation Trust ("CAT");
General Partner, J.B. Poindexter & Co.,
Houston, Texas, a private partnership; and
Partner, Iberia Petroleum Company, an oil
and gas production company. Mr. Cannon was
a director of WNS Inc., a retailing company
which filed a petition in bankruptcy within
the last five years.
Donald P. Carter Trustee Formerly, Trustee of PAF and CAT, Chairman,
434 Stable Lane Executive Vice President and Director,
Lake Forest, IL 60045 Cunningham & Walsh, Inc., Chicago, an
Age 72 advertising agency.
Gary A. Childress Trustee Private investor. Formerly, Chairman and
11 Longview Terrace Director, Bellefonte Lime Company, Inc. Mr.
Madison, CT 06443 Childress is a partner in GenLime, L.P., a
Age 65 private limited partnership, which has filed
a petition in bankruptcy within the last
five years. Formerly, Trustee of PAF and
CAT.
William D. Cvengros* Trustee Chairman of the Board of the Trust; Chief
800 Newport Center Drive Executive Officer, President, and member of
Newport Beach, CA 92660 the Management Board, PIMCO Advisors;
Age 50 President and Chief Executive Officer, Value
Advisors LLC; Co-Chairman, The 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. Chairman and Director, PIMCO
Funds: Global Investors Series plc and PIMCO
Global Advisors (Ireland) Limited.
Formerly, Trustee of PAF and CAT; President
of the Trust; Director, Vice Chairman, and
Chief Investment Officer, Pacific Life
Insurance Company ("Pacific Life"); and
Director, PIMCO Funds Distribution Company
(currently, PIMCO Funds Distributors LLC).
Richard L. Nelson Trustee President, Nelson Financial Consultants;
8 Cherry Hills Lane Director, Wynn's International, Inc., a
Newport Beach, CA 92660 building supplies company; and Trustee,
Age 69 Pacific Select Fund. Formerly, Partner,
Ernst & Young.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
-------------------- --------------------------------------------
Name, Address and Age Trust Years
- --------------------- ----- -----
<S> <C> <C>
Lyman W. Porter Trustee Professor of Management at the University of
2639 Bamboo Street California, Irvine; and Trustee, Pacific
Newport Beach, CA 92660 Select Fund.
Age 69
Alan Richards Trustee Retired Chairman of E.F. Hutton Insurance
7381 Elegans Place Group; Former Director of E.F. Hutton and
Carlsbad, CA 92009 Company, Inc.; Chairman of IBIS Capital,
Age 69 LLC, a reverse mortgage company; Director,
Inspired Arts, Inc.; Former Director of
Western National Corporation.
Joel Segall Trustee Formerly, Trustee of PAF and CAT, President
11 Linden Shores and University Professor, Bernard M. Baruch
Branford, CT 06405 College, The City University of New York;
Age 76 Deputy Under Secretary for International
Affairs, United States Department of Labor;
Professor of Finance, University of Chicago;
and Board of Managers, Coffee, Sugar and
Cocoa Exchange.
W. Bryant Stooks Trustee President, Bryant Investments, Ltd.;
1530 E. Montebello Director, American Agritec LLC, a
Phoenix, AZ 85014 manufacturer of hydrophonics products; and
Age 58 Director, Valley Isle Excursions, Inc., a
tour operator. Formerly, Trustee of PAF and
CAT, President, Senior Vice President,
Director and Chief Executive Officer,
Archirodon Group Inc.; Partner, Arthur
Andersen & Co.
Gerald M. Thorne Trustee Director, UPI Inc., a plastics company, and
5 Leatherwood Lane American Orthodontics Corp. Formerly,
Savannah, GA 31414 Trustee of PAF and CAT; Director, Kaytee,
Age 61 Inc., a birdseed company; President and
Director, Firstar National Bank of
Milwaukee; Chairman, President and
Director, Firstar National Bank of
Sheboygan; Director, Bando-McGlocklin, a
small business investment company.
Stephen J. Treadway* Trustee, President and Executive Vice President, PIMCO Advisors; Chairman
2187 Atlantic Street Chief Executive Officer and President, PIMCO Funds Distributors LLC ("PFD");
Stamford, CT 06902 Executive Vice President, Value Advisors LLC;
Age 51 Chairman, Municipal Advantage Fund, Inc. and The
Central European Value Fund, Inc.; President, The
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,
President and Chief Executive Officer of CAT;
Executive Vice President, Smith Barney Inc.
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
-------------------- --------------------------------------------
Name, Address and Age Trust Years
- --------------------- ----- -----
<S> <C> <C>
R. Wesley Burns Executive Vice President Trustee and President, PIMS; Managing Director,
Age 39 Pacific Investment Management Company ("Pacific
Investment Management"); Trustee and President,
PIMCO Variable Insurance Trust ("PVIT"); Director
and President, PIMCO Commercial Mortgage Securities
Trust, Inc. ("PCM"); Director, PIMCO Funds: Global
Investors Series plc and PIMCO Global Advisors
(Ireland) Limited. Formerly, Executive Vice
President, Pacific Investment Management, PAF and
CAT.
Newton B. Schott, Jr. Vice President and Executive Vice President, Chief Administrative
2187 Atlantic Street Secretary Officer, General Counsel and Secretary, PFD; Senior
Stamford, CT 06902 Vice President, Value Advisors LLC; Executive Vice
Age 57 President, The Emerging Markets Income Fund, Inc.,
The Emerging Markets Income Fund II, Inc., The
Emerging Markets Floating Rate Fund, Inc., The
Central European Value Fund, Inc., Global Partners
Income Fund, Inc., Municipal Advantage Fund, Inc.,
Municipal Partners Fund, Inc. and Municipal Partners
Fund II, Inc. Formerly, Vice President and Clerk of
PAF and CAT.
