<PAGE>
PIMCO Funds:
Multi-Manager Series
STATEMENT OF ADDITIONAL INFORMATION
April 1, 1999, as revised July 29, 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. The
following twenty-three series (the "Funds") invest directly in equity and/or
fixed income securities and other instruments: the Equity Income Fund, the Value
Fund, the Renaissance Fund, the Tax-Efficient Equity Fund, the Enhanced Equity
Fund, the Growth Fund, the Value 25 Fund, the Capital Appreciation Fund, the
Mid-Cap Growth Fund, the Core Equity Fund, the Mid-Cap Equity Fund, the Target
Fund, the Small-Cap Value Fund, the Small-Cap Growth Fund, the Opportunity Fund,
the Micro-Cap Growth Fund, the Innovation Fund, the International Fund, the
International Growth Fund, the Tax-Efficient Structured Emerging Markets Fund,
the Structured Emerging Markets Fund, the Precious Metals Fund and the Balanced
Fund. Three additional series, PIMCO Funds Asset Allocation Series - 90/10
Portfolio (the "90/10 Portfolio"), PIMCO Funds Asset Allocation Series - 60/40
Portfolio (the "60/40 Portfolio"), and PIMCO Funds Asset Allocation Series -
30/70 Portfolio (the "30/70 Portfolio," and together with the 90/10 Portfolio
and the 60/40 Portfolio, the "Portfolios"), are so-called "funds-of-funds" which
invest all of their assets in certain of the Funds and other series in the PIMCO
Funds family. The Mega-Cap Fund, a separate series of the Trust, is offered
through a different Prospectus and Statement of Additional Information.
The Tax Exempt Fund, formerly a series of the Trust, merged with and
into the Municipal Bond Fund of PIMCO Funds in a transaction which took place on
June 26, 1998 and was liquidated in connection with the transaction. The
International Developed and Emerging Markets Funds, formerly series of the
Trust, reorganized with and into newly formed series of Alleghany Funds in a
transaction which took place on April 30, 1999 and were liquidated in connection
with the transaction.
The Trust's investment adviser is PIMCO Advisors L.P. ("PIMCO Advisors" or
the "Adviser"), 800 Newport Center Drive, Newport Beach, California 92660.
This Statement of Additional Information is not a Prospectus, and should be
used in conjunction with the Prospectuses for the Trust, as supplemented from
time to time. Through five Prospectuses, the Trust offers up to six classes of
shares of each of the Funds and five classes of shares of each of the
Portfolios. Class A, Class B and Class C shares of certain Funds are offered
through the "Class A, B and C Prospectus," dated April 1, 1999, Class D shares
of certain Funds are offered through the "Class D Prospectus" dated April 1,
1999, and Institutional and Administrative Class shares of certain Funds are
offered through the "Institutional Prospectus," dated May 7, 1999. Class A,
Class B and Class C shares of the Portfolios are offered through the "Retail
Portfolio Prospectus," dated April 1, 1999, and Institutional and Administrative
Class Shares of the Portfolios are offered through the "Institutional Portfolio
Prospectus," dated April 1, 1999. The Class A, B and C Prospectus, the Class D
Prospectus, the Institutional Prospectus, the Retail Portfolio Prospectus and
the Institutional Portfolio Prospectus are collectively referred to herein as
the "Prospectuses." A copy of the applicable Prospectus may be obtained free of
charge at the address and telephone number(s) listed below.
<TABLE>
<CAPTION>
Institutional and Institutional Class A, B and C; Class D;
--------------------------------- --------------------------
Portfolio Prospectuses: and Retail Portfolio Prospectuses:
---------------------- ---------------------------------
<S> <C>
PIMCO Funds PIMCO Funds Distributors LLC
840 Newport Center Drive 2187 Atlantic Street
Suite 300 Stamford, Connecticut 06902
Newport Beach, California 92660 Telephone: Class A, B and C - 1-800-426-0107
Telephone: 1-800-927-4648 Class D - 1-888-87-PIMCO
1-800-987-4626 (PIMCO Infolink Audio Retail Portfolio - 1-800-426-0107
Response Network)
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES..................................................... 1
U.S. Government Securities........................................................ 1
Inflation-Indexed Bonds........................................................... 1
Borrowing......................................................................... 2
Preferred Stock................................................................... 3
Corporate Debt Securities......................................................... 3
High Yield Securities ("Junk Bonds").............................................. 4
Loan Participations and Assignments............................................... 5
Delayed Funding Loans and Revolving Credit Facilities............................. 5
Hybrid Instruments................................................................ 6
Catastrophe Bonds................................................................. 6
Participation on Creditors Committees............................................. 7
Variable and Floating Rate Securities............................................. 7
Mortgage-Related and Asset-Backed Securities...................................... 7
Foreign Securities................................................................ 11
Foreign Currencies................................................................ 13
Bank Obligations.................................................................. 14
Commercial Paper.................................................................. 15
Derivative Instruments............................................................ 16
When-Issued, Delayed Delivery and Forward Commitment Transactions................. 22
Warrants to Purchase Securities................................................... 22
Metal-Indexed Notes and Precious Metals........................................... 22
Repurchase Agreements............................................................. 23
Securities Loans.................................................................. 24
Equity-Linked Securities.......................................................... 24
Investment Strategies of the Portfolios - Incorporation by Reference.............. 24
INVESTMENT RESTRICTIONS................................................................ 25
Fundamental Investment Restrictions............................................... 25
Non-Fundamental Investment Restrictions........................................... 28
MANAGEMENT OF THE TRUST................................................................ 29
Trustees and Officers............................................................. 29
Trustees' Compensation............................................................ 33
Investment Adviser................................................................ 34
Portfolio Management Agreements................................................... 38
Fund Administrator................................................................ 42
DISTRIBUTION OF TRUST SHARES........................................................... 45
Distributor and Multi-Class Plan.................................................. 45
Contingent Deferred Sales Charge and Initial Sales Charge......................... 47
Distribution and Servicing Plans for Class A, Class B and Class C Shares.......... 48
Payments Pursuant to Class A Plans................................................ 49
Payments Pursuant to Class B Plans................................................ 51
Payments Pursuant to Class C Plans................................................ 53
Distribution and Administrative Services Plans for Administrative Class Shares.... 56
Payments Pursuant to the Administrative Plan...................................... 57
Plan for Class D Shares........................................................... 57
Purchases, Exchanges and Redemptions.............................................. 58
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................... 60
Investment Decisions.............................................................. 60
Brokerage and Research Services................................................... 60
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Portfolio Turnover................................................. 62
NET ASSET VALUE......................................................... 63
TAXATION................................................................ 63
Distributions...................................................... 64
Sales of Shares.................................................... 65
Backup Withholding................................................. 65
Options, Futures, Forward Contracts and Swap Agreements............ 65
Passive Foreign Investment Companies............................... 66
Foreign Currency Transactions...................................... 66
Foreign Taxation................................................... 66
Original Issue Discount............................................ 67
Other Taxation..................................................... 67
OTHER INFORMATION....................................................... 68
Capitalization..................................................... 68
Performance Information............................................ 68
Calculation of Yield............................................... 68
Year 2000 Readiness Disclosure..................................... 86
Compliance Efforts Related to the Euro............................. 87
Voting Rights...................................................... 88
Certain Ownership of Trust Shares.................................. 88
Custodian.......................................................... 117
Independent Accountants............................................ 117
Registration Statement............................................. 117
Financial Statements............................................... 117
APPENDIX................................................................ A-1
</TABLE>
-ii-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of each Fund and
each Portfolio are described in the applicable Prospectus(es). Additional
information concerning the characteristics of certain of the Funds' invest
ments is set forth below.
The 90/10 Portfolio, 60/40 Portfolio and 30/70 Portfolio invest all of
their assets in certain Funds and series of PIMCO Funds ("PIMS"), an open-end
series management investment company advised by Pacific Investment Management
Company ("Pacific Investment Management"), an affiliate of PIMCO Advisors. PIMS
is referred to in the Prospectuses as PIMCO Funds: Pacific Investment
Management Series. These Funds and other series in which the Portfolios invest
are referred to in this Statement as "Underlying PIMCO Funds." By investing in
Underlying PIMCO Funds, the Portfolios may have an indirect investment interest
in some or all of the securities and instruments described below depending upon
how their assets are allocated among the Underlying PIMCO Funds. The Portfolios
may also have an indirect investment interest in other securities and
instruments utilized by the Underlying PIMCO Funds which are series of PIMS.
These securities and instruments are described in the current PIMS prospectus
for Institutional Class and Administrative Class shares and in the PIMS
statement of additional information. The PIMS prospectus and statement of
additional information are incorporated in this document by reference. See
"Investment Strategies of the Portfolios - Incorporation by Reference" below.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts
issued in connection with so-called trademark zero coupon securities, such as
CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury
securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
Inflation-Indexed Bonds
The Balanced Fund may invest in inflation-indexed bonds, which are fixed
income securities whose value is periodically adjusted according to the rate of
inflation. Two structures are common. The U.S. Treasury and some other issuers
utilize a structure that accrues inflation into the principal value of the bond.
Most other issuers pay out the Consumer Price Index ("CPI") accruals as part of
a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of
approximately five, ten or thirty years, although it is possible that securities
with other maturities will be issued in the future. The U.S. Treasury securities
pay interest on a semi-annual basis equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if the Balanced Fund purchased
an inflation-indexed bond with a par value of $1,000 and a 3% real rate of
return coupon (payable 1.5% semi-annually), and the rate of inflation over the
first six months was 1%, the mid-year par value of the bond would be $1,010 and
the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If
inflation during the second half of the year resulted in the whole year's
inflation equaling 3%, the
-1-
<PAGE>
end-of-year par value of the bond would be $1,030 and the second semi-annual
interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed and will fluctuate. The Fund may
also invest in other inflation-related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal amount.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if the rate of inflation rises at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increase at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measure ment of changes
in the cost of living, made up of components such as housing, food,
transportation and energy. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation index
calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in
the prices of goods and services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
Borrowing
Subject to the limitations described under "Investment Restrictions" below,
a Fund may be permitted to borrow for temporary purposes and/or for investment
purposes. Such a practice will result in leveraging of a Fund's assets and may
cause a Fund to liquidate portfolio positions when it would not be advantageous
to do so. This borrowing may be unsecured. Provisions of the Investment Company
Act of 1940, as amended ("1940 Act"), require a Fund to maintain continuous
asset coverage (that is, total assets including borrowings, less liabilities
exclusive of borrowings) of 300% of the amount borrowed, with an exception for
borrowings not in excess of 5% of the Fund's total assets made for temporary
administrative purposes. As noted under "Investment Restrictions," certain
Funds are subject to limitations on borrowings which are more strict than those
imposed by the 1940 Act. Any borrowings for temporary administrative purposes
in excess of 5% of the Fund's total assets must maintain continuous asset
coverage. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, a Fund may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing will tend to exaggerate
the effect on net asset value of any increase or decrease in the market value of
a Fund's portfolio. Money borrowed will be subject to interest costs which may
or may not be recovered by appreciation of the securities purchased. A Fund
also may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
-2-
<PAGE>
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements if permitted to do so under its investment
restrictions. A reverse repurchase agreement involves the sale of a portfolio-
eligible security by a Fund, coupled with its agreement to repurchase the
instrument at a specified time and price. The Fund will segregate assets
determined to be liquid by the Adviser or the Fund's sub-adviser. (The Funds'
sub-advisers are referred to herein as "Sub-Advisers"; as discussed below under
"Management of the Trust--Investment Adviser," the PIMCO Equity Advisors
division of PIMCO Advisors is also referred to as a "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. Reverse repurchase agreements will be
subject to the Funds' limitations on borrowings as specified under "Investment
Restrictions" below.
Preferred Stock
All Funds may invest in preferred stock. Preferred stock is a form of
equity ownership in a corporation. The dividend on a preferred stock is a fixed
payment which the corporation is not legally bound to pay. Certain classes of
preferred stock are convertible, meaning the preferred stock is convertible into
shares of common stock of the issuer. By holding convertible preferred stock, a
Fund can receive a steady stream of dividends and still have the option to
convert the preferred stock to common stock.
Corporate Debt Securities
All Funds may invest in corporate debt securities. The Equity Income,
Value, Tax-Efficient Equity, Value 25, Capital Appreciation, Mid-Cap Growth,
Micro-Cap Growth, Small-Cap Value, Small-Cap Growth, Core Equity, Mid-Cap
Equity, Enhanced Equity, Structured Emerging Markets and Tax-Efficient
Structured Emerging Markets Funds' investments in corporate debt securities are
limited to short-term corporate debt securities, except that the Structured
Emerging Markets and Tax-Efficient Structured Emerging Markets Funds may invest
up to 5% of their respective net assets in debt securities of emerging markets
issuers. The investment return of corporate debt securities reflects interest
earnings and changes in the market value of the security. The market value of a
corporate debt obligation may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument.
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Fund, or, if unrated, are deemed to
be comparable in quality to corporate debt securities in which the Fund may
invest. The rate of return or return of principal on some debt obligations may
be linked or indexed to the level of exchange rates between the U.S. dollar and
a foreign currency or currencies.
Among the corporate debt securities in which the Funds may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to non-
convertible debt securities. Convertible securities rank senior to common stock
in a corporation's capital structure and, therefore, generally entail less risk
than the corporation's common stock.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Fund is
called for redemption, the Fund would be required to permit the issuer to redeem
the security and convert it to underlying common stock, or would sell the
convertible security to a third party.
-3-
<PAGE>
High Yield Securities ("Junk Bonds")
Certain of the Funds may invest in debt/fixed income securities of domestic
or foreign issuers that meet minimum ratings criteria set forth for a Fund, or,
if unrated, are of comparable quality in the opinion of the Fund's Sub-Adviser.
A description of the ratings categories used is set forth in the Appendix to
this Statement of Additional Information.
A security is considered to be below "investment grade" quality if it is
either (1) not rated in one of the four highest rating categories by one of the
Nationally Recognized Statistical Rating Organizations ("NRSROs") (i.e., rated
Ba or below by Moody's Investors Service, Inc. ("Moody's") or BB or below by
Standard & Poor's Ratings Services ("S&P")) or (2) if unrated, determined by the
relevant Sub-Adviser to be of comparable quality to obligations so rated.
The Renaissance, Growth and Balanced Funds may invest a portion of their
assets in fixed income securities rated lower than Baa by Moody's or lower than
BBB by S&P but rated at least B by Moody's or S&P or, if not rated, determined
by the Sub-Adviser to be of comparable quality. In addition, the Renaissance
Fund may invest in convertible securities rated below B by Moody's or S&P (or,
if unrated, considered by the Sub-Adviser to be of comparable quality).
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. Investors should
consider the risks associated with high yield securities before investing in
these Funds. Although each of the Renaissance and Growth Funds reserves the
right to do so at any time, as of the date of this Statement of Additional
Information, neither Fund invests or has the present intention to invest more
than 5% of its assets in high yield securities or junk bonds. Investment in
high yield securities generally provides greater income and increased
opportunity for capital appreciation than investments in higher quality
securities, but it also typically entails greater price volatility as well as
principal and income risk. High yield securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. The market for these securities is relatively new, and
many of the outstanding high yield securities have not endured a major business
recession. A long-term track record on default rates, such as that for
investment grade corporate bonds, does not exist for this market. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt/fixed income securities. Each Fund of
the Trust that may purchase high yield securities may continue to hold such
securities following a decline in their rating if in the opinion of the Adviser
or the Sub-Adviser, as the case may be, it would be advantageous to do so.
Investments in high yield securities that are eligible for purchase by certain
of the Funds are described as "speculative" by both Moody's and S&P.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated fixed income securities.