Jeffrey M. Sargent Vice President Vice President and Manager Shareholder Services and
Age 36 Fund Administration, Pacific Investment Management;
Senior Vice President of PIMS, PVIT and PCM.
Richard M. Weil Vice President General Counsel, PIMCO Advisors. Formerly, Vice
Age 36 President, Bankers Trust Company; Associate,
Simpson, Thatcher & Bartlett.
John P. Hardaway Treasurer Senior Vice President and Manager of Investment
Age 42 Operations Accounting, Pacific Investment
Management; Treasurer, PIMS, PVIT and PCM.
Formerly, Vice President, Pacific Investment
Management.
Joseph D. Hattesohl Assistant Treasurer Vice President and Manager of Financial Reporting
Age 35 and Taxes, Pacific Investment Management; Assistant
Treasurer, PIMS, PVIT and PCM. Formerly, Director
of Financial Reporting, Carl J. Brown & Co.; Tax
Manager, Price Waterhouse LLP.
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
-------------------- ---------------------------------------------
Name, Address and Age Trust Years
- --------------------- ----- -----
<S> <C> <C>
Garlin G. Flynn Assistant Secretary Specialist, Pacific Investment Management;
Age 53 Secretary, PIMS; Secretary, PVIT; and Secretary,
PCM. Formerly, Senior Fund Administrator, Pacific
Investment Management; Senior Mutual Fund Analyst,
PIMCO Advisors Institutional Services.
</TABLE>
* Trustee is an "interested person" of the Trust (as defined in Section
2(a)(19) of the 1940 Act).
Trustees' Compensation
Trustees, other than those affiliated with PIMCO Advisors, the Sub-Adviser,
another affiliate of PIMCO Advisors, or Pacific Investment Management Company,
receive an annual retainer of $47,000, plus $2,000 for each Board of Trustees
meeting attended ($1,000 if the meeting is attended by telephone), and $1,000
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 $2,000, 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 Independent Trustees receives an additional annual retainer
of $3,000. If in the judgment of the Independent Trustees, it is necessary or
appropriate for any Independent Trustee, including the Chairman, to perform
services in connection with extraordinary Fund activities or circumstances,
including actual or threatened litigation, the Trustee shall be compensated for
such services at the rate of $2,000 per day, plus reimbursement of reasonable
expenses. 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.
-12-
<PAGE>
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, 1998:
<TABLE>
<CAPTION>
(1) (2) (3)
Total
Aggregate Compensation from
Compensation from Trust and Fund
Name of Trustee Trust Complex /1/
--------------- ----- -----------
<S> <C> <C>
E. Philip Cannon/2/ $51,600 $60,000
Donald P. Carter $58,425 $65,500
Gary A. Childress $51,600 $60,000
Gary L. Light/3/ $38,700 $45,500
Richard L. Nelson $51,275 $93,000
Lyman W. Porter/2/ $49,900 $90,500
Alan Richards $56,100 $98,500
Joel Segall/2/ $49,475 $57,500
W. Bryant Stooks $49,475 $56,500
Gerald M. Thorne/2/ $51,175 $59,500
</TABLE>
Investment Adviser
PIMCO Advisors serves as investment adviser to the Fund pursuant to an
investment advisory agreement ("Advisory Agreement") between PIMCO Advisors and
the Trust. PIMCO Advisors was organized as a limited partnership under Delaware
law in 1987. PIMCO Partners, G.P. ("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 current
Managing Directors and two former Managing Directors of Pacific Investment
Management Company (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.
______________________
/1/ The amounts listed in column (3) include total compensation paid to the
Trustees for their services as Trustees of the Trust (for all Trustees), CAT
(for all Trustees), and Pacific Select Fund (for Messrs. Nelson, Porter, and
Richards) for the twelve-month period ended June 30, 1998. By virtue of having
PIMCO Advisors or an affiliate of PIMCO Advisors as investment adviser, the
Trust, CAT and Pacific Select Fund were considered to be part of the same "Fund
Complex" for these purposes. As a result of a change in management of CAT on
December 12, 1997, 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.
/2/ The Trust has adopted a deferred compensation plan (the "Plan") which
went into place during fiscal 1997. 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 -$51,600,
$60,000; Porter - $49,900, $58,000; Segall - $26,650, $32,000; Thorne -$51,175,
$59,500.
/3/ Mr. Light retired as a Trustee of the Trust during the fiscal year ended
June 30, 1998.
-13-
<PAGE>
PGP and PAH have substantially delegated their management and control of
PIMCO Advisors to a Management Board. 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
representatives of the Public General Partner or, if there is no Public General
Partner, 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 Companies having the greatest total income, determined as of the date
of appointment; and (v) one Managing Director of each of two other Investment
Managing Companies 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.
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 four members. The members of the Executive Committee are William
D. Cvengros, Brent R. Harris, Glenn S. Schafer and William S. Thompson, Jr.
PIMCO Advisors, PGP and PAH are located at 800 Newport Center Drive,
Newport Beach, California 92660. PIMCO Advisors and its subsidiary partnerships
had approximately $255 billion of assets under management as of June 30, 1999.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Fund and for
managing, either directly or through others selected by the Adviser, the
investment of the Fund. PIMCO Advisors retains its affiliate, Cadence Capital
Management ("Cadence"), to serve as the Fund's Sub-Adviser. PIMCO Advisors also
furnishes to the Board of Trustees periodic reports on the investment
performance of the Fund.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Fund in accordance with applicable laws and regulations. The
investment advisory services of PIMCO Advisors to the Trust are not exclusive
under the terms of the Advisory Agreement. PIMCO Advisors is free to, and does,
render investment advisory services to others.
The Advisory Agreement will continue in effect with respect to the 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.
The Adviser receives a monthly investment advisory fee from the Fund at the
following annual rate (based on the average daily net assets of the Fund):
<TABLE>
<CAPTION>
Fund Advisory
- ---- Fee Rate
--------
<S> <C>
Mega-Cap Fund..................................................... .45%
</TABLE>
The Fund will commence operations in September, 1999 and accordingly has
not paid advisory fees to the Adviser for a full fiscal year.
Portfolio Management Agreement
Pursuant to a Portfolio Management Agreement between the Adviser and
Cadence, Cadence provides investment advisory services to the Fund. For the
services provided, the Adviser (not the Trust) pays Cadence a monthly fee at the
annual rate of .35% based on the average daily net assets of the Fund.
-14-
<PAGE>
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 June 30, 1999, of approximately $7.5 billion.
The Fund will commence operations in September, 1999 and accordingly the
Sub-Adviser has not received fees with respect to the Fund for a full fiscal
year.
Fund Administrator
In addition to its services as Adviser, PIMCO Advisors serves as
administrator (and is referred to in this capacity as the "Administrator") to
the Fund pursuant to an administration agreement (the "Administration
Agreement") with the Trust. The Administrator provides or procures
administrative services to the Fund, which include clerical help and accounting,
bookkeeping, internal audit services and certain other services it requires and
preparation of reports to the Fund's shareholders and regulatory filings. PIMCO
Advisors has retained Pacific Investment Management Company ("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 Fund, and is responsible for the costs of registration of the Fund's
shares and the printing of prospectuses and shareholder reports for current
shareholders. Under the Administration Agreement, the Administrator has agreed
to provide or procure these services, and to bear these expenses, at the annual
rate of .25% based on the Fund's average daily net assets attributable in the
aggregate to its Institutional Class and Administrative Class shares.
Except for the expenses paid by the Administrator, the Trust bears all
costs of its operations. The Trust is responsible for the following expenses:
(i) salaries and other compensation of any of the Trust's executive officers and
employees who are not officers, directors, stockholders, or employees of PIMCO
Advisors, Pacific Investment Management, or their subsidiaries or affiliates;
(ii) taxes and governmental fees; (iii) brokerage fees and commissions and other
portfolio transaction expenses; (iv) costs of borrowing money, including
interest expenses; (v) fees and expenses of the Trustees who are not "interested
persons" of PIMCO Advisors, the Sub-Adviser or another affiliate of PIMCO
Advisors, 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 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 on behalf of
the Fund at any time by vote of (1) a majority of the Trustees, or (2) a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to PIMCO Advisors.
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
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services rendered to the Fund, 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.
The Fund recently commenced operations and did not pay any administrative
fees during the last fiscal year.
DISTRIBUTION OF FUND SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distributors LLC (the "Distributor") serves as the distributor
of each class of the Fund'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 the Fund or a class of shares 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 Fund shares.
The Distribution Contract will continue in effect with respect to the 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 Plan 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 series of the Trust or classes of shares, it may
continue in effect with respect to any series or class as to which it has not
been terminated (or has been renewed).
The Trust currently offers two classes of shares of the Fund:
Institutional Class and Administrative Class shares. 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 Fund). Administrative Class shares are offered primarily through
employee benefit plan alliances, broker-dealers, and other intermediaries, and
the 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 the 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.
Distribution and Administrative Services Plans for Administrative Class Shares
The Trust has adopted an Administrative Services Plan with respect to the
Administrative Class shares of the Fund. 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 the
Fund.
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 the 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 Fund. Such
services may include, but are not limited to,
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the following: providing facilities to answer questions from prospective
investors about the 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 the Fund, in an amount up to 0.25% on an annual basis of the average daily
net assets of that class, financial intermediaries that provide certain
administrative services for Administrative Class shareholders. Such services may
include, but are not limited to, the following: receiving, aggregating and
processing shareholder orders; furnishing shareholder sub-accounting; providing
and maintaining elective shareholder services such as check writing and wire
transfer services; providing and maintaining pre-authorized investment plans;
communicating periodically with shareholders; acting as the sole shareholder of
record and nominee for shareholders; maintaining accounting records for
shareholders; answering questions and handling correspondence from shareholders
about their accounts; and performing similar account administrative services.
The same entity may be the recipient of fees under both the Administrative
Distribution Plan and the Administrative Services Plan, but may not receive fees
under both plans with respect to the same assets.
Each Administrative Plan provides that it may not be amended to increase
materially the costs which Administrative Class shareholders may bear under the
Plan without the approval of a majority of the outstanding voting securities of
the Administrative Class, and by vote of a majority of both (i) the Trustees of
the Trust and (ii) those Trustees ("disinterested Administrative Plan Trustees")
who are not "interested persons" of the Trust (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to it, cast in person at a meeting called for the
purpose of voting on the Plan and any related amendments.
Each Administrative Plan provides that it may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Administrative Plan Trustees. The Administrative Class
Distribution Plan further provides that it may not take effect unless approved
by the vote of a majority of the outstanding voting securities of the
Administrative Class.