While offering a greater potential opportunity for capital appreciation and
higher yields than investments in higher rated debt securities, high yield
securities typically entail greater potential price volatility and may be less
liquid than investment grade debt. High yield securities may be regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and achievement of a Fund's investment objective may,
to the extent of its investments in high yield securities, depend more heavily
on the Sub-Adviser's creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities are likely to be sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt/fixed income securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Funds investing in such securities may incur
additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which
-4-
<PAGE>
pay interest periodically and in cash. Even though such securities do not pay
current interest in cash, a Fund nonetheless is required to accrue interest
income on these investments and to distribute the interest income on a current
basis. Thus, a Fund could be required at times to liquidate other investments in
order to satisfy its distribution requirements.
Prices of high yield/high risk securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to economic downturns or individual corporate developments. The
secondary market on which high yield securities are traded may be less liquid
than the market for higher grade securities. Less liquidity in the secondary
trading market could adversely affect the price at which the Funds could sell a
high yield security, and could adversely affect the daily net asset value of the
shares. Lower liquidity in secondary markets could adversely affect the value
of high yield/high risk securities held by the Renaissance, Growth and Balanced
Funds. While lower rated securities typically are less sensitive to interest
rate changes than higher rated securities, the market prices of high yield/high
risk securities structured as "zero coupon" or "pay-in-kind" securities may be
affected to a greater extent by interest rate changes. See Appendix A to this
Statement of Additional Information for further information regarding high
yield/high risk securities. For instance, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market. When secondary markets for high yield securities are less liquid than
the market for higher grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available.
Debt securities are purchased and sold principally in response to current
assessments of future changes in business conditions and the levels of interest
rates on debt/fixed income securities of varying maturities, the availability of
new investment opportunities at higher relative yields, and current evaluations
of an issuer's continuing ability to meet its obligations in the future. The
average maturity or duration of the debt/fixed income securities in a Fund's
portfolio may vary in response to anticipated changes in interest rates and to
other economic factors. Securities may be bought and sold in anticipation of a
decline or a rise in market interest rates. In addition, a Fund may sell a
security and purchase another of comparable quality and maturity (usually, but
not always, of a different issuer) at approximately the same time to take
advantage of what are believed to be short-term differentials in values or
yields.
Loan Participations and Assignments
The Balanced Fund may invest in fixed- and floating-rate loans arranged
through private negotiations between an issuer of debt instruments and one or
more financial institutions ("lenders"). Generally, the Fund's investments in
loans are expected to take the form of loan participations and assignments of
portions of loans from third parties.
Large loans to corporations or governments may be shared or syndicated
among several lenders, usually banks. The Fund may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Characteristics and Risks of Securities
and Investment Techniques--Illiquid Securities" in the Class A, B and C and
Institutional Prospectuses for a discussion of the limits on the Balanced Fund's
investments in loan participations and assignments with limited marketability.
If the Fund purchases a participation, it may only be able to enforce its rights
through the lender, and may assume the credit risk of the lender in addition to
the borrower. In assignments, the Fund's rights against the borrower may be
more limited than those held by the original lender.
Delayed Funding Loans and Revolving Credit Facilities
The Balanced Fund may also enter into, or acquire participations in,
delayed funding loans and revolving credit facilities. Delayed funding loans
and revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. A revolving credit facility differs from a delayed funding loan
in that as the borrower repays the loan, an amount equal
-5-
<PAGE>
to the repayment may be borrowed again during the term of the revolving credit
facility. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when it might not otherwise
decide to do so (including a time wh/en the company's financial condition makes
it unlikely that such amounts will be repaid).
The Balanced Fund may acquire a participation interest in delayed funding
loans or revolving credit facilities from a bank or other financial institution.
See "Loan Participations and Assignments." The terms of the participation
require the Fund to make a pro rata share of all loans extended to the borrower
and entitles the Fund to a pro rata share of all payments made by the borrower.
Delayed funding loans and revolving credit facilities usually provide for
floating or variable rates of interest. To the extent that the Fund is
committed to advance additional funds, it will at all times segregate assets,
determined to be liquid by the Adviser or a Sub-Adviser in accordance with
procedures established by the Board of Trustees, in an amount sufficient to meet
such commitments.
Hybrid Instruments
The Balanced Fund may invest in "hybrid" or indexed securities. A hybrid
instrument can combine the characteristics of securities, futures, and options.
For example, the principal amount or interest rate of a hybrid could be tied
(positively or negatively) to the price of some commodity, currency or
securities index or another interest rate (each a "benchmark"). The interest
rate or (unlike most fixed income securities) the principal amount payable at
maturity of a hybrid security may be increased or decreased, depending on
changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and increased
total return. Hybrids may not bear interest or pay dividends. The value of a
hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the
benchmark. These benchmarks may be sensitive to economic and political events,
such as commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the redemption
value of a hybrid could be zero. Thus, an investment in a hybrid may entail
significant market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal amount and
pays a fixed rate or floating rate of interest. The purchase of hybrids also
exposes the Fund to the credit risk of the issuer of the hybrids. These risks
may cause significant fluctuations in the net asset value of the Fund.
Accordingly, the Fund will not invest more than 5% of its assets (taken at
market value at the time of investment) in hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Fund's investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.
Catastrophe Bonds
The Balanced Fund may invest in "catastrophe bonds." Catastrophe bonds are
fixed income securities, for which the return of principal and payment of
interest is contingent on the non-occurrence of a specific "trigger"
catastrophic event, such as a hurricane or an earthquake. They may be issued by
government agencies, insurance companies, reinsurers, special purpose
corporations or other on-shore or off-shore entities. If a trigger event causes
losses exceeding a specific amount in the geographic region and time period
specified in a bond, a Fund investing in the bond may lose a portion or all of
its principal invested in the bond. If no trigger event occurs, the Fund will
recover its principal plus interest. For some catastrophe bonds, the trigger
event or losses may be based on companywide losses, index-portfolio losses,
industry indices or readings of scientific instruments rather than specified
actual losses. Often the catastrophe bonds provide for extensions of maturity
that are mandatory, or optional at the discretion of the issuer, in order to
process and audit loss claims in those cases where a trigger event has, or
possibly has, occurred. In addition to the specified trigger events,
catastrophe bonds may also expose the Fund to certain unanticipated risks
including but not limited to issuer (credit) default, adverse regulatory or
jurisdictional interpretations and adverse tax consequences.
-6-
<PAGE>
Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Characteristics and Risks of Securities and Investment Techniques--Illiquid
Securities" in the Class A, B and C and Institutional Prospectuses. Lack of a
liquid market may impose the risk of higher transaction costs and the
possibility that the Balanced Fund may be forced to liquidate positions when it
would not be advantageous to do so. Catastrophe bonds are typically rated, and
the Fund will only invest in catastrophe bonds that meet the credit quality
requirements for the Fund.
Participation on Creditors Committees
A Fund may from time to time participate on committees formed by creditors
to negotiate with the management of financially troubled issuers of securities
held by the Fund. Such participation may subject a Fund to expenses such as
legal fees and may make the Fund an "insider" of the issuer for purposes of the
federal securities laws, and therefore may restrict the Fund's ability to trade
in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by a Fund on such committees also may
expose the Fund to potential liabilities under the federal bankruptcy laws or
other laws governing the rights of creditors and debtors. A Fund would
participate on such committees only when the Adviser and the relevant 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.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
Certain of the Funds may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied
to another interest rate, such as a money-market index or U.S. Treasury bill
rate. The interest rate on a floater resets periodically, typically every six
months. Because of the interest rate reset feature, floaters provide a Fund
with a certain degree of protection against rises in interest rates, but
generally do not allow the Fund to participate fully in appreciation resulting
from any general decline in interest rates.
Certain Funds may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security generally will exhibit greater
price volatility than a fixed rate obligation of similar credit quality. See
"Mortgage-Related and Asset-Backed Securities" below.
Mortgage-Related and Asset-Backed Securities
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities" below. Certain debt securities are also secured with collateral
consisting of mortgage-related securities. See "Collateralized Mortgage
Obligations" below.
Mortgage Pass-Through Securities. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional payments
are caused by repayments of principal resulting from the sale of the underlying
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-
-7-
<PAGE>
related securities (such as securities issued by the GNMA) are described as
"modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of mortgages insured by the Federal Housing Administration (the "FHA"), or
guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the FNMA and the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
the Secretary of Housing and Urban Development. FNMA purchases conventional
(i.e., not insured or guaranteed by any government agency) residential mortgages
from a list of approved seller/services which include state and federally
chartered savings and loan associations, mutual savings banks, commercial banks,
and credit unions and mortgage bankers. Pass-through securities issued by FNMA
are guaranteed as to timely payment of principal and interest by FNMA but are
not backed by the full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation formerly owned by the twelve Federal Home Loan Banks and
now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or services of the underlying mortgage loans as
well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees, and the creditworthiness of the issuers thereof, will
be considered in determining whether a mortgage-related security meets the
Trust's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. A Fund may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the originator/servicers and poolers, the Sub-
Adviser determines that the securities meet the Fund's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the Sub-Adviser's opinion are illiquid if, as a result, more
than 15% of the value of the Fund's net assets (taken at market value at the
time of investment) will be invested in illiquid securities.
-8-
<PAGE>
Mortgage-related securities that are issued or guaranteed by the U.S.
Government, its agencies or instru mentalities, are not subject to a Fund's
industry concentration restrictions, see "Investment Restrictions," by virtue of
the exclusion from that test available to all U.S. Government securities. In
the case of privately issued mortgage-related securities, the Funds take the
position that mortgage-related securities do not represent interests in any
particular "industry" or group of industries. The assets underlying such
securities may be represented by a portfolio of first lien residential mortgages
(including both whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or guaranteed by GNMA,
FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn
be insured or guaranteed by the FHA or the VA. In the case of private issue
mortgage-related securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent that real
properties securing such assets may be located in the same geographical region,
the security may be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of residential
homeowners to make payments of principal and interest on the underlying
mortgages.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
--------
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B, or
C Bond currently being paid off. When the Series A, B, and C Bonds are paid in
full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semi-annually, as opposed to monthly. The amount of principal payable on
each semi-annual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semi-annual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
-9-
<PAGE>
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Commercial Mortgage-Backed Securities. Commercial Mortgage-Backed
Securities include securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property. The market for commercial mortgage-
backed securities developed more recently and in terms of total outstanding
principal amount of issues is relatively small compared to the market for
residential single-family mortgage-backed securities. Many of the risks of
investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These
risks reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage- or asset-backed securities.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
IO class of stripped mortgage-backed securities. See "Other Mortgage-Related
Securities--Stripped Mortgage-Backed Securities." In addition, if a series of a
CMO includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-backed securities, in certain
circumstances a Fund may fail to recoup some or all of its initial investment
in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has developed fairly recently and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not,
have been registered under the Securities Act of 1933, as amended (the "1933
Act"). CMO residuals, whether or not registered under the 1933 Act, may be
subject to certain restrictions on transferability, and may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
-10-
<PAGE>
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the "IO"
class), while the other class will receive all of the principal (the "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were developed fairly recently. As a result, established trading markets have
not yet developed and, accordingly, these securities may be deemed "illiquid"
and subject to a Fund's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Adviser and Sub-Advisers
expect that other asset-backed securities (unrelated to mortgage loans) will be
offered to investors in the future and may be purchased by the Funds that may
invest in mortgage-related securities. Several types of asset-backed securities
have already been offered to investors, including Certificates for Automobile
Receivables/SM/ ("CARS/SM/"). CARS/SM/ represent undivided fractional interests
in a trust whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS/SM/ are passed through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. An investor's return on CARS/SM/
may be affected by early prepayment of principal on the underlying vehicle sales
contracts. If the letter of credit is exhausted, the trust may be prevented
from realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of federal and state
bankruptcy and insolvency laws, or other factors. As a result, certificate
holders may experience delays in payments or losses if the letter of credit is
exhausted.
Consistent with a Fund's investment objectives and policies, the Adviser
and Sub-Adviser also may invest in other types of asset-backed securities.
Foreign Securities
The Structured Emerging Markets, Tax-Efficient Structured Emerging Markets,
International Growth and International Funds may invest in U.S. dollar or
foreign currency-denominated corporate debt securities of foreign issuers;
preferred securities of foreign issuers; certain foreign bank obligations; and
U.S. dollar- or foreign currency-denominated obligations of foreign governments
or their subdivisions, agencies and instrumentalities, international agencies
and supranational entities. The Structured Emerging Markets, Tax-Efficient
Structured Emerging Markets, International Growth, International and Precious
Metals Funds may also invest in common stocks issued by foreign companies. The
Precious Metals Fund may invest primarily in securities of foreign issuers,
securities denominated in foreign currencies, securities principally traded on
securities markets outside of the United States and in securities of foreign
issuers that are traded on U.S. securities markets. The Renaissance, Core
Equity, Mid-Cap Equity, Growth, Target, Opportunity and Innovation Funds each
may invest up to 15% of their respective net assets in securities which are
traded principally in securities markets outside the United States (Eurodollar
certificates of deposit are excluded for purposes of these limitations), and
(except for the Core Equity and Mid-Cap Equity Funds) may invest without limit
in securities of foreign issuers that are traded in U.S. securities markets.
The Enhanced Equity Fund may invest in common stock of foreign issuers if it is
included in the index from which stocks are selected. The Balanced Fund may
invest up to 20% of its assets allocated for investment in fixed income
securities in securities denominated in foreign currencies, and may invest
beyond this limit in U.S. dollar-denominated securities of foreign issuers.
-11-
<PAGE>
Each of the Funds may invest in American Depository Receipts ("ADRs").
The Renaissance, Growth, Target, Core Equity, Mid-Cap Equity, Opportunity,
Innovation, Structured Emerging Markets, Tax-Efficient Structured Emerging
Markets, International Growth, International and Precious Metals Funds may
invest in European Depository Receipts ("EDRs") or Global Depository Receipts
("GDRs"). ADRs are dollar-denominated receipts issued generally by domestic
banks and represent the deposit with the bank of a security of a foreign issuer.
EDRs are foreign currency-denominated receipts similar to ADRs and are issued
and traded in Europe, and are publicly traded on exchanges or over-the-counter
in the United States. GDRs may be offered privately in the United States and
also trade in public or private markets in other countries. ADRs, EDRs and GDRs
may be issued as sponsored or unsponsored programs. In sponsored programs, an
issuer has made arrangements to have its securities trade in the form of ADRs,
EDRs or GDRs. In unsponsored programs, the issuer may not be directly involved
in the creation of the program. Although regulatory requirements with respect
to sponsored and unsponsored programs are generally similar, in some cases it
may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program.
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.
Special Risks of Investing in Russian and Other Eastern European
Securities. The International, International Growth, Tax-Efficient Structured
Emerging Markets and Structured Emerging Markets Funds may invest a portion of
their assets in securities of issuers located in Russia and in other Eastern
European countries. The political, legal and operational risks of investing in
the securities of Russian and other Eastern European issuers, and of having
assets custodied within these countries, may be particularly acute. Investments
in Eastern European countries may involve acute risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. Also, certain
Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property.
In addition, governments in certain Eastern European countries may require
that a governmental or quasi-governmental authority act as custodian of a Fund's
assets invested in such country. To the extent such
-12-
<PAGE>
governmental or quasi-governmental authorities do not satisfy the requirements
of the 1940 Act to act as foreign custodians of the Fund's cash and securities,
the Fund's investment in such countries may be limited or may be required to be
effected through intermediaries. The risk of loss through governmental
confiscation may be increased in such circumstances.
Investments in securities of Russian issuers may involve a particularly
high degree of risk and special considerations not typically associated with
investing in U.S. and other more developed markets, many of which stem from
Russia's continuing political and economic instability and the slow-paced
development of its market economy. Investments in Russian securities should be
considered highly speculative. Such risks and special considerations include:
(a) delays in settling portfolio transactions and the risk of loss arising out
of Russia's system of share registration and custody (see below); (b)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (c) difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information; (d) the general financial condition of Russian companies,
which may involve particularly large amounts of inter-company debt; and (e) the
risk that the Russian tax system will not be reformed to prevent inconsistent,
retroactive and/or exorbitant taxation or, in the alternative, the risk that a
reformed tax system may result in the inconsistent and unpredictable enforcement
of the new tax laws. Also, there is the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies to the
detriment of investors, including non-market-oriented policies such as the
support of certain industries at the expense of other sectors or investors, a
return to the centrally planned economy that existed prior to the dissolution of
the Soviet Union, or the nationalization of privatized enterprises.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of companies is normally
recorded. Ownership of shares (except where shares are held through
depositories that meet the requirements of the 1940 Act) is defined according to
entries in the company's share register and normally evidenced by extracts from
the register or, in certain limited circumstances, by formal share certificates.