Each Administrative Plan provides that it shall continue in effect so long
as such continuance is specifically approved at least annually by the Trustees
and the disinterested Administrative Plan Trustees. Each Administrative Plan
provides that any person authorized to direct the disposition of monies paid or
payable by a class pursuant to the Plan or any related agreement shall provide
to the Trustees, and the Board shall review at least quarterly, a written report
of the amounts so expended and the purposes for which such expenditures were
made.
Each Administrative Plan provides that expenses payable under the Plan may
be carried forward for reimbursement for up to twelve months beyond the date in
which the expense is incurred, subject to the limit that not more than 0.25% of
the average daily net assets of Administrative Class shares may be used in any
month to pay expenses under the Plan. Each Administrative Plan requires that
Administrative Class shares incur no interest or carrying charges.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that some, if not
all, of the fees paid pursuant to both Administrative Plans will qualify as
"service fees" and therefore will not be limited by NASD rules.
The Fund will commence operations in September, 1999 and accordingly did
not make any payments under the Administrative Plans during the last fiscal
year.
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Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of the Fund's shares are discussed in
the Prospectus under the headings "Purchase of Shares," "Redemption of Shares,"
and "Net Asset Value."
Certain clients of the Adviser or Sub-Adviser whose assets would be
eligible for purchase by the Fund may purchase shares of the Trust with such
assets. Assets so purchased by the Fund will be valued in accordance with
procedures adopted by the Board of Trustees.
One or both classes of shares of the Fund may not be qualified or
registered for sale in all States. Prospective investors should inquire as to
whether shares of the Fund, or class of shares thereof, are available for offer
and sale in their State of domicile or residence. Shares of the Fund may not be
offered or sold in any State unless registered or qualified in that
jurisdiction, unless an exemption from registration or qualification is
available.
As described in the Prospectus under the caption "Redemption of Shares," a
shareholder may exchange shares of the Fund for shares of the same class of any
other series of the Trust that is available for investment, or any series of
PIMCO Funds: Pacific Investment Management Series, on the basis of their
respective net asset values. For federal income tax purposes, an exchange is
treated as a sale of shares and generally results in a capital gain or loss.
Orders for exchanges accepted prior to the close of regular trading on the
New York Stock Exchange on any day the Trust is open for business will be
executed at the respective net asset values determined as of the close of
business that day. Orders for exchanges received after the close of regular
trading on the New York Stock Exchange on any business day will be executed at
the respective net asset values determined at the close of the next business
day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to adopt a policy of terminating the exchange privilege of any
shareholder who makes more than a specified number of exchanges in a 12 month
period or in any calendar year. For example, the Trust currently limits the
number of "round trip" exchanges an investor may make. An investor makes a
"round trip" exchange when the investor purchases shares of the Fund,
subsequently exchanges those shares for shares of a different series of the
Trust and then exchanges back into the Fund. The Trust has the right to refuse
any exchange for any investor who completes (by making the exchange back into
the shares of the Fund) more than six round trip exchanges in any twelve-month
period. Although the Trust has no current intention of terminating or modifying
the exchange privilege other than as set forth in the preceding sentence, it
reserves the right to do so as described in the Prospectus.
The Trust reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Fund, limited in amount with respect to each
shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1%
of the net asset value of the Fund at the beginning of such period. Although the
Fund will normally redeem all shares for cash, it may redeem amounts in excess
of the lesser of (i) or (ii) above by payment in kind of securities held by the
Fund.
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 $100,000 with
respect to Institutional Class and Administrative Class shares. The
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Prospectus may set forth higher minimum account balances for one or both 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 Fund may also charge periodic account fees for
accounts that fall below minimum balances as described in the Prospectus.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Investment decisions for the Fund and for the other investment advisory
clients of the Adviser and Sub-Adviser 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 Fund). 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 Sub-Adviser'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 Fund usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Fund 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
Fund of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according
to such factors as the difficulty and size of the transaction. Transactions in
foreign securities generally involve the payment of fixed brokerage commissions,
which are generally higher than those in the United States.
The Adviser and/or Sub-Adviser 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 Fund through a substantial number of
brokers and dealers. In so doing, the Adviser or Sub-Adviser 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 Sub-Adviser, having in mind the Fund'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.
The Fund recently commenced operations and did not pay any brokerage
commissions during the last fiscal year.
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 Sub-Adviser receive research services from many broker-dealers
with which the Adviser and Sub-Adviser place the Trust's
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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 Sub-Adviser in advising various of
their clients (including the Fund), although not all of these services are
necessarily useful and of value in managing the Fund. The advisory fees paid by
the Fund are not reduced because the Adviser and Sub-Adviser 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
Sub-Adviser may cause the Fund 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 Sub-Adviser may also consider sales of shares of
the Fund as a factor in the selection of broker-dealers to execute portfolio
transactions for the Trust.
The Adviser or Sub-Adviser 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 Sub-Adviser where, in the judgment of the Adviser or Sub-
Adviser, 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 Sub-Adviser may receive and retain compensation for effecting
portfolio transactions for the Fund on a national securities exchange of which
the broker-dealer is a member if the transaction is "executed" on the floor of
the exchange by another broker which is not an "associated person" of the
affiliated broker-dealer, and if there is in effect a written contract between
the Adviser or Sub-Adviser 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 Sub-Adviser by the 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 Prospectus, the Sub-Adviser manages the
portfolio of the Fund without regard generally to restrictions on portfolio
turnover. Trading in fixed income securities does not generally involve the
payment of brokerage commissions, but does involve indirect transaction costs.
The higher the rate of portfolio turnover of the Fund, the higher these
transaction costs borne by the Fund generally will be. To the extent portfolio
turnover results in the realization of net short-term capital gains, such gains
are generally taxed to shareholders at ordinary income tax rates. See
"Taxation."
The portfolio turnover rate of the 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.
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NET ASSET VALUE
As indicated in the Prospectus under the heading "Net Asset Value," the
Fund'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.
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 the Fund.
The Fund intends to qualify annually and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
generally must, among other things, (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or 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") and (b) 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, the Fund must distribute each taxable
year the sum of (i) at least 90% of its investment company taxable income (which
includes dividends, interest and net short-term capital gains in excess of any
net long-term capital losses) and (ii) 90% of its tax exempt interest, net of
expenses allocable thereto. By qualifying as a regulated investment company,
the Fund will not be subject to federal income taxes to the extent that its net
investment income, net short-term capital gains and net long-term capital gains
are distributed. In addition, the Treasury Department is authorized to
promulgate regulations under which gains from foreign currencies (and options,
futures, and forward contracts on foreign currency) would not constitute
qualifying income for purposes of the Qualifying Income Test if such gains are
not directly related to investing in securities (or options and futures with
respect to stock or securities). To date, such regulations have not been
issued.
In years when the Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of reducing
the shareholder's basis in the shares.
Distributions
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (any net long-term capital gains in excess of the sum of net
short-term capital losses and capital loss carryovers from prior years)
designated by the Fund as capital gain dividends, if any, that it distributes to
shareholders on a timely basis. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by the Fund on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To avoid the tax, the
Fund must distribute during each calendar year an amount equal to the sum of (1)
at least 98% of its ordinary income (not taking into account any
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capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (and adjusted for certain ordinary losses)
for the twelve month period ending on October 31 of the calendar year, and (3)
all ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
The tax status of the Fund and the distributions which it may make are
summarized in the Prospectus under the caption "Dividends, Distributions and
Taxes." All dividends and distributions of the Fund, whether received in shares
or cash, are taxable and must be reported on each shareholder's federal income
tax return. Distributions received by tax-exempt shareholders will not be
subject to federal income tax to the extent permitted under the applicable tax
exemption.
A portion of the dividends paid by the Fund on investments 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).
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains (generally subject to a 20%
tax rate for shareholders who are individuals), regardless of how long the
shareholder has held the Fund's shares and are not eligible for the dividends
received deduction. Any distributions that are not from the Fund's investment
company taxable income or net capital gains may be characterized as a return of
capital to shareholders or, in some cases, as capital gain. The tax treatment
of dividends and distributions will be the same whether a shareholder reinvests
them in additional shares or elects to receive them in cash. The Fund's
investment in other investment companies could affect the amount, timing and
character of distributions to shareholders of the Fund.
Dividends and distributions on shares of the Fund are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the net asset value of the Fund reflects gains that are either unrealized,
or realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses.
Sales of Shares
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Long-term capital gains will
generally be taxed at a federal income tax rate of 20% to shareholders who are
individuals. Any loss realized on a disposition will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of shares
held by the shareholder for six months or less will be treated as a long-term
capital loss to the extent of any distributions of capital gain dividends
received by the shareholder with respect to such shares.
Backup Withholding
The Fund may be required to withhold 31% of all taxable distributions
payable to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders
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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.
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund may be treated
as debt securities that are issued originally at a discount. Generally, the
amount of the original issue discount ("OID") is treated as interest income and
is included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
securities having market discount, which could affect the character and timing
of recognition of income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by the Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
The Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
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
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Certificates). The Fund will provide information annually to shareholders
indicating the amount and percentage of its dividend distribution which is
attributable to interest on federal obligations, and will indicate to the extent
possible from what types of federal obligations such dividends are derived. The
Trust is organized as a Massachusetts business trust. Under current law, so long
as the Fund qualifies for the federal income tax treatment described above, it
is believed that neither the Trust nor the Fund will be liable for any income or
franchise tax imposed by Massachusetts. Shareholders, in any event, are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust as amended and restated on January 14, 1997. The
capitalization of the Trust consists solely of an unlimited number of shares of
beneficial interest. The Board of Trustees may establish additional series (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of the Fund, each shareholder is
entitled to receive his pro rata share of the net assets of the Fund.
Performance Information
Performance information is computed separately for each class of the Fund.
The Fund may from time to time include the total return of each class of its
shares in advertisements or in information furnished to present or prospective
shareholders. The Fund may from time to time include in advertisements the total
return of each class and the ranking of those performance figures relative to
such figures for groups of mutual funds categorized by Lipper Analytical
Services as having the same investment objectives. Information provided to any
newspaper or similar listing of the Fund's net asset values and public offering
prices will separately present each class of shares. The Fund also may compute
current distribution rates and use this information in its Prospectus and
Statement of Additional Information, in reports to current shareholders, or in
certain types of sales literature provided to prospective investors.
Calculation of Total Return
Quotations of average annual total return for the Fund, or a class of
shares thereof, 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 proportionate share of Fund or class expenses on an
annual basis, and assume that (i) the maximum sales load (or other charges
deducted from payments), if any, 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 Prospectus and (ii)
all dividends and distributions are reinvested when paid. Quotations of total
return may also be shown for other periods. The Fund may also, with respect to
certain periods of less than one year, provide total return information for that
period that is unannualized. Under applicable regulations, any such information
is required to be accompanied by standardized total return information.