However, there is no central registration system for shareholders and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision nor are they licensed with any governmental entity. It is
possible for a Fund to lose its registration through fraud, negligence or even
mere oversight. While a Fund will endeavor to ensure that its interest
continues to be appropriately recorded, which may involve a custodian or other
agent inspecting the share register and obtaining extracts of share registers
through regular confirmations, these extracts have no legal enforceability and
it is possible that subsequent illegal amendment or other fraudulent act may
deprive the Fund of its ownership rights or improperly dilute its interests. In
addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for a Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration.
Also, although a Russian public enterprise with more than 500 shareholders
is required by law to contract out the maintenance of its shareholder register
to an independent entity that meets certain criteria, this regulation has not
always been strictly enforced in practice. Because of this lack of
independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent a Fund from
investing in the securities of certain Russian companies deemed suitable by the
Fund's Sub-Adviser. Further, this also could cause a delay in the sale of
Russian securities held by a Fund if a potential purchaser is deemed unsuitable,
which may expose the Fund to potential loss on the investment.
Foreign Currencies
The Renaissance, Core Equity, Mid-Cap Equity, Growth, Target, Opportunity,
Innovation, International, International Growth, Structured Emerging Markets,
Tax-Efficient Structured Emerging Markets, Precious Metals
-13-
<PAGE>
and Balanced Funds may enter into forward foreign currency exchange contracts to
reduce the risks of adverse changes in foreign exchange rates. In addition, the
Structured Emerging Markets, Tax-Efficient Structured Emerging Markets,
International, International Growth, Balanced and Precious Metals Funds may buy
and sell foreign currency futures contracts and options on foreign currencies
and foreign currency futures.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. By entering into a forward foreign
currency exchange contract, the fund "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration of
the contract. As a result, a Fund reduces its exposure to changes in the value
of the currency it will deliver and increases its exposure to changes in the
value of the currency it will exchange into. Contracts to sell foreign
currencies would limit any potential gain which might be realized by a Fund if
the value of the hedged currency increases. A Fund may enter into these
contracts for the purpose of hedging against foreign exchange risks arising from
the Funds' investment or anticipated investment in securities denominated in
foreign currencies. Suitable hedging transactions may not be available in all
circumstances. Also, such hedging transactions may not be successful and may
eliminate any chance for a Fund to benefit from favorable fluctuations in
relevant foreign currencies.
The International, International Growth, Structured Emerging Markets and
Tax-Efficient Structured Emerging Markets Funds may also enter into forward
foreign currency exchange contracts for purposes of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
currency to another. To the extent that they do so, the International,
Structured Emerging Markets and Tax-Efficient Structured Emerging Markets Funds
will be subject to the additional risk that the relative value of currencies
will be different than anticipated by the particular Fund's Sub-Adviser. A Fund
may use one currency (or a basket of currencies) to hedge against adverse
changes in the value of another currency (or a basket of currencies) when
exchange rates between the two currencies are positively correlated. A Fund
will segregate assets determined to be liquid by the Adviser or a Sub-Adviser in
accordance with procedures established by the Board of Trustees to cover forward
currency contracts entered into for non-hedging purposes. The Funds may also
use foreign currency futures contracts and related options on currencies for the
same reasons for which forward foreign currency exchange contracts are used.
Special Risks Associated with the Introduction of the Euro. The recent
introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the European Economic and Monetary Union
presents unique uncertainties for European securities in the markets in which
they trade and with respect to the operation of the Funds that invest in
securities denominated in European currencies and other European securities.
The introduction of the euro will result in the redenomination of European debt
and equity securities over a period of time. Uncertainties raised by the
introduction of the euro include whether the payment and operational systems of
banks and other financial institutions will be ready by the scheduled launch
date, the creation of suitable clearing and settlement payment systems for the
new currency, the valuation and legal treatment of outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro and adverse accounting or tax consequences that may arise from the
transition to the euro. These or other factors could cause market disruptions
and could adversely affect the value of securities and foreign currencies held
by the Funds.
Bank Obligations
Bank obligations in which the Funds may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no
-14-
<PAGE>
market for such deposits. A Fund will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its net assets (taken at market value at the time of investment) would be
invested in such deposits, repurchase agreements maturing in more than seven
days and other illiquid assets. Each Fund may also hold funds on deposit with
its sub-custodian bank in an interest-bearing account for temporary purposes.
Each Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Renaissance, Growth, Target, Core Equity, Mid-Cap Equity, Opportunity,
Innovation, International, Structured Emerging Markets, Tax-Efficient Structured
Emerging Markets, International Growth, Precious Metals and Balanced Funds limit
their investments in foreign bank obligations to obligations of foreign banks
(including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) are among the 75 largest foreign banks in the
world in terms of total assets; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the relevant Sub-Adviser, are of an investment quality
comparable to obligations of United States banks in which the Funds may invest.
Subject to each Fund's limitation on concentration of no more than 25% of its
assets in the securities of issuers in a particular industry, there is no
limitation on the amount of a Fund's assets which may be invested in obligations
of foreign banks which meet the conditions set forth above.
Obligations of foreign banks involve certain risks associated with
investing in foreign securities described under "Foreign Securities" above,
including the possibilities that their liquidity could be impaired because of
future political and economic developments, that their obligations may be less
marketable than comparable obligations of United States banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized, that foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal and interest on those obligations and
that the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
Commercial Paper
All Funds may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Funds consists of U.S. dollar-denominated obligations of
domestic issuers, or, additionally for the Renaissance, Growth, Target, Core
Equity, Mid-Cap Equity, Opportunity, Innovation, Structured Emerging Markets,
Tax-Efficient Structured Emerging Markets, International, International Growth,
Precious Metals and Balanced Funds, foreign currency-denominated obligations of
domestic or foreign issuers which, at the time of investment, are (i) rated "P-
1" or "P-2" by Moody's or "A-1" or "A-2" or better by S&P, (ii) issued or
guaranteed as to principal and interest by issuers or guarantors having an
existing debt security rating of "A" or better by Moody's or "A" or better by
S&P, or (iii) securities which, if not rated, are, in the opinion of the 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.
-15-
<PAGE>
Derivative Instruments
The following describes certain derivative instruments and products in
which the Funds may invest (to the extent described in the Prospectuses and
under "Investment Restrictions" below) and risks associated therewith.
The Funds might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. Also, suitable
derivative and/or hedging transactions may not be available in all circumstances
and there can be no assurance that a Fund will be able to identify or employ a
desirable derivative and/or hedging transaction at any time or from time to
time.
Options on Securities and Indexes. A Fund may, to the extent specified for
the Fund in the Prospectuses and under "Investment Restrictions" below, purchase
and sell both put and call options on fixed income or other securities or
indexes in standardized contracts traded on foreign or domestic securities
exchanges, boards of trade, or similar entities, or quoted on National
Association of Securities Dealers Automated Quotations ("NASDAQ") or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of
the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Sub-Adviser in accordance with procedures established by the Board of
Trustees in such amount are segregated) upon conversion or exchange of other
securities held by the Fund. For a call option on an index, the option is
covered if the Fund segregates assets determined to be liquid by the Adviser or
a Sub-Adviser in accordance with procedures established by the Board of Trustees
in an amount equal to the contract value of the index. A call option is also
covered if the Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written, provided the difference is segregated by the Fund in assets
determined to be liquid by the Adviser or a Sub-Adviser in accordance with
procedures established by the Board of Trustees. A put option on a security or
an index is "covered" if the Fund segregates assets determined to be liquid by
the Sub-Adviser in accordance with procedures established by the Board of
Trustees equal to the exercise price. A put option is also covered if the Fund
holds a put on the same security or index as the put written where the exercise
price of the put held is (i) equal to or greater than the exercise price of the
put written, or (ii) less than the exercise price of the put written, provided
the difference is segregated by the Fund in assets determined to be liquid by
the Adviser or a Sub-Adviser in accordance with procedures established by the
Board of Trustees.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by a Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
-16-
<PAGE>
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is recorded
as a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
OTC Options. The Renaissance, Growth, Target, Opportunity, Innovation,
International, International Growth and Precious Metals Funds may enter into
over-the-counter ("OTC") options transactions only with primary dealers in U.S.
Government securities and only pursuant to agreements that will assure that the
relevant Fund will at all times have the right to repurchase the option written
by it from the dealer at a specified formula price. The Funds will treat the
amount by which such formula price exceeds the intrinsic value of the option
(i.e., the amount, if any, by which the market price of the underlying security
exceeds the exercise price of the option) as an illiquid investment.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options on securities and on indexes. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option may expire worthless. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Fund forgoes,
during the option's life, the opportunity to profit from increases in the market
value of the security covering the call option above the sum of the premium and
the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Foreign Currency Options. Each of the Funds that may buy or sell foreign
currencies may buy or sell put and call options on foreign currencies either on
exchanges or in the over-the-counter market. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the
exercise price until the option expires. A call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options.
Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified in the
Prospectuses. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument, foreign currency or the cash value
of an index at a specified price and time.
-17-
<PAGE>
For instance, futures contract on a securities index (an "Index Future") is
an agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of a securities index
("Index") at the close of the last trading day of the contract and the price at
which the index contract was originally written. Although the value of an Index
might be a function of the value of certain specified securities, no physical
delivery of these securities is made. A unit is the value of the relevant Index
from time to time. Entering into a contract to buy units is commonly referred
to as buying or purchasing a contract or holding a long position in an Index.
Index Futures contracts can be traded through all major commodity brokers. A
Fund's purchase and sale of Index Futures is limited to contracts and exchanges
which have been approved by the CFTC. A Fund will ordinarily be able to close
open positions on the futures exchange on which Index Futures are then traded at
any time up to and including the expiration day. As described below, a Fund
will be required to segregate initial margin in the name of the futures broker
upon entering into an Index Future. Variation margin will be paid to and
received from the broker on a daily basis as the contracts are marked to market.
For example, when a Fund has purchased an Index Future and the price of the
relevant Index has risen, that position will have increased in value and the
Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when a Fund has purchased an Index Future and
the price of the relevant Index has declined, the position would be less
valuable and the Fund would be required to make a variation margin payment to
the broker.
The following example illustrates generally the manner in which Index
Futures operate. The Standard & Poor's 100 Stock Index is composed of 100
selected common stocks, most of which are listed on the New York Stock Exchange.
The S&P 100 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract
would be worth $18,000 (100 units x $180). The Index Future specifies that no
delivery of the actual stocks making up the Index will take place. Instead,
settlement in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and the actual level
of the Index at the expiration of the contract. For example, if a Fund enters
into a futures contract to buy 100 units of the S&P 100 Index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $184 on that
future date, the Fund will gain $400 (100 units x gain of $4). If the Fund
enters into a futures contract to sell 100 units of the Index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on that
future date, the Fund will lose $200 (100 units x loss of $2).
A public market exists in futures contracts covering a number of Indexes as
well as financial instruments and foreign currencies, including but not limited
to: the S&P 500; the S&P Midcap 400; the Nikkei 225; the NYSE composite; U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit;
Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar;
the British pound; the German mark; the Japanese yen; the French franc; the
Swiss franc; the Mexican peso; and certain multinational currencies, such as the
European Currency Unit ("ECU"). It is expected that other futures contracts in
which the Funds may invest will be developed and traded in the future.
Certain Funds may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the holder acquires a short
position and the writer is assigned the opposite long position.
A Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or in the case of futures options, for which an established
over-the-counter market exists.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to segregate a specified amount of assets determined to be liquid by
the Adviser or a Sub-Adviser in accordance with procedures established by the
Board of Trustees ("initial margin"). The margin required for a futures
contract is set by the
-18-
<PAGE>
exchange on which the contract is traded and may be modified during the term of
the contract. Margin requirements on foreign exchanges may be different than
U.S. exchanges. The initial margin is in the nature of a performance bond or
good faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (i.e.,
with the same exchange, underlying security or index, and delivery month). If
an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. Any transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. The Funds may enter
into positions in futures contracts and related options for "bona fide hedging"
purposes. In addition, certain Funds may utilize futures contracts for
investment purposes. For instance, the International, International Growth,
Structured Emerging Markets and Tax-Efficient Structured Emerging Markets Funds
may invest to a significant degree in Index Futures on stock indexes and related
options (including those which may trade outside of the United States) as an
alternative to purchasing individual stocks in order to adjust their exposure to
a particular market. With respect to positions in futures and related options
that do not constitute bona fide hedging positions, a Fund will not enter into a
futures contract or futures option contract if, immediately thereafter, the
aggregate initial margin deposits relating to such positions plus premiums paid
by it for open futures option positions, less the amount by which any such
options are "in-the-money," would exceed 5% of the Fund's net assets. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-
money" if the exercise price exceeds the value of the futures contract that is
the subject of the option.
When purchasing a futures contract, a Fund will segregate (and mark-to-
market on a daily basis) assets determined to be liquid by the Adviser or a Sub-
Adviser in accordance with procedures established by the Board of Trustees that,
when added to the amounts deposited with a futures commission merchant as
margin, are equal to the total market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a put option on
the same futures contract with a strike price as high or higher than the price
of the contract held by the Fund.
When selling a futures contract, a Fund will segregate (and mark-to-market
on a daily basis) assets determined to be liquid by the Adviser or a Sub-Adviser
in accordance with procedures established by the Board of Trustees that are
equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an Index Future, a portfolio with a
volatility substantially similar to that of the Index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Trust's custodian).
When selling a call option on a futures contract, a Fund will segregate
(and mark-to-market on a daily basis) assets determined to be liquid by the
Adviser or a Sub-Adviser in accordance with procedures established by the
-19-
<PAGE>
Board of Trustees that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will segregate (and
mark-to-market on a daily basis) assets determined to be liquid by the Adviser
or a Sub-Adviser in accordance with procedures established by the Board of
Trustees that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the Fund may cover the position either by entering
into a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Fund.
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. Some of the risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation.
For example, if the price of the futures contract moves more than the price of
the hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. In addition, there are significant differences between the
securities and futures markets that could result in an imperfect correlation
between the markets, causing a given hedge not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options on
securities, including technical influences in futures trading and futures
options, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of issuers.
To compensate for imperfect correlations, a Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches. A decision as to whether, when and how to hedge involves
the exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected interest
rate trends. Also, suitable hedging transactions may not be available in all
circumstances.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
-20-
<PAGE>
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts and Forward Currency Exchange Contracts and Options thereon.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States;
may not involve a clearing mechanism and related guarantees; and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. Some foreign exchanges may be principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Trust's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume. In addition, unless a Fund hedges against fluctuations in the
exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that a Fund might realize in trading
could be eliminated by adverse changes in the exchange rate, or the Fund could
incur losses as a result of those changes.
Swap Agreements. The Tax-Efficient Equity, Structured Emerging Markets and
Tax-Efficient Structured Emerging Markets Funds may enter into equity index swap
agreements for purposes of attempting to gain exposure to the stocks making up
an index of securities in a market without actually purchasing those stocks.
The Balanced Fund may enter into swap agreements to hedge against changes in
interest rates, foreign currency exchange rates or securities prices. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested in a
"basket" of securities representing a particular index.
Most swap agreements entered into by the Funds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counter party will be covered by segregating assets
determined to be liquid by the Adviser or a Sub-Adviser in accordance with
procedures established by the Board of Trustees, to avoid any potential
leveraging of the Fund's portfolio. Obligations under swap agreements so covered
will not be construed to be "senior securities" for purposes of a Fund's
investment restriction concerning senior securities. A Fund will not enter into
a swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Sub-Adviser's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Funds will enter into swap
agreements only with counter parties that meet certain standards of
creditworthiness (generally, such counter parties would have to be eligible
counter parties under the terms of the Funds' repurchase agreement guidelines).