Performance information for the Fund may also be compared to: (i) the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average 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
-24-
<PAGE>
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 Fund. Unmanaged indexes (i.e., other than Lipper)
generally do not reflect deductions for administrative and management costs or
expenses. The Adviser and the Sub-Adviser may also report to shareholders or to
the public in advertisements concerning the performance of the Adviser and/or
the Sub-Adviser as advisers to clients other than the Trust, and on the
comparative performance or standing of the Adviser and/or the Sub-Adviser in
relation to other money managers. Such comparative information may be compiled
or provided by independent ratings services or by news organizations. Any
performance information, whether related to the Fund, the Adviser or the Sub-
Adviser, should be considered in light of the Fund's investment objectives and
policies, characteristics and quality, and the market conditions during the time
period indicated, and should not be considered to be representative of what may
be achieved in the future.
The 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 380 industrial, 10 transportation, 39 utilities and 71
financial services concerns. The S&P 500 represents about 73% 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 February
26, 1999, approximately 25% of the 400 stocks were stocks listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") system, 73%
were stocks listed on the New York Stock Exchange and 2% 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 $1.54 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.
From time to time, the Fund 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,
1998, the U.S. equity market capitalization represented approximately 40% of the
equity market capitalization of all the world's markets. This compares with 52%
in 1980 and 70% in 1972.
From time to time, the Trust may use, in its advertisements and other
information relating to the Fund, data concerning the performance of stocks
relative to that of fixed income investments and relative to the cost of living
over various periods of time. The table below sets forth the annual returns for
each calendar year from 1973 through 1998 (as well as a cumulative return and
average annual return for this period) for the S&P 500 and Treasury bills (using
the formula set forth after the table) as well as the rates of inflation (based
on the Consumer Price Index) during such periods.
<TABLE>
<CAPTION>
Consumer Price
Period S&P 500 Treasury Bills Index
- ------ ------- -------------- -----
<S> <C> <C> <C>
1973 -14.7 6.9 8.8
1974 -26.5 8.0 12.2
1975 37.2 5.8 7.0
1976 23.8 5.0 4.8
1977 -7.2 5.1 6.8
1978 6.5 7.2 9.0
1979 18.4 10.4 13.3
</TABLE>
-25-
<PAGE>
<TABLE>
<S> <C> <C> <C>
1980 32.4 11.2 12.4
1981 -4.9 14.7 8.9
1982 21.4 10.5 3.8
1983 22.5 8.8 3.8
1984 6.3 9.9 3.9
1985 32.2 7.7 3.8
1986 18.5 6.1 1.1
1987 5.2 5.5 4.4
1988 16.8 6.3 4.4
1989 31.5 8.4 4.6
1990 -3.2 7.8 6.1
1991 30.5 5.6 3.1
1992 7.7 3.5 2.9
1993 10.1 2.9 2.7
1994 1.3 3.9 2.7
1995 37.4 5.6 2.7
1996 23.1 5.2 3.3
1997 33.4 5.3 1.7
1998 28.6 4.9 1.6
- ----------------------------------------------------------
Cumulative Return
1973-1998 2,667.2% 478.0% 285.6%
- ----------------------------------------------------------
Average Annual Return
1973-1998 13.6% 7.0% 5.3%
- ----------------------------------------------------------
</TABLE>
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:
Pt = [ 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.
<TABLE>
<CAPTION>
Small Mid-Size Large
Period Companies Companies Companies
- ------ --------- --------- ---------
<S> <C> <C> <C>
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
1997 22.8 32.3 33.4
1998 -2.6 19.1 28.6
</TABLE>
-26-
<PAGE>
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------
Cumulative Return
2/28/81-12/31/98 710.5% 1,784.5% 1,616.9%
- -----------------------------------------------------------
Average Annual Return
2/28/81-12/31/98 12.4% 17.9% 17.3%
- -----------------------------------------------------------
</TABLE>
The Fund may use, in its advertisements and other information, data
concerning the projected cost of a college education in future years based on
1997/1998 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 Fund 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 the Fund will grow at or above the rate of
growth of the cost of a college education.
Potential College Cost Table
<TABLE>
<CAPTION>
Start Public Private Start Public Private
Year College College Year College College
- ---- ------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C>
1997 $13,015 $57,165 2005 $16,487 $72,415
1998 $13,406 $58,880 2006 $16,982 $74,587
1999 $13,808 $60,646 2007 $17,491 $76,825
2000 $14,222 $62,466 2008 $18,016 $79,130
2001 $14,649 $64,340 2009 $18,557 $81,504
2002 $15,088 $66,270 2010 $19,113 $83,949
2003 $15,541 $68,258 2011 $19,687 $86,467
2004 $16,007 $70,306 2012 $20,278 $89,061
</TABLE>
Costs assume a steady increase in the annual cost of college of 3% per year from
a 1996-97 base year amount. Actual rates of increase may be more or less than 3%
and may vary.
In its advertisements and other materials, the Trust may compare the
returns over periods of time of investments in stocks, bonds and treasury bills
to each other and to the general rate of inflation. For example, the average
annual return of each during the period from 1973 through 1998 was:
*Stocks: 13.6%
Bonds: 9.5%
T-Bills: 7.0%
Inflation: 5.3%
*Returns of unmanaged indexes do not reflect past or future
performance of the Fund. Stocks are represented by Ibbotson's Large Company
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 1999 Yearbook, Ibbotson Associates, Chicago. All rights
reserved.