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
-21-
<PAGE>
When-Issued, Delayed Delivery and Forward Commitment Transactions
A Fund may purchase or sell securities on a when-issued or delayed delivery
basis. These transactions involve a commitment by the Fund to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Fund will segregate until the settlement date
assets determined to be liquid by the Adviser or a 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 a 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 a Fund is not required to pay for the security until the delivery date,
these risks are in addition to the risks associated with the Fund's other
investments. If the Fund remains substantially fully invested at a time when
delayed delivery purchases are outstanding, the delayed delivery purchases may
result in a form of leverage. When the Fund has sold a security on a delayed
delivery basis, the Fund does not participate in future gains or losses with
respect to the security. If the other party to a delayed delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or could suffer a loss. A Fund may dispose of or
renegotiate a delayed delivery transaction after it is entered into, and may
sell when-issued securities before they are delivered, which may result in a
capital gain or loss. There is no percentage limitation on the extent to which
the Funds may purchase or sell securities on a delayed delivery basis.
Each Fund may make contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the Fund
either (i) segregates until the settlement date assets determined to be liquid
by the Adviser or a 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. Certain Funds may enter into forward commitments for the
purchase or sale of foreign currencies. Forward commitments may be considered
securities in themselves. They involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. A Fund may
dispose of a commitment prior to settlement and may realize short-term profits
or losses upon such disposition.
Warrants to Purchase Securities
Certain Funds may invest in warrants to purchase equity or fixed income
securities. Bonds with warrants attached to purchase equity securities have
many characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value.
Metal-Indexed Notes and Precious Metals
The Precious Metals Fund may invest in notes, the principal amount or
redemption price of which is indexed to, and thus varies directly with, changes
in the market price of gold bullion or other precious metals ("Metal-Indexed
Notes"). It is expected that the value of Metal-Indexed Notes will be as
volatile as the price of the underlying metal.
The Precious Metals Fund will only purchase Metal-Indexed Notes which are
rated investment grade or are issued by issuers that have outstanding debt
obligations rated investment grade or commercial paper rated in the top rating
category by any NRSRO, or Metal-Indexed Notes issued by issuers that the Sub-
Adviser has determined to be of similar creditworthiness. Debt obligations
rated in the fourth highest rating category by an NRSRO are considered to have
some speculative characteristics. The Metal-Indexed Notes might be backed by a
bank letter of credit,
-22-
<PAGE>
performance bond or might be otherwise secured, and any such security, which
would be held by the Fund's custodian, would be taken into account in
determining the creditworthiness of the securities. The Precious Metals Fund
might purchase unsecured Metal-Indexed Notes if the issuer thereof met the
Fund's credit standards without any such security. While the principal amount or
redemption price of Metal-Indexed Notes would vary with the price of the
resource, such securities would not be secured by a pledge of the resource or
any other security interest in or claim on the resource. In the case of Metal-
Indexed Notes not backed by a performance bond, letter of credit or similar
security, it is expected that such securities generally would not be secured by
any other specific assets.
The Precious Metals Fund anticipates that if Metal-Indexed senior
securities were to be purchased, such securities would be issued by precious
metals or commodity brokers or dealers, by mining companies, by commercial banks
or by other financial institutions. Such issuers would issue notes to hedge
their inventories and reserves of the resource, or to borrow money at a
relatively low cost (which would include the nominal rate of interest paid on
Metal-Indexed Notes, described below, and the cost of hedging the issuer's
metals exposure). The Precious Metals Fund would not purchase a Metal-Indexed
Note issued by a broker or dealer if as a result of such purchase more than 5%
of the value of the Fund's total assets would be invested in securities of such
issuer. The Precious Metals Fund might purchase Metal-Indexed Notes from
brokers or dealers which are not also securities brokers or dealers. Precious
metals or commodity brokers or dealers are not subject to supervision or
regulation by any governmental authority or self-regulatory organization in
connection with the issuance of Metal-Indexed Notes.
Until fairly recently, there were no Metal-Indexed Notes outstanding and
consequently there is no secondary trading market for such securities. Although
a limited secondary market might develop among institutional traders, there is
no assurance that such a market will develop. No public market is expected to
develop, since the Precious Metals Fund expects that Metal-Indexed Notes will
not be registered under the 1933 Act, and therefore disposition of such
securities, other than to the issuer thereof (as described below), would be
dependent upon the availability of an exemption from such registration.
Any Metal-Indexed Notes which the Precious Metals Fund might purchase
generally will have maturities of one year or less. Such notes, however, will
be subject to being called for redemption by the issuer on relatively short
notice. In addition, it is expected that the Metal-Indexed Notes will be
subject to being put by the Precious Metals Fund to the issuer or to a stand-by
broker meeting the credit standards set forth above, with payments being
received by the Precious Metals Fund on no more than seven days' notice. A
stand-by broker might be a securities broker-dealer, in which case the Precious
Metals Fund's investment will be limited by applicable regulations of the
Securities and Exchange Commission (the "SEC"). The put feature of the Metal-
Indexed Notes will ensure liquidity even in the absence of a secondary trading
market. The securities will be repurchased upon exercise of the holder's put at
the specified exercise price, less repurchase fees, if any, which are not
expected to exceed 1% of the redemption or repurchase proceeds. Depending upon
the terms of particular Metal-Indexed Notes, there might be a period as long as
five days between the date upon which the Precious Metals Fund notifies the
issuer of the exercise of the put and determination of the sale price.
It is expected that any Metal-Indexed Notes which the Precious Metals Fund
might purchase will bear interest or pay preferred dividends at relatively
nominal rates under 2% per annum. The Precious Metals Fund's holdings of such
senior securities therefore would not generate appreciable current income, and
the return from such senior securities would be primarily from any profit on the
sale or maturity thereof at a time when the price of the relevant precious metal
is higher than it was when the senior securities were purchased.
Repurchase Agreements
Each of the Funds may enter into repurchase agreements with domestic
commercial banks or registered broker/dealers. A repurchase agreement is a
contract under which a Fund would acquire a security for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). In the case of repurchase
agreements with broker-dealers, the value of the underlying securities (or
collateral) will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. The Fund bears a risk of
loss in the
-23-
<PAGE>
event that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities. The Adviser and the Sub-Advisers, as appropriate,
will monitor the creditworthiness of the counter parties.
Securities Loans
Subject to certain conditions described in the Prospectuses, each of the
Equity Income, Value, Tax-Efficient Equity, Enhanced Equity, Value 25, Capital
Appreciation, Mid-Cap Growth, Small-Cap Value, Small-Cap Growth, Core Equity,
Mid-Cap Equity, Target, Micro-Cap Growth, Structured Emerging Markets, Tax-
Efficient Structured Emerging Markets and Balanced Funds may make secured loans
of its portfolio securities amounting to no more than 33 1/3% of its total
assets, and each of the Renaissance, Growth, Opportunity, Innovation,
International, International Growth and Precious Metals Funds may make such
loans amounting to no more than 25% of its total assets. The risks in lending
portfolio securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Adviser or the Sub-Advisers 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.
Equity-Linked Securities
Each of the Structured Emerging Markets and Tax-Efficient Structured
Emerging Markets Funds may invest up to 15% of its net assets in equity-linked
securities. Equity-linked securities are privately issued securities whose
investment results are designed to correspond generally to the performance of a
specified stock index or "basket" of stocks, or sometimes a single stock.
Investing in equity-linked securities involves risks similar to the risks of
investing in foreign equity securities. See "Foreign Securities" in this
Statement of Additional Information. In addition, the Funds bear the risk that
the issuer of an equity-linked security may default on its obligations under the
security. Equity-linked securities may be considered illiquid and thus subject
to the Funds' restrictions on investments in illiquid securities.
Investment Strategies of the Portfolios - Incorporation by Reference
The 90/10 Portfolio, 60/40 Portfolio and 30/70 Portfolio invest all of
their assets in Underlying PIMCO Funds, which include certain Funds of the Trust
and series of PIMS as specified in the Retail Portfolio Prospectus and
Institutional Portfolio Prospectus. By investing in Underlying PIMCO Funds, the
Portfolios may be subject to some or all of the risks associated with the
securities, instruments and techniques utilized by the Funds described above.
They may also be subject to additional risks associated with other securities,
instruments and techniques utilized by Underlying Funds which are series of
PIMS. The PIMS series and their attendant risks as described in the current
PIMS prospectus for Institutional Class and Administrative Class shares and PIMS
statement of additional information, which are included in the PIMS registration
statement (File Nos. 033-12113 and 811-5028) on file with the Securities and
Exchange Commission. The current PIMS prospectus and statement of additional
are each on file with the Securities and Exchange Commission and are
incorporated in this document by reference. The PIMS documents may also be
obtained free of charge by calling PIMCO Funds Distributors LLC at 1-800-426-
0107.
-24-
<PAGE>
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
The investment restrictions set forth below are fundamental policies of the
Renaissance, Growth, Target, Opportunity, Innovation, International,
International Growth and Precious Metals Funds and may not be changed with
respect to any such Fund without shareholder approval by vote of a majority of
the outstanding voting securities of that Fund. Under these restrictions, none
----
of the above-mentioned Funds may:
(1) borrow money in excess of 10% of the value (taken at the lower of cost
or current value) of such Fund's total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will be
repaid before any additional investments are purchased;
(2) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of such Fund's total assets (taken at cost) and then only to
secure borrowings permitted by Restriction (1) above. (The deposit of
securities or cash or cash equivalents in escrow in connection with the writing
of covered call or put options, respectively, is not deemed to be pledges or
other encumbrances.) (For the purpose of this restriction, collateral
arrangements with respect to the writing of options, futures contracts, options
on futures contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures or related options are deemed
to be the issuance of a senior security.);
(3) underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
(4) purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate, except that the Precious Metals Fund may purchase or sell
agricultural land;
(5) acquire more than 10% of the voting securities of any issuer, both
with respect to any such Fund and to the Funds to which this policy relates, in
the aggregate; or
(6) concentrate more than 25% of the value of its total assets in any one
industry; except that the Precious Metals Fund will concentrate more than 25% of
its total assets in securities of companies principally engaged in the
extraction, processing, distribution or marketing of precious metals, and the
Innovation Fund will concentrate more than 25% of its assets in companies which
use innovative technologies to gain a strategic, competitive advantage in their
industry as well as companies that provide and service those technologies.
The investment objective of each of the above-referenced Funds and the Tax-
Efficient Equity, Value 25 and Tax-Efficient Structured Emerging Markets Funds
is non-fundamental and may be changed with respect to each such Fund by the
Trustees without shareholder approval.
The investment restrictions set forth below are fundamental policies of
each of the Equity Income, Value, Tax-Efficient Equity, Enhanced Equity, Value
25, Capital Appreciation, Mid-Cap Growth, Small-Cap Value, Small-Cap Growth,
Core Equity, Mid-Cap Equity, Micro-Cap Growth, Tax-Efficient Structured Emerging
Markets, Structured Emerging Markets and Balanced Funds, and may not be changed
with respect to any such Fund without shareholder approval by vote of a majority
of the outstanding shares of that Fund. The investment objective of each of
these Funds (with the exception of the Tax-Efficient Equity, Value 25 and Tax-
Efficient Structured Emerging Markets Funds) is also fundamental and may not be
changed without such shareholder approval. Under the following restrictions,
none of the above-mentioned Funds may:
- ----
-25-
<PAGE>
(1) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of any
one issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one issuer, except
that this restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(4) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(5) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Fund may
engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(6) purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities, but it
may make margin deposits in connection with transactions in options, futures,
and options on futures, and except that effecting short sales will be deemed not
to constitute a margin purchase for purposes of this restriction;
(7) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Fund may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts as described in the Prospectuses
and in this Statement of Additional Information (the deposit of assets in escrow
in connection with the writing of covered put and call options and the purchase
of securities on a when-issued or delayed delivery basis and collateral
arrangements with respect to initial or variation margin deposits for futures
contracts, options on futures contracts, and forward foreign currency contracts
will not be deemed to be pledges of such Fund's assets);
(8) issue senior securities, except insofar as such Fund may be deemed to
have issued a senior security by reason of borrowing money in accordance with
the Fund's borrowing policies, and except for purposes of this investment
restriction, collateral, escrow, or margin or other deposits with respect to the
making of short sales, the purchase or sale of futures contracts or related
options, purchase or sale of forward foreign currency contracts, and the writing
of options on securities are not deemed to be an issuance of a senior security;
(9) lend any funds or other assets, except that such Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans, (b) enter into repurchase agreements and reverse
repurchase agreements, and (c) lend its portfolio securities in an 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.
-26-
<PAGE>
Notwithstanding the provisions of fundamental investment restrictions (7)
and (8) above, a Fund may borrow money for temporary administrative purposes.
To the extent that borrowings for temporary administrative purposes exceed 5% of
the total assets of a Fund, such excess shall be subject to the 300% asset
coverage requirement of fundamental investment restriction (7).
The investment restrictions set forth below are fundamental policies of the
90/10 Portfolio, the 60/40 Portfolio and the 30/70 Portfolio and may not be
changed with respect to any such Portfolio without shareholder approval by vote
of a majority of the outstanding voting securities of that Portfolio. Under
these restrictions, a Portfolio may not:
(1) invest in a security if, as a result of such investment, more than
25% of its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry,
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto) or securities issued by any investment company;
(2) purchase securities of any issuer unless such purchase is consistent
with the maintenance of the Portfolio's status as a diversified company under
the Investment Company Act of 1940, as amended;
(3) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(4) purchase or sell commodities or commodities contracts (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts or swap agreements), except that any such Portfolio
may engage in interest rate futures contracts, stock index futures contracts,
futures contracts based on other financial instruments or one or more groups of
instruments, and on options on such futures contracts;
(5) borrow money, or pledge, mortgage or hypothecate its assets, except
that a Portfolio may (i) borrow from banks or enter into reverse repurchase
agreements, or employ similar investment techniques, and pledge its assets in
connection therewith, but only if immediately after each borrowing and
continuing thereafter, there is asset coverage of 300% and (ii) enter into
reverse repurchase agreements and transactions in options, futures, options on
futures, and forward foreign currency contracts to the extent described in the
then current Prospectus(es) for the Portfolio and in this Statement of
Additional Information (the deposit of assets in escrow in connection with the
writing of covered put and call options and the purchase of securities on a
when-issued or delayed delivery basis and collateral arrangements with respect
to initial or variation margin deposits for futures contracts, options on
futures contracts, and forward foreign currency contracts will not be deemed to
be pledges of such Portfolio's assets);
(6) issue senior securities, except insofar as such Portfolio may be
deemed to have issued a senior security by reason of borrowing money in
accordance with the Portfolio's borrowing policies, and except for purposes of
this investment restriction, collateral, escrow, or margin or other deposits
with respect to the making of short sales, the purchase or sale of futures
contracts or related options, purchase or sale of forward foreign currency
contracts, and the writing of options on securities are not deemed to be an
issuance of a senior security;
(7) lend any funds or other assets, except that such Portfolio may,
consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures, or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans, (b) enter into repurchase agreements
and reverse repurchase agreements, and (c) lend its portfolio securities in an
amount not to exceed one-third of the value of its total assets, provided such
loans are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the Trustees of the Trust; or
(8) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the federal securities laws.
-27-
<PAGE>
Notwithstanding the provisions of fundamental investment restrictions (5)
and (6) above, a Portfolio may borrow money for temporary administrative
purposes. To the extent that borrowings for temporary administrative purposes
exceed 5% of the total assets of a Portfolio, such excess shall be subject to
the 300% asset coverage requirement of fundamental investment restriction (5).
Notwithstanding any other fundamental investment restriction or policy,
each Portfolio may invest some or all of its assets in a single registered open-
end investment company or a series thereof. Unless specified above, any
fundamental investment restriction or policy of any such registered open-end
investment company or series thereof shall not be considered a fundamental
investment restriction or policy of a Portfolio investing therein.
The investment objective of each of the Portfolios is non-fundamental and
may be changed with respect to each such Portfolio by the Trustees without
shareholder approval.
Non-Fundamental Investment Restrictions
Each Fund (but not any Portfolio) is also subject to the following non-
fundamental restrictions and policies (which may be changed without shareholder
approval) and, unless otherwise indicated, may not:
(1) invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities the disposition of which is restricted under
federal securities laws, (c) repurchase agreements maturing in more than seven
days, (d) OTC options (to the extent described above under "Derivative
Instruments -- OTC Options"), and (e) IO/PO SMBS (as described above under
"Mortgage-Related and Asset-Backed Securities -- Stripped Mortgage - Backed
Securities") if, as a result, more than 15% of a Fund's net assets, taken at
current value, would then be invested in securities described in (a), (b), (c),
(d) and (e) above. For the purpose of this restriction, securities subject to a
7-day put option or convertible into readily saleable securities or commodities
are not included with subsections (a) or (b);
(2) purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment by a Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.);
(3) make short sales of securities or maintain a short position for the
account of a Fund unless at all times when a short position is open such Fund
owns an equal amount of such securities or owns or has the right to acquire
securities which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short;
(4) purchase or sell commodities or commodity contracts except that a Fund
may purchase and sell financial futures contracts and related options and the
Precious Metals Fund may purchase and sell precious metals and other commodities
and futures thereon;
(5) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth and Precious Metals Funds, make
loans, except by purchase of debt obligations or by entering into repurchase
agreements or through the lending of the Fund's portfolio securities with
respect to not more than 25% of its total assets (33 1/3% in the case of the
Target Fund);
(6) with respect to the Renaissance, Growth, Target, Opportunity,
Innovation, International, International Growth and Precious Metals Funds, and
in each case with respect to 75% of such Fund's total assets, invest in
securities of any issuer if, immediately after such investment, more than 5% of
the total assets of such Fund (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not apply to bank
certificates of deposit or to obligations issued or guaranteed as to interest
and principal by the U.S. government or its agencies or instrumentalities;
-28-
<PAGE>
(7) purchase securities the disposition of which is restricted under the
federal securities laws (excluding for purposes of this restriction securities
offered and sold pursuant to Rule 144A of the 1933 Act and Section 4(2)
commercial paper) if, as a result, such investments would exceed 15% of the
value of the net assets of the relevant Fund;
(8) write (sell) or purchase options except that each Fund may (a) write
covered call options or covered put options on securities that it is eligible to
purchase and enter into closing purchase transactions with respect to such
options, and (b) in combination therewith, or separately, purchase put and call
options on securities it is eligible to purchase, and (c) each Fund may engage
in options on securities indexes, options on foreign currencies, options on
futures contracts, and options on other financial instruments or one or more
groups of instruments; provided that the premiums paid by each Fund on all
outstanding options it has purchased do not exceed 5% of its total assets. Each
Fund may enter into closing sale transactions with respect to options it has
purchased;
(9) invest more than 15% of the net assets of a Fund (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include repurchase agreements maturing in more than
seven days, certain loan participation interests, fixed time deposits which are
not subject to prepayment or provide withdrawal penalties upon prepayment (other
than overnight deposits), or other securities which legally or in the Adviser's
or Sub-Adviser's opinion may be deemed illiquid (other than securities issued
pursuant to Rule 144A under the 1933 Act and certain commercial paper that the
Adviser or Sub-Adviser has determined to be liquid under procedures approved by
the Board of Trustees); or
(10) borrow money (excluding reverse repurchase agreements which are
subject to such Fund's fundamental borrowing restriction), except for temporary
administrative purposes.
The Trust has not adopted any non-fundamental investment restrictions or
policies for the 90/10 Portfolio, 60/40 Portfolio or 30/70 Portfolio.
Unless otherwise indicated, all limitations applicable to a Fund's or
Portfolio'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 a Fund's or Portfolio's assets invested in certain securities or
other instruments resulting from market fluctuations or other changes in a
Fund's or Portfolio's total assets will not require the Fund or Portfolio to
dispose of an investment until the Adviser or Sub-Adviser determines that it is
practicable to sell or close out the investment without undue market or tax
consequences to the Fund or Portfolio. In the event that ratings services
assign different ratings to the same security, the Adviser or 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 Prospectuses, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund, the Portfolio or the Trust, as the case may be,
or (2) 67% or more of the shares of the Fund, the Portfolio or the Trust, as the
case may be, present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
MANAGEMENT OF THE TRUST
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.
-29-
<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 of
3838 Olympia Inverness Management LLC, a private equity
Houston, TX 77019 investment firm. Formerly, Headmaster, St. John's
Age 58 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, Cunningham
Lake Forest, IL 60045 & Walsh, Inc., Chicago, an advertising agency.
Age 72
Gary A. Childress Trustee Private investor. Formerly, Chairman and Director,
11 Longview Terrace Bellefonte Lime Company, Inc. Mr. Childress is a
Madison, CT 06443 partner in GenLime, L.P., a private limited
Age 65 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 Executive
800 Newport Center Drive Officer, President, and member of the Management
Newport Beach, CA 92660 Board, PIMCO Advisors; President and Chief
Age 50 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; Director,
8 Cherry Hills Lane Wynn's International, Inc., a building supplies
Newport Beach, CA 92660 company; and Trustee, Pacific Select Fund.
Age 69 Formerly, Partner, Ernst & Young.
</TABLE>
-30-
<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 Select Fund.
Newport Beach, CA 92660
Age 69
Alan Richards Trustee Retired Chairman of E.F. Hutton Insurance Group;
7381 Elegans Place Former Director of E.F. Hutton and Company, Inc.;
Carlsbad, CA 92009 Chairman of IBIS Capital, LLC, a reverse mortgage
Age 69 company; Director, Inspired Arts, Inc.; Former
Director of Western National Corporation.
Joel Segall Trustee Formerly, Trustee of PAF and CAT, President and
11 Linden Shores University Professor, Bernard M. Baruch College,
Branford, CT 06405 The City University of New York; Deputy Under
Age 76 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.; Director,
1530 E. Montebello American Agritec LLC, a manufacturer of
Phoenix, AZ 85014 hydrophonics products; and Director, Valley Isle
Age 58 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, Trustee of
Savannah, GA 31414 PAF and CAT; Director, Kaytee, Inc., a birdseed
Age 61 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.
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
-------------------- --------------------------------------------
Name, Address and Age Trust Years
- --------------------- ----- -----
<S> <C> <C>
Stephen J. Treadway* Trustee, President and Executive Vice President, PIMCO Advisors;
2187 Atlantic Street Chief Executive Officer Chairman and President, PIMCO Funds Distributors
Stamford, CT 06902 LLC ("PFD"); Executive Vice President, Value
Age 51 Advisors LLC; 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.
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 (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;
Stamford, CT 06902 Senior Vice President, Value Advisors LLC;
Age 57 Executive Vice 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
Age 36 and 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.
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Position(s) With the Principal Occupation(s) During the Past Five
-------------------- --------------------------------------------
Name, Address and Age Trust Years
- --------------------- ----- -----
<S> <C> <C>
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.
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, a Sub-Adviser, or
Pacific Investment Management, 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.
-33-
<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>
(1) (2) (3)
Total
Aggregate Compensation
Compensation from from Trust and
Name of Trustee Trust Fund 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 each of the Funds and
Portfolios pursuant to an investment advisory agreement ("Advisory Agreement")
between PIMCO Advisors and the Trust. PIMCO Advisors was organized as a limited
partnership under Delaware law in 1987. PIMCO Partners, G.P. ("PGP") and PIMCO
Advisors Holdings L.P. ("PAH") are the general partners of PIMCO Advisors. PGP
is a general partnership between PIMCO Holding LLC ("PH LLC"), a Delaware
limited liability company and an indirect wholly-owned subsidiary of Pacific
Life Insurance Company, and PIMCO Partners LLC, a California limited liability
company controlled by the current Managing Directors and two former Managing
Directors of Pacific Investment Management (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.
-34-
<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 $248.7 billion of assets under management as of March 31,
1999.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for providing advice and guidance with respect to the Funds and
Portfolios and for managing, either directly or through others selected by the
Adviser, the investment of the Funds and Portfolios. PIMCO Advisors also
furnishes to the Board of Trustees periodic reports on the investment
performance of each Fund and Portfolio. For all of the Funds except the Growth,
Target, Opportunity, Innovation, Renaissance, Core Equity, Mid-Cap Equity,
International Growth and Precious Metals Funds, PIMCO Advisors has engaged
affiliates to serve as Sub-Advisers. The PIMCO Equity Advisors division ("PIMCO
Equity Advisors") of PIMCO Advisors manages the investment portfolios of the
Growth, Target, Opportunity, Innovation, Renaissance, Core Equity, Mid-Cap
Equity and International Growth Funds. Acting in this capacity, PIMCO Equity
Advisors is also referred to herein as a "Sub-Adviser." If a Sub-Adviser ceases
to manage the portfolio of a Fund, PIMCO Advisors will either assume full
responsibility for the management of that Fund, or retain a new Sub-Adviser
subject to the approval of the Trustees and, if required, the Fund's
shareholders.
PIMCO Advisors' Asset Allocation Committee is responsible for determining
how the assets of the 90/10 Portfolio, the 60/40 Portfolio and the 30/70
Portfolio are allocated and reallocated from time to time among the Underlying
PIMCO Funds. The Portfolios do not pay any fees to PIMCO Advisors in return for
these services under the Advisory Agreement. The Portfolios do, however,
indirectly pay a proportionate share of the advisory fees paid to PIMCO Advisors
and Pacific Investment Management Company by the Underlying PIMCO Funds in which
the Portfolios invest.
Under the terms of the Advisory Agreement, PIMCO Advisors is obligated to
manage the Funds and the Portfolios in accordance with applicable laws and
regulations. The investment advisory services of PIMCO Advisors to the Trust
are not exclusive under the terms of the Advisory Agreement. PIMCO Advisors is
free to, and does, render investment advisory services to others.
The Advisory Agreement will continue in effect with respect to a Fund and
Portfolio for two years from its effective date, and thereafter on a yearly
basis, provided such continuance is approved annually (i) by the holders of a
majority of the outstanding voting securities of the Fund or Portfolio, or by
the Board of Trustees, and (ii) by a majority of the Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Advisory Agreement. The Advisory
Agreement may be terminated without penalty by vote of the Trustees or the
shareholders of the Trust, or by the Adviser, on 60 days' written notice to the
other party and will terminate automatically in the event of its assignment. In
addition, the Advisory Agreement may be terminated with regard to the
Renaissance, Growth, Target, Opportunity, Innovation, International and Precious
Metals Funds by vote of a majority of the Trustees who are not interested
persons of PIMCO Advisors, on 60 days' written notice to PIMCO Advisors.
-35-
<PAGE>
The Adviser currently receives a monthly investment advisory fee from each
Fund at the following annual rates (based on the average daily net assets of the
particular Funds):
<TABLE>
<CAPTION>
Fund Advisory
- ----
Fee Rate
--------
<S> <C>
Equity Income, Value, Tax-Efficient Equity, Capital Appreciation,
Mid-Cap Growth, Structured Emerging Markets,
Tax-Efficient Structured
Emerging Markets,
Enhanced Equity and Balanced Funds................................. .45%
Growth and Value 25 Funds............................................ .50%
International and Target Funds....................................... .55%
Core Equity Fund..................................................... .57%
Small-Cap Value, Renaissance and Precious Metals
Funds............................................................... .60%
Mid-Cap Equity Fund.................................................. .63%
Opportunity and Innovation Funds..................................... .65%
International Growth Fund............................................ .85%
Small-Cap Growth Fund................................................ 1.00%
Micro-Cap Growth Fund................................................ 1.25%
</TABLE>
-36-
<PAGE>
For the fiscal years ended June 30, 1998, June 30, 1997 and June 30, 1996
(the fiscal year ended June 30, 1996 being an eight-month period) the Funds paid
the Adviser (or its predecessor) the following amounts under the Advisory
Contract:
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
Fund 6/30/98 6/30/97 6/30/96
- ---- ------- ------- -------
<S> <C> <C> <C>
Equity Income Fund $ 795,252 $ 555,146 $ 425,899
Value Fund 951,140 463,869 65,873
Small-Cap Value Fund 1,395,130 249,347 156,721
Core Equity Fund 504,760 234,333 145,931
Mid-Cap Equity Fund 53,956 48,656 35,315
Capital Appreciation Fund 3,627,790 1,953,374 883,498
Mid-Cap Growth Fund 2,622,029 1,219,531 617,546
Micro-Cap Growth Fund 2,759,876 1,390,317 669,726
Small-Cap Growth Fund 411,785 327,245 426,098
Enhanced Equity Fund 199,467 292,187 274,512
Emerging Markets Fund/(1)/ 349,026 568,277 440,978
International Developed Fund/(1)/ 653,050 525,817 294,777
Balanced Fund 300,049 306,756 235,529
Renaissance Fund* 3,010,051 913,256 N/A
Growth Fund* 9,329,701 3,758,433 N/A
Target Fund* 6,607,151 2,887,743 N/A
Opportunity Fund* 5,172,363 2,324,663 N/A
Innovation Fund* 2,028,712 750,414 N/A
International Fund* 922,680 559,353 N/A
International Growth Fund** 24,756 N/A N/A
Precious Metals Fund* 165,918 119,710 N/A
Tax Exempt Fund*/(1)/ 144,515 66,977 N/A
----------- ----------- ----------
TOTAL $42,029,157 $19,515,404 $4,672,403
</TABLE>
- --------------
* Amounts for the year ended June 30, 1997 are for the period 1/18/97 through
6/30/97.
** Amounts for the year ended June 30, 1998 are for the period 12/31/97 through
6/30/98.
(1) The Tax Exempt Fund merged with and into the Municipal Bond Fund of PIMS in
a transaction which took place on June 26, 1998. The Tax Exempt Fund was
liquidated in connection with the transaction and is no longer a series of the
Trust. The International Developed and Emerging Markets Funds reorganized with
and into newly formed series of Alleghany Funds in a transaction which took
place on April 30, 1999. The International Developed and Emerging Markets Funds
were liquidated in connection with the transaction and are no longer series of
the Trust.
-37-
<PAGE>
In addition, the predecessors of the Renaissance, Growth, Target,
Opportunity, Innovation, International, Precious Metals and Tax Exempt Funds
(each of which is a former series of PAF which reorganized as a Fund of the
Trust on January 17, 1997) paid the Adviser the following amounts for the fiscal
period ended January 17, 1997 and the fiscal year ended September 30, 1996 under
separate management contracts between the Adviser and PAF:
<TABLE>
<CAPTION>
10/1/96 Year
to Ended
Fund 1/17/97 9/30/96
- ---- ------- -------
<S> <C> <C>
Renaissance Fund $ 653,744 $ 1,627,632
Growth Fund 3,370,567 9,987,541
Target Fund 2,584,257 7,295,767
Opportunity Fund 1,898,337 6,183,575
Innovation Fund 545,586 1,063,584
International Fund 537,647 1,872,608
Precious Metals Fund 107,290 397,969
Tax Exempt Fund 99,023 333,349
---------- -----------
TOTAL $9,796,451 $28,762,025
</TABLE>
Portfolio Management Agreements
PIMCO Equity Advisors manages the investment portfolios of the Growth,
Target, Opportunity, Innovation, Renaissance, Core Equity, Mid-Cap Equity and
International Growth Funds. The Adviser employs Sub-Advisers to provide
investment advisory services to each other Fund pursuant to portfolio management
agreements (each a "Portfolio Management Agreement") between the Adviser and the
Fund's Sub-Adviser. Each Sub-Adviser retained by the Adviser is an affiliate
of the Adviser except for Van Eck Associates Corporation ("Van Eck"), which
advises the Precious Metals Fund, and Blairlogie Capital Management
("Blairlogie"), which advises the International Fund. The Adviser currently has
eight subsidiary partnerships, the following four of which manage one or more of
the Funds: Pacific Investment Management, Parametric Portfolio Associates
("Parametric"), Cadence Capital Management ("Cadence") and NFJ Investment Group
("NFJ"). On April 30, 1999, the Adviser sold all of its ownership interest in
Blairlogie. See "Blairlogie" below.