-27-
<PAGE>
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 period from
1973 through 1998, the average annual return of stocks comprising the Ibbotson's
Large Company Stock Total Return Index ranged from -26.5% to 37.4% while the
annual return of a hypothetical portfolio comprised 40% of such common stocks,
40% of bonds comprising the Ibbotson's Long-term Corporate bond Index and 20% of
Treasury bills comprising the Ibbottson's Treasury Bill Index (a "mixed
portfolio") would have ranged from -10.2% to 28.2% over the same period. The
average annual returns of each investment for each of the years from 1973
through 1998 is set forth in the following table.
<TABLE>
<CAPTION>
MIXED
YEAR STOCKS BONDS T-BILLS INFLATION PORTFOLIO
- ---- ------- ----- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1973 -14.66% 1.14% 6.93% 8.80% -4.02%
1974 -26.47% -3.06% 8.00% 12.26% -10.21%
1975 37.20% 14.64% 5.80% 7.01% 21.90%
1976 23.84% 18.65% 5.08% 4.81% 18.01%
1977 -7.18% 1.71% 5.12% 6.77% -1.17%
1978 6.56% -0.07% 7.18% 9.03% 4.03%
1979 18.44% -4.18% 10.38% 13.31% 7.78%
1980 32.42% 2.61% 11.24% 12.40% 14.17%
1981 -4.91% -0.96% 14.71% 8.94% 0.59%
1982 21.41% 43.79% 10.54% 3.87% 28.19%
1983 22.51% 4.70% 8.80% 3.80% 12.64%
1984 6.27% 16.39% 9.85% 3.95% 11.03%
1985 32.16% 30.90% 7.72% 3.77% 26.77%
1986 18.47% 19.85% 6.16% 1.13% 16.56%
1987 5.23% -0.27% 5.46% 4.41% 3.08%
1988 16.81% 10.70% 6.35% 4.42% 12.28%
1989 31.49% 16.23% 8.37% 4.65% 20.76%
1990 -3.17% 6.87% 7.52% 6.11% 2.98%
1991 30.55% 19.79% 5.88% 3.06% 21.31%
1992 7.67% 9.39% 3.51% 2.90% 7.53%
1993 10.06% 13.17% 2.89% 2.75% 9.84%
1994 1.31% -5.76% 3.90% 2.67% -1.00%
1995 37.40% 27.20% 5.60% 2.70% 26.90%
1996 23.10% 1.40% 5.20% 3.30% 10.84%
1997 33.40% 12.90% 7.10% 1.70% 19.94%
1998 28.58% 10.76% 4.86% 1.61% 16.70%
</TABLE>
Returns of unmanaged indexes do not reflect past or future performance
of the Fund. Stocks are represented by Ibbotson's Large Company Stock Total
Return Index. Bonds are represented by Ibbotson's Long-term Corporate Bond
Index. Treasury bills are represented by Ibbotson's Treasury Bill Index and
Inflation is represented by the Cost of Living Index. Treasury bills are
all unmanaged indexes, which can not be invested in directly. While
Treasury bills are insured and offer a fixed rate of return, both the
principal and yield of investment securities will fluctuate with changes in
market conditions. Source: Ibbotson, Roger G., and Rex A. Sinquefiled,
Stocks, Bonds, Bill and Inflation (SBBI), 1989, updated in Stocks, Bonds,
Bills and Inflation 1999 Yearbook, Ibbotson Associates, Chicago. All rights
reserved.
-28-
<PAGE>
The Trust may use in its advertisements and other materials examples
designed to demonstrate the effect of compounding when an investment is
maintained over several or many years. For example, the following table shows
the annual and total contributions necessary to accumulate $200,000 of savings
(assuming a fixed rate of return) over various periods of time:
<TABLE>
<CAPTION>
Investment Annual Total Total
Period Contribution Contribution Saved
------ ------------ ------------ -----
<S> <C> <C> <C>
30 Years $ 1,979 $ 59,370 $200,000
25 Years $ 2,955 $ 73,875 $200,000
20 Years $ 4,559 $ 91,180 $200,000
15 Years $ 7,438 $ 111,570 $200,000
10 Years $ 13,529 $ 135,290 $200,000
</TABLE>
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 the Fund. 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 the Fund
should be aware that the Fund may experience in the future periods of
negative growth.
The Trust may set forth in its advertisements and other materials
information regarding the relative reliance in recent years on personal savings
for retirement income versus reliance on Social Security benefits and company
sponsored retirement plans. For example, the following table offers such
information for 1998:
<TABLE>
<CAPTION>
% of Income for Individuals
Aged 65 Years and Older in 1997*
-------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
<S> <C> <C>
1997 43% 57%
</TABLE>
* 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 Fund may appear in various national
publications and services including, but not limited to: The Wall Street
Journal, Barron's, Pensions and Investments, Forbes, Smart Money, Mutual 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 Fund,
and may provide information relating to the Adviser and the Sub-Adviser,
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 Sub-Adviser 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 Fund.
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
the Fund over a specified period of time and may use charts and graphs to
display that growth.
-29-
<PAGE>
From time to time, the Trust may set forth in its advertisements and other
materials the names of and additional information regarding investment analysts
employed by the Sub-Adviser who assist with portfolio management and research
activities on behalf of the Fund.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
series of the Trust 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 Trust's series, including
the Fund, and series of PIMS which indicate how, in Ibbotson's opinion, a
hypothetical investor with a 5+ year investment horizon might allocate his or
her assets among PIMCO Funds. 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
Sub-Adviser nor Ibbotson represent or guarantee that investors who allocate
their assets according to Ibbotson's models will achieve their desired
investment results.