Pacific Investment Management
- -----------------------------
Pursuant to a Portfolio Management Agreement between the Adviser and Pacific
Investment Management, Pacific Investment Management provides investment advice
with respect to the portion of the assets of the Balanced Fund allocated by the
Adviser for investment in fixed income securities. For the services provided,
the Adviser (not the Trust) pays Pacific Investment Management a fee at the
annual rate of .25% of the average daily net assets of the Balanced Fund
allocated to Pacific Investment Management for investment in fixed income
securities.
Pacific Investment Management is an investment management firm organized as
a general partnership. Pacific Investment Management has two partners: PIMCO
Advisors as the supervisory partner, and PIMCO Management Inc. as the managing
partner. The predecessor investment adviser to Pacific Investment Management
commenced operations in 1971. Pacific Investment Management is located at 840
Newport Center Drive, Suite 300, Newport Beach, California 92660. Pacific
Investment Management provides advisory services to PIMCO Funds, PIMCO Variable
Insurance Trust, PIMCO Commercial Mortgage Securities Trust, Inc., which is a
closed-end management investment company, managed accounts consisting of
proceeds from various pension and profit sharing plans and other sub-advised
open-end management investment companies. Pacific Investment Management had
approximately $165.1 billion of assets under management as of March 31, 1999.
-38-
<PAGE>
PIMCO Equity Advisors
- ---------------------
PIMCO Equity Advisors, a division of PIMCO Advisors, acts as the Sub-
Adviser and provides investment advisory services to the Growth, Target,
Opportunity, Innovation, Renaissance, Core Equity, Mid-Cap Equity and
International Growth Funds. PIMCO Equity Advisors' address is 33 Maiden Lane,
New York, NY 10038. Additional information about PIMCO Advisors, including
information regarding investment advisory fees paid to PIMCO Advisors by the
Growth, Target, Opportunity, Innovation, Renaissance, Core Equity, Mid-Cap
Equity and International Growth Funds, is provided above under "Investment
Adviser." Prior to March 5, 1999, Columbus Circle Investors ("Columbus Circle"),
a former subsidiary partnership of the Adviser, served as Sub-Adviser to the
Growth, Target, Opportunity and Innovation Funds. Columbus Circle served as Sub-
Adviser to the Renaissance Fund until May 7, 1999, and it served as Sub-Adviser
to the Core Equity, Mid-Cap Equity and International Growth Funds until July 1,
1999. On July 1, 1999, the Adviser sold all of its ownership interest in
Columbus Circle to certain of Columbus Circle's employees.
Parametric
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Parametric, Parametric is the Sub-Adviser and provides investment advisory
services to the Tax-Efficient Equity, Enhanced Equity, Structured Emerging
Markets and Tax-Efficient Structured Emerging Markets Funds. For the services
provided to each Fund, the Adviser (not the Trust) pays Parametric a monthly fee
for each Fund at the following annual rates (based on the average daily net
assets of the particular Fund): .35% for the Tax-Efficient Equity Fund, .35%
for the Enhanced Equity Fund, .35% for the Structured Emerging Markets Fund, and
.35% for the Tax-Efficient Structured Emerging Markets Fund.
Parametric is an investment management firm organized as a general
partnership. Parametric is the successor investment adviser to Parametric
Portfolio Associates, Inc., a wholly-owned corporate subsidiary of PFAMCo.
Parametric has two partners: PIMCO Advisors as the supervisory partner, and
Parametric Management Inc. as the managing partner. The predecessor investment
adviser to Parametric commenced operations in 1987. Parametric is located at
7310 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104-7090.
Parametric provides investment management services to a number of institutional
accounts, including employee benefit plans, college endowment funds and
foundations. Accounts managed by Parametric had combined assets, as of March
31, 1999, of approximately $3.5 billion.
Cadence
- -------
Pursuant to a Portfolio Management Agreement between the Adviser and
Cadence, Cadence provides investment advisory services to the Capital
Appreciation Fund, the Mid-Cap Growth Fund, the Micro-Cap Growth Fund, the
Small-Cap Growth Fund and a portion of the Balanced Fund allocated by the
Adviser for investment in common stocks. For the services provided, the Adviser
(not the Trust) pays Cadence a monthly fee for each Fund at the following annual
rates (based on the average daily net assets of the particular Fund): .35% for
the Capital Appreciation Fund, .35% for the Mid-Cap Growth Fund, .35% for the
portion of the Balanced Fund's assets allocated to Cadence for investment in
common stock, .90% for the Small-Cap Growth Fund, and 1.15% for the Micro-Cap
Growth Fund.
Cadence is an investment management firm organized as a general
partnership. Cadence is the successor investment adviser to Cadence Capital
Management Corporation, a wholly-owned subsidiary of PFAMCo. Cadence has two
partners: PIMCO Advisors as the supervisory partner, and Cadence Capital
Management Inc. as the managing partner. The predecessor investment adviser to
Cadence commenced operations in 1988. Cadence is located at Exchange Place, 53
State Street, Boston, Massachusetts 02109. Cadence provides investment
management services to a number of institutional accounts, including employee
benefit plans, college endowment funds and foundations. Accounts managed by
Cadence had combined assets, as of March 31, 1999, of approximately $7.0
billion.
-39-
<PAGE>
NFJ
- ---
Pursuant to a Portfolio Management Agreement between the Adviser and NFJ,
NFJ provides investment advisory services to the Equity Income Fund, the Value
Fund, the Value 25 Fund, the Small-Cap Value Fund, and a portion of the Balanced
Fund allocated by the Adviser for investment in common stocks. For the
services provided, the Adviser (not the Trust) pays NFJ a monthly fee for each
Fund at the following annual rates (based on the average daily net assets of the
particular Fund): .35% for the Equity Income Fund, .40% for the Value 25 Fund,
.35% for the Value Fund, .35% for the portion of the Balanced Fund allocated to
NFJ for investment in common stock, and .50% for the Small-Cap Value Fund.
NFJ is an investment management firm organized as a general partnership.
NFJ is the successor investment adviser to NFJ Investment Group, Inc., a wholly-
owned subsidiary of PFAMCo. NFJ has two partners: PIMCO Advisors as the
supervisory partner, and NFJ Management Inc. as the managing partner. The
predecessor investment adviser to NFJ commenced operations in 1989. NFJ is
located at 2121 San Jacinto, Suite 1840, Dallas, Texas 75201. NFJ provides
investment management services to a number of institutional accounts, including
employee benefit plans, college endowment funds and foundations. Accounts
managed by NFJ had combined assets, as of March 31, 1999, of approximately $2.3
billion.
Blairlogie
- ----------
Pursuant to a Portfolio Management Agreement between the Adviser and
Blairlogie, Blairlogie provides investment advisory services to the
International Fund. For the services provided, the Adviser (not the Trust) pays
Blairlogie a monthly fee for the Fund at the annual rate of .40% based on the
average daily net assets of the International Fund.
Blairlogie is an investment management firm organized as a limited
partnership under the laws of the United Kingdom. Blairlogie is the successor
investment adviser to Blairlogie Capital Management Ltd., an indirect subsidiary
of PFAMCo, which commenced operations in 1992. Blairlogie is an indirect
majority-owned subsidiary of the Alleghany Corporation. Blairlogie is located
at 125 Princes Street, 4th Floor, Edinburgh EH2 4AD, Scotland. Blairlogie
provides investment management services to a number of institutional accounts,
including employee benefit plans, college endowment funds and foundations.
Accounts managed by Blairlogie had combined assets, as of March 31, 1999, of
approximately $900 million.
Until April 30, 1999, Blairlogie was an affiliate of the Adviser. On April
30, 1999, the Adviser sold all of its ownership interests in Blairlogie to
subsidiaries of the Alleghany Corporation (the "Blairlogie Transaction") and
Blairlogie is no longer affiliated with the Adviser.
In connection with the Blairlogie Transaction, the Emerging Markets and
International Developed Funds (the "Transferred Funds") transferred all of their
assets and liabilities to newly formed series of Alleghany Funds managed by
Blairlogie. The Transferred Funds were liquidated in connection with the
Blairlogie Transaction and are no longer series of the Trust.
Van Eck
- -------
Pursuant to a Portfolio Management Agreement between the Adviser and Van
Eck, Van Eck provides investment advisory services to the Precious Metals Fund.
For the Services provided, the Adviser (not the Trust) pays Van Eck a monthly
fee at the annual rate of .35% based on the average daily net assets of the
Precious Metals Fund.
Van Eck is a Delaware corporation registered as an investment adviser with
the SEC. Van Eck and its affiliates advise other mutual funds and private
accounts. Van Eck is controlled by John C. van Eck who, along with members of
his immediate family, owns 100% of the stock of Van Eck. Van Eck is located at
99 Park Avenue, New York, New York 10001. Accounts managed by Van Eck had
combined assets, as of March 31, 1999, of approximately $1.1 billion.
-40-
<PAGE>
Allocation among Portfolio Managers for the Balanced Fund
- ---------------------------------------------------------
PIMCO Advisors determines the allocation of the Balanced Fund's assets
among the various asset classes and types of securities in which the Fund
invests. PIMCO Advisors reserves the right to allocate a portion of the Fund's
assets for investment in money market instruments and reserves the right to
manage the investment of such assets.
For the fiscal years ended June 30, 1998, June 30, 1997 and June 30, 1996
(the fiscal year ended June 30, 1996 being an eight-month period), the amount of
portfolio management fees paid by the Adviser (or its predecessor) to the
applicable Sub-Adviser (or its predecessor) for each of the Funds was as
follows:
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
Fund 06/30/98 06/30/97 06/30/96
- ---- -------- -------- --------
<S> <C> <C> <C>
Equity Income Fund $ 618,529 $ 492,429 $ 425,899
Value Fund 739,776 388,966 65,873
Small-Cap Value Fund 1,162,608 224,788 156,721
Core Equity Fund 416,205 215,998 136,615
Mid-Cap Equity Fund 45,391 45,074 23,814
Capital Appreciation Fund 2,821,614 1,714,191 883,498
Mid-Cap Growth Fund 2,039,356 1,059,242 617,546
Micro-Cap Growth Fund 2,539,086 1,325,695 669,726
Small-Cap Growth Fund 370,606 311,280 426,098
Enhanced Equity Fund 155,141 268,021 274,512
Emerging Markets Fund 307,963 501,411 385,438
International Developed Fund 544,208 478,789 237,138
Balanced Fund 212,532 228,898 161,345
Renaissance Fund* 1,906,366 575,288 N/A
Growth Fund* 6,344,197 2,544,364 N/A
Target Fund* 4,324,681 1,869,073 N/A
Opportunity Fund* 3,819,591 1,709,827 N/A
Innovation Fund* 1,186,016 435,246 N/A
International Fund* 671,040 348,938 N/A
International Growth Fund** 11,650 N/A N/A
Precious Metal Fund* 96,785 66,070 N/A
Tax Exempt Fund* 144,515 66,756 N/A
----------- ----------- ----------
TOTAL $30,477,856 $14,870,344 $4,464,223
- -----------------
</TABLE>
*Amounts for the year ended June 30, 1997 are for the period 1/18/97 through
6/30/97.
**Amounts for the year ended June 30, 1998 are for the period 12/31/97 through
6/30/98.
-41-
<PAGE>
The Adviser paid the Sub-Advisers for the predecessors of the Renaissance,
Growth, Target, Opportunity, Innovation, International, Precious Metals and Tax
Exempt Funds (each of which is a former series of PAF which reorganized as a
Fund of the Trust on January 17, 1997) the following amounts for the fiscal
period ended January 17, 1997 and the fiscal year ended September 30, 1996 under
separate sub-advisory agreements between the Adviser and the relevant Sub-
Adviser:
<TABLE>
<CAPTION>
10/1/96 Year
to Ended
Fund 1/17/97 09/30/96
- ---- ------ --------
<S> <C> <C>
Renaissance Fund $ 326,864 $ 813,816
Growth Fund 1,685,284 4,993,770
Target Fund 1,292,168 3,647,884
Opportunity Fund 949,192 3,091,788
Innovation Fund 272,772 531,792
International Fund 268,824 936,304
Precious Metals Fund 53,837 198,985
Tax Exempt Fund 49,512 166,675
---------- -----------
TOTAL $4,898,453 $14,381,014
</TABLE>
Fund Administrator
In addition to its services as Adviser, PIMCO Advisors serves as
administrator (and is referred to in this capacity as the "Administrator") to
the Funds and Portfolios pursuant to an administration agreement (the
"Administration Agreement") with the Trust. The Administrator provides or
procures administrative services to the Funds and Portfolios, which include
clerical help and accounting, bookkeeping, internal audit services and certain
other services they require, and preparation of reports to the Trust's
shareholders and regulatory filings. PIMCO Advisors has retained Pacific
Investment Management as sub-administrator to provide such services pursuant to
a sub-administration agreement (the "Sub-Administration Agreement"). PIMCO
Advisors may also retain other affiliates to provide such services. In
addition, the Administrator arranges at its own expense for the provision of
legal, audit, custody, transfer agency and other services necessary for the
ordinary operation of the Funds and Portfolios, and is responsible for the costs
of registration of the Trust's shares and the printing of prospectuses and
shareholder reports for current shareholders. Under the Administration
Agreement, the Administrator has agreed to provide or procure these services,
and to bear these expenses, at the following annual rates for each Fund and
Portfolio (each expressed as a percentage of the Fund's or Portfolio's average
daily net assets attributable to the indicated class or classes of shares on an
annual basis):
Administrative Fee Rate
-----------------------
<TABLE>
<CAPTION>
Institutional and Class A, Class B,
Administrative and Class C Class D
Fund or Portfolio Classes* Shares* Shares**
- ----------------- ------- ------ ------
<S> <C> <C> <C>
Equity Income Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Tax-Efficient Equity Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Value Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Small-Cap Value Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Institutional and Class A, Class B,
Administrative and Class C Class D
Fund or Portfolio Classes* Shares* Shares**
- ----------------- ------- ------ ------
<S> <C> <C> <C>
Core Equity Fund .25% N/A N/A
Mid-Cap Equity Fund .25% N/A N/A
Value 25 Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Capital Appreciation Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Mid-Cap Growth Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Micro-Cap Growth Fund .25% N/A N/A
Small-Cap Growth Fund .25% N/A N/A
Enhanced Equity Fund .25% N/A N/A
Balanced Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Renaissance Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
Growth Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Target Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Opportunity Fund .25% .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
Innovation Fund .25% .40% of first $2.5 billion .65%
.35% of amounts in excess of $2.5 billion
International Fund .50% .65% of first $2.5 billion N/A
.60% of amounts in excess of $2.5 billion
International Growth Fund .50% N/A N/A
Precious Metals Fund N/A .45% of first $2.5 billion N/A
.40% of amounts in excess of $2.5 billion
Tax-Efficient Structured .50% N/A N/A
Emerging Markets Fund
Structured Emerging .50% N/A N/A
Markets Fund
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
Institutional and Class A, Class B,
Administrative and Class C Class D
Fund or Portfolio Classes* Shares* Shares**
- ----------------- ------- ------ ------
<S> <C> <C> <C>
90/10 Portfolio .10%*** .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
60/40 Portfolio .10%*** .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
30/70 Portfolio .10%*** .40% of first $2.5 billion N/A
.35% of amounts in excess of $2.5 billion
</TABLE>
* The Administrator receives administrative fees based on a Fund's or
Portfolio's average daily net assets attributable in the aggregate to its
Institutional and Administrative Class shares on the one hand, and to its Class
A, Class B and Class C shares on the other.
** As described below, the Administration Agreement includes a plan adopted in
conformity with Rule 12b-1 which provides for the payment of up to .25% of the
.65% Class D Administrative Fee rate as reimbursement for expenses in respect of
activities that may be deemed to be primarily intended to result in the sale of
Class D shares.
*** The Administrative Fee for Institutional and Administrative Class shares of
each Portfolio reflects a fee waiver currently in effect. In the absence of
this waiver, this Administrative Fee rate for Institutional and Administrative
Class shares of each Portfolio would be 0.15% per annum.
Except for the expenses paid by the Administrator, the Trust bears all
costs of its operations. The Trust is responsible for the following expenses:
(i) salaries and other compensation of any of the Trust's executive officers and
employees who are not officers, directors, stockholders, or employees of PIMCO
Advisors, Pacific Investment Management, or their subsidiaries or affiliates;
(ii) taxes and governmental fees; (iii) brokerage fees and commissions and other
portfolio transaction expenses; (iv) costs of borrowing money, including
interest expenses; (v) fees and expenses of the Trustees who are not "interested
persons" of PIMCO Advisors, any Sub-Adviser, or the Trust, and any counsel
retained exclusively for their benefit; (vi) extraordinary expenses, including
costs of litigation and indemnification expenses; (vii) expenses which are
capitalized in accordance with generally accepted accounting principals; and
(viii) any expenses allocated or allocable to a specific class of shares
("Class-specific expenses").
Class-specific expenses include distribution and/or service fees payable
with respect to the Class A, Class B, Class C, Class D or Administrative Class
shares and administrative fees as described above, and may include certain other
expenses as permitted by the Trust's Amended and Restated Multi-Class Plan (the
"Multi-Class Plan") adopted pursuant to Rule 18f-3 under the 1940 Act, which is
subject to review and approval by the Trustees. It is not presently anticipated
that any expenses other than distribution and/or service fees and administrative
fees will be allocated on a class-specific basis.
The Administration Agreement may be terminated by the Trust at any time by
vote of (1) a majority of the Trustees, (2) a majority of the outstanding voting
securities of the Trust, or (3) with respect to the Renaissance, Growth, Target,
Opportunity, Innovation, International and Precious Metals Funds, by a majority
of the Trustees who are not interested persons of the Trust or PIMCO Advisors,
on 60 days' written notice to PIMCO Advisors.
Under the Administration Agreement, the Administrator or an affiliate may
pay financial service firms a portion of the Class D administration fees in
return for the firms' services (normally not to exceed an annual rate of .35% of
a Fund's average daily net assets attributable to Class D shares purchased
through such firms). The Administration Agreement includes a plan specific to
Class D shares which has been adopted in conformity with the requirements set
forth under Rule 12b-1 of the 1940 Act to allow for payment of up to .25% per
annum of the Class D administrative fees as reimbursement for expenses in
respect of activities that may be deemed to be primarily intended to result in
the sale of Class D shares. The principal types of activities for which such
payments may be made are services in connection with the distribution of Class D
shares and/or the provision of shareholder services. See "Distribution of Trust
Shares--Plan for Class D Shares."
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
-44-
<PAGE>
services rendered to the Trust, at any time by vote of a majority of the
disinterested Trustees of the Trust. The Sub-Administration Agreement will also
terminate upon termination of the Administration Agreement.
For the fiscal years ended June 30, 1998, June 30, 1997 and June 30, 1996
(the fiscal year ended June 30, 1996 being an eight-month period), the aggregate
amount of the administration fees paid by the Funds was as follows (Class A,
Class B and Class C shares were not offered prior to January 17, 1997 and Class
D shares were not offered during the periods listed):
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
Fund 06/30/98 06/30/97 06/30/96
- ---- -------- -------- --------
<S> <C> <C> <C>
Equity Income Fund $ 487,106 $ 311,798 $ 236,611
Value Fund 720,965 318,624 36,596
Small-Cap Value Fund 850,182 114,067 65,176
Core Equity Fund 221,386 102,634 63,942
Mid-Cap Equity Fund 21,411 19,291 14,011
Capital Appreciation Fund 2,144,151 1,093,013 490,803
Mid-Cap Growth Fund 1,722,412 729,997 342,880
Micro-Cap Growth Fund 551,975 278,025 133,934
Small-Cap Growth Fund 102,410 81,774 106,715
Enhanced Equity Fund 110,815 161,982 151,842
Emerging Markets Fund 208,654 312,540 259,300
International Developed Fund 555,314 437,490 244,350
Balanced Fund 186,627 170,134 130,017
Renaissance Fund* 2,006,144 605,566 N/A
Growth Fund* 7,463,761 2,993,370 N/A
Target Fund* 4,805,201 2,076,748 N/A
Opportunity Fund* 3,182,992 1,424,856 N/A
Innovation Fund* 1,248,438 458,154 N/A
International Fund* 1,090,440 567,025 N/A
International Growth Fund** 14,562 N/A N/A
Precious Metals Fund* 124,438 84,947 N/A
Tax Exempt Fund* 193,724 89,008 N/A
----------- ----------- ----------
TOTAL $28,013,108 $12,431,043 $2,276,177
</TABLE>
- ------------------------
*Amounts for the year ended June 30, 1997 are for the period from 1/17/97
through 6/30/97.
**Amounts for the year ended June 30, 1998 are for the period from 12/31/97
through 6/30/98.
The predecessor series of the Renaissance, Growth, Target, Opportunity,
Innovation, International, Precious Metals and Tax Exempt Funds (each a series
of PAF which reorganized as a Fund of the Trust on January 17, 1997) received
administrative services during fiscal years 1997 and 1996 under separate
management contracts between the Adviser and PAF on behalf of each such series.
See "Investment Adviser" above for the amounts paid to the Adviser by these
series under such management contracts during fiscal years 1997 and 1996.
Shares of the Portfolios were not offered during the periods listed above.
DISTRIBUTION OF TRUST SHARES
Distributor and Multi-Class Plan
PIMCO Funds Distributors LLC (the "Distributor") serves as the distributor
of each class of the Trust's shares pursuant to a distribution contract (the
"Distribution Contract") with the Trust. The Distributor is a wholly-owned
subsidiary of PIMCO Advisors. The Distribution Contract is terminable with
respect to a Fund, Portfolio or class or shares without penalty, at any time, by
the Fund, Portfolio or class by not more than 60 days' nor less than
-45-
<PAGE>
30 days' written notice to the Distributor, or by the Distributor upon not more
than 60 days' nor less than 30 days' written notice to the Trust. The
Distributor is not obligated to sell any specific amount of Trust shares.
The Distribution Contract will continue in effect with respect to each Fund
and Portfolio, and each class of shares thereof, for successive one-year
periods, provided that each such continuance is specifically approved (i) by the
vote of a majority of the entire Board of Trustees or by the majority of the
outstanding shares of the Fund, Portfolio or class, and (ii) by a majority of
the Trustees who are not interested persons (as defined in the 1940 Act) of the
Trust and who have no direct or indirect interest financial interest in the
Distribution Contract or the Distribution and/or Servicing Plans described
below, by vote cast in person at a meeting called for the purpose. If the
Distribution Contract is terminated (or not renewed) with respect to one or more
Funds, Portfolios or classes, it may continue in effect with respect to any
Fund, Portfolio or class as to which it has not been terminated (or has been
renewed).
The Trust currently offers up to six classes of shares of each of the
Funds: Class A, Class B, Class C, Class D, Institutional Class and
Administrative Class shares. The Trust currently offers Class A, Class B, Class
C, Institutional Class and Administrative Class shares of each Portfolio.
Class A, Class B and Class C shares of the Trust are offered through firms
("participating brokers") which are members of the National Association of
Securities Dealers, Inc. ("NASD"), and which have dealer agreements with the
Distributor, or which have agreed to act as introducing brokers for the
Distributor ("introducing brokers").
Class D shares are generally offered to clients of financial service firms,
such as broker-dealers or registered investment advisers, with which the
Distributor has an agreement for the use of PIMCO Funds: Multi-Manager Series in
particular investment products, programs or accounts for which a fee may be
charged.
Institutional Class shares are offered primarily for direct investment by
investors such as pension and profit sharing plans, employee benefit trusts,
endowments, foundations, corporations, and high net worth individuals
(Institutional Class shares may also be offered through certain financial
intermediaries that charge their customers transaction or other fees with
respect to the customers' investments in the Funds). Administrative Class
shares are offered primarily through employee benefit plan alliances, broker-
dealers, and other intermediaries, and each Fund pays service or distribution
fees to such entities for services they provide to Administrative Class
shareholders.
Under the Trust's Multi-Class Plan, shares of each class of each Fund and
Portfolio represent an equal pro rata interest in the Fund or Portfolio and,
generally, have identical voting, dividend, liquidation, and other rights
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (a) each class has a different designation; (b) each
class of shares bears any class-specific expenses allocated to it; (c) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its distribution or service arrangements; and (d) each class
has separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. In
addition, each class may have a differing sales charge structure, and differing
exchange and conversion features.
-46-
<PAGE>
Contingent Deferred Sales Charge and Initial Sales Charge
As described in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "How to Redeem," a contingent deferred sales charge
is imposed upon certain redemptions of Class A, Class B and Class C shares. No
contingent deferred sales charge is currently imposed upon redemptions of Class
D, Institutional Class or Administrative Class shares. Because contingent
deferred sales charges are calculated on a series-by-series basis, shareholders
should consider whether to exchange shares of one Fund or Portfolio for shares
of another Fund or Portfolio prior to redeeming an investment if such an
exchange would reduce the contingent deferred sales charge applicable to such
redemption.
During the fiscal years ended June 30, 1998 and June 30, 1997, the
Distributor received the following aggregate amounts in contingent deferred
sales charges on Class A shares, Class B shares and Class C shares of the Funds:
<TABLE>
<CAPTION>
Year Year
Ended Ended
Class 6/30/98 6/30/97
- ----- ------- -------
<S> <C> <C>
Class A $ 2,273 $ 40,456
Class B $945,353 $789,851
Class C $480,061 $533,975
</TABLE>
Shares of the Portfolios were first offered beginning October 1, 1998.
The Funds did not offer Class A, B and C shares in fiscal years prior to
the fiscal year ended June 30, 1997. However, during the fiscal year ended
September 30, 1996, the Distributor received the following amounts in contingent
deferred sales charges on shares of series of PAF which reorganized as the
following Funds of the Trust: Class A shares: Growth - $9,168, Target - $14
--------------
and Opportunity - $4,190. Class B shares: Renaissance - $8,722, Growth -
--------------
$37,445, Target - $31,670, Innovation - $36,477, International - $6,359,
Precious Metals - $1,179 and Tax Exempt -$4,055. Class C shares: Renaissance
--------------
- - $12,809, Growth - $124,264, Target - $89,334, Opportunity - $37,154,
Innovation - $29,110, International - $22,016, Precious Metals - $15,384 and Tax
Exempt - $1,596.
As described in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "Alternative Purchase Arrangements - Initial Sales
Charge Alternative - Class A Shares," Class A shares of the Trust are sold
pursuant to an initial sales charge, which declines as the amount of the
purchase reaches certain defined levels. For the fiscal years ended June 30,
1998 and June 30, 1997, the Distributor received an aggregate of $4,878,434 and
$2,927,636, respectively, and retained an aggregate of $506,878 and $369,546,
respectively, in initial sales charges paid by Class A shareholders of the
Trust.
The Trust did not offer Class A shares in fiscal years prior to the fiscal
year ended June 30, 1997. However, during the fiscal year ended September 30,
1996, the Distributor received the following amounts in initial sales charges
paid by shareholders of PAF series which reorganized as the following Funds of
the Trust: Renaissance - $205,419, Growth - 549,330, Target - $852,363,
Opportunity - $176,391, Innovation - $685,093, International - $91,177, Precious
Metals - $72,503 and Tax Exempt - $37,180, and retained the following amounts:
Renaissance - $27,477, Growth -$83,657, Target - $126,693, Opportunity -
$29,605, Innovation - $114,091, International - $13,871, Precious Metals -$7,738
and Tax Exempt - $3,140.
Additional Waivers of Initial Sales Charge and CDSC
- ---------------------------------------------------
As described in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "Alternative Purchase Arrangements--Initial Sales
Charge Alternative-Class A Shares--Sales at Net Asset Value," each Fund and
Portfolio may sell its Class A shares at net asset value without a sales charge
to certain categories of investors. In addition to the categories listed in the
Prospectuses, Class A shares may also be sold at net asset value without an
initial sales charge to current or retired officers, trustees, directors or
employees of affiliates of the Adviser and the Distributor, and to a parent,
brother or sister of any such officer, trustee, director or employee or a spouse
or child of any of the foregoing persons, or any trust, profit sharing or
pension plan for the benefit of any such person. In addition, as described in
the Class A, B and C Prospectus and the Retail Portfolio Prospectus under the
caption "Alternative Purchase Arrangements--Waiver of Contingent Deferred Sales
Charges," each Fund and Portfolio may
-47-
<PAGE>
waive the CDSC applicable to Class A and Class C shares in certain
circumstances. In addition to those listed in the Prospectuses, the Class A CDSC
and Class C CDSC are waived in the following circumstances. The Class A CDSC is
currently waived for redemptions by a shareholder who purchased $1,000,000 or
more of Class A shares (and therefore did not pay a sales charge) where the
participating broker or dealer involved in the sale of such shares waived the
commission it would normally receive from the Distributor pursuant to an
agreement with the Distributor. The Class C CDSC is currently waived for
redemptions by a shareholder where the participating broker or dealer involved
in the purchase of such shares waived the commission it normally would receive
from the Distributor in connection with such purchase pursuant to an agreement
with the Distributor.
Distribution and Servicing Plans for Class A, Class B and Class C Shares
As stated in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus under the caption "Distributor and Distribution and Servicing Plans,"
Class A, Class B and Class C shares of the Trust are continuously offered
through participating brokers which are members of the NASD and which have
dealer agreements with the Distributor, or which have agreed to act as
introducing brokers.
Pursuant to separate Distribution and Servicing Plans for Class A, Class B
and Class C shares (the "Retail Plans"), the Distributor receives (i) in
connection with the distribution of Class B and Class C shares of the Trust,
certain distribution fees from the Trust, and (ii) in connection with personal
services rendered to Class A, Class B and Class C shareholders of the Trust and
the maintenance of shareholder accounts, certain servicing fees from the Trust.
Subject to the percentage limitations on these distribution and servicing fees
set forth in the Class A, B and C Prospectus and the Retail Portfolio
Prospectus, the distribution and servicing fees may be paid with respect to
services rendered and expenses borne in the past with respect to Class A, Class
B and Class C shares as to which no distribution and servicing fees were paid on
account of such limitations. The Distributor pays (i) all or a portion of the
distribution fees it receives from the Trust to participating and introducing
brokers, and (ii) all or a portion of the servicing fees it receives from the
Trust to participating and introducing brokers, certain banks and other
financial intermediaries.
Each Retail Plan may be terminated with respect to any Fund or Portfolio to
which the Plan relates by vote of a majority of the Trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Plan or the
Distribution Contract ("disinterested Retail Plan Trustees"), or by vote of a
majority of the outstanding voting securities of the relevant class of that Fund
or Portfolio. Any change in any Retail Plan that would materially increase the
cost to the class of shares of any Fund or Portfolio to which the Plan relates
requires approval by the affected class of shareholders of that Fund or
Portfolio. The Trustees review quarterly written reports of such costs and the
purposes for which such costs have been incurred. Each Retail Plan may be
amended by vote of the Trustees, including a majority of the disinterested
Retail Plan Trustees, cast in person at a meeting called for the purpose. As
long as the Retail Plans are in effect, selection and nomination of those
Trustees who are not interested persons of the Trust shall be committed to the
discretion of such disinterested Trustees.