Year 2000 Readiness Disclosure
Many of the world's computer systems may be unable to correctly recognize,
interpret or use dates beyond the year 1999 (the "Year 2000 Problem"). This
inability might lead to significant business disruptions. PIMCO Advisors and
Pacific Investment Management, which serves as sub-administrator to the Fund,
are taking steps to ensure that their computer systems will function properly.
PIMCO Advisors has designated a team of information and business professionals
(the "Year 2000 Team") to address the Year 2000 Problem and has developed a
written "Year 2000 Plan."
The Year 2000 Plan consists of five general phases: Awareness, Assessment,
Remediation, Testing and Implementation. The Year 2000 Plan and budget were
prepared and approved by PIMCO Advisors' Management Board on July 21, 1998.
During the Awareness phase, the Year 2000 Team informed the employees of the
Adviser and its subsidiaries, including their highest levels of management,
about the Year 2000 Problem. During the Assessment phase, the Year 2000 Team
prepared an inventory of information technology ("IT") and non-IT systems used
by the Adviser, its subsidiaries and Pacific Investment Management. Systems were
classified as software, hardware or embedded chips. Separately, systems were
also classified as mission critical or non-mission critical. As the inventory
was compiled and verified, each system was preliminarily assessed for Year 2000
compliance. This preliminary assessment was made by obtaining manufacturers'
representations that a given product is Year 2000 compliant or other evidence of
compliance. Systems for which no such evidence can be obtained were identified
as candidates for correction or replacement ("Remediation"). During the
Remediation phase, software, hardware and embedded chips identified during the
Assessment phase to be non-Year 2000 compliant are corrected or replaced.
Necessarily, further corrections and replacements may need to be made after the
Remediation phase has been completed as a result of problems identified during
the Testing phase or otherwise. During the Testing phase, the Adviser performs
internal testing, point-to-point testing and industry testing programs. Testing
generally will be performed in order of criticality, with mission-critical
systems receiving the highest priority. PIMCO Advisors does not plan to test
non-mission critical systems that are not used in its business (e.g., software
applications incidently installed on PCs). Several subsidiaries of the Adviser
plan on participating in the Securities Industry Association industry-wide
testing forum. During the Implementation phase, systems that have been tested
and identified as being Year 2000 compliant are put into normal business
operation and contingency plans are finalized.
As with all investment advisers, the business operations of the Adviser,
its investment advisory subsidiaries and Pacific Investment Management are
heavily dependent upon a complete worldwide network of financial systems that
utilize date fields. The ability of the Adviser, its investment advisory
subsidiaries and Pacific Investment Management to endure any adverse effects of
the transition to the Year 2000 are highly dependent upon the efforts of third
parties, particularly issuers, brokers, dealers and custodians. The failure of
third party organizations to resolve their own processing issues with respect to
the Year 2000 Problem in a timely manner could have a material adverse effect on
the Adviser's business. As of the date of this Statement of Additional
Information, the management of each of the Adviser, its investment advisory
subsidiaries and Pacific Investment Management believes that the
-30-
<PAGE>
transition to the Year 2000 will not have a material adverse effect on its
business or operations. However, complications as yet unidentified may arise in
internal or external systems or with data providers, other securities firms or
institutions, issuers, counterparties or other entities or even with general
economic conditions related to the Year 2000 Problem. The Year 2000 Problem may
be particularly acute with respect to foreign markets and securities of foreign
issuers (including ADRs) in which the Fund invests due to a potential lack of
Year 2000 compliance efforts in foreign markets and by foreign companies.
Although the Adviser's efforts and expenditures in connection with the Year 2000
Problem are substantial, there can be no assurances that shareholders of the
Fund will not suffer from disruptions or adverse results arising as a
consequence of the Year 2000 Problem.
Compliance Efforts Related to the Euro
Another potential computer system problem may arise in conjunction with the
recent introduction of the euro. Whether introducing the euro to financial
companies' systems will be problematic is not fully known; however, the cost
associated with making systems recognize the euro is not currently expected to
be material.
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.
Each class of shares of the Fund has identical voting rights except that
each class of shares has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class. These shares are entitled to vote
at meetings of shareholders. Matters submitted to shareholder vote must be
approved by the Fund separately except (i) when required by the 1940 Act shares
shall be voted together and (ii) when the Trustees have determined that the
matter does not affect all series of the Trust, then only shareholders of the
series affected shall be entitled to vote on the matter. Each class of shares of
the Fund will vote together, except with respect 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.
Certain Ownership of Trust Shares
As of August 5, 1999, the Trust believes that the Trustees and officers of
the Trust, as a group, owned less than one percent of each class of the Fund. As
of August 5, 1999, no person owned of record or beneficially 5% or more of
either class of shares of the Fund.
Custodian
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas City,
Missouri 64105, serves as custodian for assets of the Trust. Pursuant to a sub-
custody agreement between IFTC and State Street Bank and
-31-
<PAGE>
Trust Company ("State Street"), State Street serves as subcustodian of the Trust
for the custody of the foreign securities acquired by the Trust's series that
invest in foreign securities. Under the agreement, State Street may hold foreign
securities at its principal offices and its 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 Fund will not
occur, and shareholders bear the risk of losses arising from these or other
events.
Independent Accountants
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, Missouri 64105,
serves as the independent public accountants for the Fund.
PricewaterhouseCoopers LLP provides audit services, accounting assistance, and
consultation in connection with SEC filings.
Registration Statement
This Statement of Additional Information and the Prospectus 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 Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the relevant registration statement, each such statement
being qualified in all respects by such reference.
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