The Retail Plans will continue in effect with respect to each Fund and
Portfolio, and each class of shares thereof, for successive one-year periods,
provided that each such continuance is specifically approved (i) by the vote of
a majority of the disinterested Retail Plan Trustees and (ii) by the vote of a
majority of the entire Board of Trustees cast in person at a meeting called for
the purpose of voting on such approval.
If a Retail Plan is terminated (or not renewed) with respect to one or more
Funds or Portfolios, or classes thereof, it may continue in effect with respect
to any class of any Fund or Portfolio as to which it has not been terminated (or
has been renewed).
The Trustees believe that the Retail Plans will provide benefits to the
Trust. In this regard, the Trustees believe that the Retail Plans will result
in greater sales and/or fewer redemptions of Trust shares, although it is
impossible to know for certain the level of sales and redemptions of Trust
shares that would occur in the absence of the Retail Plans or under alternative
distribution schemes. Although the expenses of the Funds and Portfolios are
essentially fixed, the Trustees believe that the effect of the Retail Plans on
sales and/or redemptions may benefit the Trust by reducing expense ratios and/or
by affording greater flexibility to the Sub-Advisers. From time to time,
expenses of the Distributor incurred in connection with the sale of Class B and
Class C shares of the Trust, and in connection with the servicing of Class B and
Class C shareholders and the maintenance of shareholder accounts, may exceed the
distribution and servicing fees collected by the Distributor. The Trustees
consider such unreimbursed
-48-
<PAGE>
amounts, among other factors, in determining whether to cause the Funds and
Portfolios to continue payments of distribution and servicing fees in the future
with respect to Class B and Class C shares.
Payments Pursuant to Class A Plans
For the fiscal years ended June 30, 1998 and June 30, 1997, the Trust paid
the Distributor an aggregate of $2,017,316 and $1,147,572, respectively,
pursuant to the Class A Retail Plan. Such payments were allocated among the
operational Funds as follows (Class A shares of the Portfolios were initially
offered beginning October 1, 1998):
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund 06/30/98 06/30/97
- ---- -------- --------
<S> <C> <C>
Equity Income Fund $ 20,227 $ 938
Value Fund 46,720 14,876
Small-Cap Value Fund 91,688 2,770
Core Equity Fund N/A N/A
Mid-Cap Equity Fund N/A N/A
Capital Appreciation Fund 75,035 5,510
Mid-Cap Growth Fund 72,631 12,246
Micro-Cap Growth Fund N/A N/A
Small-Cap Growth Fund N/A N/A
Enhanced Equity Fund N/A N/A
Emerging Markets Fund 697 108
International Developed Fund 2,903 169
Balanced Fund 12,278 173
Renaissance Fund 130,230 53,527
Growth Fund 403,013 290,828
Target Fund 394,300 288,012
Opportunity Fund 531,993 320,127
Innovation Fund 164,089 99,910
International Fund 42,700 34,195
International Growth Fund N/A N/A
Precious Metals Fund 13,370 14,218
Tax Exempt Fund 15,442 9,965
</TABLE>
During the fiscal year ended June 30, 1998, the amounts collected pursuant
to the Class A Retail Plan were used as follows by the Distributor: sales
commissions and other compensation to sales personnel, $1,512,987; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders) and other expenses
(including data processing, legal and operations), $504,329. These totals,
allocated among (i) compensation and (ii) sales material and other expenses for
each Fund, were as follows:
-49-
<PAGE>
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- --------
<S> <C> <C> <C>
Equity Income Fund $ 15,170 $ 5,057 $ 20,227
Value Fund 35,040 11,680 46,720
Small-Cap Value Fund 68,766 22,922 91,688
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 56,276 18,759 75,035
Mid-Cap Growth Fund 54,473 18,158 72,631
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 523 174 697
International Developed Fund 2,177 726 2,903
Balanced Fund 9,208 3,070 12,278
Renaissance Fund 97,672 32,558 130,230
Growth Fund 302,260 100,753 403,013
Target Fund 295,725 98,575 394,300
Opportunity Fund 398,995 132,998 531,993
Innovation Fund 123,067 41,022 164,089
International Fund 32,025 10,675 42,700
International Growth Fund N/A N/A N/A
Precious Metals Fund 10,027 3,343 13,370
Tax Exempt Fund 11,582 3,861 15,442
</TABLE>
The Trust did not offer Class A shares in fiscal years prior to the fiscal
year ended June 30, 1997. For the fiscal year ended September 30, 1996, PAF
paid the Distributor an aggregate of $1,556,119 pursuant to a Distribution and
Servicing Plan applicable to the Class A shares of PAF (the "PAF Class A Plan"),
which is similar to the Class A Plan of the Trust. Such payments were
allocated among the predecessors of the following Funds (each of which was
formerly a series of PAF which reorganized as a series of the Trust on January
17, 1997) as follows:
<TABLE>
<CAPTION>
Year Ended
Sept. 30, 1996
--------------
<S> <C>
Renaissance Fund $ 38,973
Growth Fund 351,506
Target Fund 338,598
Opportunity Fund 308,794
Innovation Fund 88,089
International Fund 42,411
Precious Metals Fund 21,416
Tax Exempt Fund 10,288
</TABLE>
The remainder of the total payments made under the PAF Class A Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMS, an
affiliated mutual fund family, in transactions which took place on January 17,
1997.
-50-
<PAGE>
Payments Pursuant to Class B Plans
For the fiscal years ended June 30, 1998 and June 30, 1997, the Trust paid
the Distributor an aggregate of $4,549,168 and $1,670,623, respectively,
pursuant to the Class B Retail Plan. Such payments were allocated among the
operational Funds as follows (Class B shares of the Portfolios were initially
offered beginning October 1, 1998):
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund 06/30/98 06/30/97
- ---- -------- --------
<S> <C> <C>
Equity Income Fund $ 80,992 $ 5,019
Value Fund 311,768 101,067
Small-Cap Value Fund 611,536 17,419
Core Equity Fund N/A N/A
Mid-Cap Equity Fund N/A N/A
Capital Appreciation Fund 165,015 5,077
Mid-Cap Growth Fund 528,760 104,374
Micro-Cap Growth Fund N/A N/A
Small-Cap Growth Fund N/A N/A
Enhanced Equity Fund N/A N/A
Emerging Markets Fund 4,696 633
International Developed Fund 21,969 2,256
Balanced Fund 42,373 2,223
Renaissance Fund 603,997 204,965
Growth Fund 660,761 351,684
Target Fund 727,857 450,009
Opportunity Fund N/A N/A
Innovation Fund 629,537 332,295
International Fund 85,359 53,098
International Growth Fund N/A N/A
Precious Metals Fund 41,484 21,713
Tax Exempt Fund 33,064 18,818
</TABLE>
-51-
<PAGE>
During the fiscal year ended June 30, 1998, the amounts collected pursuant
to the Class B Retail Plan were used as follows by the Distributor: sales
commissions and other compensation to sales personnel, $3,411,876; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders), and other expenses
(including data processing, legal and operations), $1,137,292. These totals,
allocated among (i) compensation and (ii) sales material and other expenses for
each Fund, were as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- ---------
<S> <C> <C> <C>
Equity Income Fund $ 60,744 $ 20,248 $ 80,992
Value Fund 233,826 77,942 311,768
Small-Cap Value Fund 458,652 152,884 611,536
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 123,761 41,254 165,015
Mid-Cap Growth Fund 396,570 132,190 528,760
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 3,522 1,174 4,696
International Developed Fund 16,477 5,492 21,969
Balanced Fund 31,780 10,593 42,373
Renaissance Fund 452,998 150,999 603,997
Growth Fund 495,571 165,190 660,761
Target Fund 545,893 181,964 727,857
Opportunity Fund N/A N/A N/A
Innovation Fund 472,153 157,384 629,537
International Fund 64,020 21,340 85,359
International Growth Fund N/A N/A N/A
Precious Metals Fund 31,113 10,371 41,484
Tax Exempt Fund 24,798 8,266 33,064
</TABLE>
-52-
<PAGE>
The Trust did not offer Class B shares in fiscal years prior to the fiscal
year ended June 30, 1997. For the fiscal year ended September 30, 1996, PAF
paid the Distributor an aggregate of $1,839,931 pursuant to a Distribution and
Servicing Plan applicable to the Class B shares of PAF (the "PAF Class B Plan"),
which is similar to the Class B Plan of the Trust. Such payments were allocated
among the predecessors of the following Funds (each of which was formerly a
series of PAF which reorganized as a series of the Trust on January 17, 1997) as
follows:
<TABLE>
<CAPTION>
Year Ended
Sept. 30, 1996
--------------
<S> <C>
Renaissance Fund $ 62,195
Growth Fund 211,778
Target Fund 241,125
Opportunity Fund N/A
Innovation Fund 166,747
International Fund 289,719
Precious Metals Fund 14,083
Tax Exempt Fund 14,673
</TABLE>
The remainder of the total payments made under the PAF Class B Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMS, an
affiliated mutual fund family, in transactions which took place on January 17,
1997.
Payments Pursuant to Class C Plans
For the fiscal years ended June 30, 1998 and June 30, 1997, the Trust paid
the Distributor an aggregate of $42,819,673 and $28,944,078, respectively,
pursuant to the Class C Retail Plan. Such payments were allocated among the
operational Funds as follows (Class C shares of the Portfolios were initially
offered beginning October 1, 1998):
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund 06/30/98 06/30/97
- ---- -------- --------
<S> <C> <C>
Equity Income Fund $ 139,875 $ 13,919
Value Fund 784,829 245,893
Small-Cap Value Fund 814,232 39,558
Core Equity Fund N/A N/A
Mid-Cap Equity Fund N/A N/A
Capital Appreciation Fund 392,705 28,078
Mid-Cap Growth Fund 951,993 197,365
Micro-Cap Growth Fund N/A N/A
Small-Cap Growth Fund N/A N/A
Enhanced Equity Fund N/A N/A
Emerging Markets Fund 14,813 5,070
International Developed Fund 40,459 4,936
Balanced Fund 41,412 1,876
Renaissance Fund 3,887,867 2,024,245
Growth Fund 16,386,591 11,107,219
Target Fund 9,707,945 7,238,372
Opportunity Fund 5,829,510 4,950,118
Innovation Fund 1,834,958 1,149,018
International Fund 1,421,443 1,354,452
International Growth Fund N/A N/A
Precious Metals Fund 181,565 255,508
Tax Exempt Fund 389,476 328,451
</TABLE>
During the fiscal year ended June 30, 1998, the amounts collected pursuant
to the Class C Retail Plan were used as follows by the Distributor: sales
commissions and other compensation to sales personnel, $32,114,755; preparing,
printing and distributing sales material and advertising (including preparing,
printing and distributing prospectuses to non-shareholders) and other expenses
(including data processing, legal and operations), $10,704,918.
-53-
<PAGE>
These totals, allocated among (i) compensation and (ii) sales material and other
expenses for each Fund, were as follows:
<TABLE>
<CAPTION>
Sales Material
and Other
Compensation Expenses Total
------------ -------------- -----------
<S> <C> <C> <C>
Equity Income Fund $ 104,906 $ 34,969 $ 139,875
Value Fund 588,622 196,207 784,829
Small-Cap Value Fund 610,674 203,558 814,232
Core Equity Fund N/A N/A N/A
Mid-Cap Equity Fund N/A N/A N/A
Capital Appreciation Fund 294,529 98,176 392,705
Mid-Cap Growth Fund 713,995 237,998 951,993
Micro-Cap Growth Fund N/A N/A N/A
Small-Cap Growth Fund N/A N/A N/A
Enhanced Equity Fund N/A N/A N/A
Emerging Markets Fund 11,110 3,703 14,813
International Developed Fund 30,344 10,115 40,459
Balanced Fund 31,059 10,353 41,412
Renaissance Fund 2,915,900 971,967 3,887,867
Growth Fund 2,289,943 4,096,648 16,386,591
Target Fund 7,280,959 2,426,986 9,707,945
Opportunity Fund 4,372,132 1,457,378 5,829,510
Innovation Fund 1,376,218 458,740 1,834,958
International Fund 1,066,082 355,361 1,421,443
International Growth Fund N/A N/A N/A
Precious Metals Fund 136,174 45,391 181,565
Tax Exempt Fund 292,107 97,369 389,476
</TABLE>
The Trust did not offer Class C shares in fiscal years prior to the fiscal
year ended June 30, 1997. For the fiscal year ended September 30, 1996, PAF
paid the Distributor an aggregate of $41,704,155 pursuant to a Distribution and
Servicing Plan applicable to the Class C shares of PAF (the "PAF Class C Plan"),
which is similar to the Class C Plan of the Trust. Such payments were allocated
among the predecessors of the following Funds (each of which was formerly a
series of PAF Fund which reorganized as a series of the Trust on January 17,
1997) as follows:
<TABLE>
<CAPTION>
Year Ended
Sept. 30, 1996
--------------
<S> <C>
Renaissance Fund $ 1,965,449
Growth Fund 13,593,775
Target Fund 8,684,223
Opportunity Fund 7,455,633
Innovation Fund 899,377
International Fund 1,858,512
Precious Metals Fund 430,849
Tax Exempt Fund 499,738
</TABLE>
The remainder of the total payments made under the PAF Class C Plan for
such fiscal years was allocated among other series of PAF which either merged
with Funds of the Trust or merged with/reorganized as series of PIMS, an
affiliated mutual fund family, in transactions which took place on January 17,
1997.
From time to time, expenses of principal underwriters incurred in
connection with the distribution of Class B and Class C shares of the Funds, and
in connection with the servicing of Class A, Class B and Class C shareholders of
the Funds and the maintenance of Class A, Class B and Class C shareholder
accounts, may exceed the distribution and/or servicing fees collected by the
Distributor. As noted above, Class A, Class B and Class C Distribution and
-54-
<PAGE>
Servicing Plans, which are similar to the Trust's current Plans, were in effect
prior to January 17, 1997 in respect of series of PAF that were predecessors of
certain of the Funds listed below. The remaining Funds did not offer Class A,
Class B or Class C shares prior to January 17, 1997. As of June 30, 1998, such
expenses were approximately $11,946,000 in excess of payments under the Class A
Plan, $22,563,000 in excess of payments under the Class B Plan and $2,252,000 in
excess of payments under the Class C Plan.
The allocation of such excess (on a pro rata basis) among the Funds listed
below as of June 30, 1998 was as follows:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Balanced Fund $ 114,354 $ 311,366 $ 4,119
Capital Appreciation Fund 864,192 1,414,624 34,818
Emerging Markets Fund 5,052 13,321 569
Equity Income Fund 153,514 524,983 11,208
Growth Fund 2,217,715 2,796,317 905,533
Innovation Fund 1,055,088 2,811,646 106,466
International Developed Fund 58,174 105,611 3,110
International Fund 216,026 322,227 68,277
Mid-Cap Growth Fund 677,693 2,930,058 68,372
Opportunity Fund 2,412,474 -- 243,645
Precious Metals Fund 43,292 132,484 6,856
Renaissance Fund 1,010,427 3,479,893 228,385
Small-Cap Value Fund 889,489 3,634,823 63,450
Target Fund 1,969,040 2,846,350 464,235
Value Fund 259,521 1,239,508 42,959
</TABLE>
The allocation of such excess (on a pro rata basis) among the Funds,
calculated as a percentage of net assets of each Fund listed below as of June
30, 1998, was as follows:
<TABLE>
<CAPTION>
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C>
Balanced Fund 1.19% 3.47% 0.05%
Capital Appreciation Fund 1.19 3.47 0.05
Emerging Markets Fund 1.19 3.47 0.05
Equity Income Fund 1.19 3.47 0.05
Growth Fund 1.19 3.47 0.05
Innovation Fund 1.19 3.47 0.05
International Developed Fund 1.19 3.47 0.05
International Fund 1.19 3.47 0.05
Mid-Cap Growth Fund 1.19 3.47 0.05
Opportunity Fund 1.19 -- 0.05
Precious Metals Fund 1.19 3.47 0.05
Renaissance Fund 1.19 3.47 0.05
Small-Cap Value Fund 1.19 3.47 0.05
Target Fund 1.19 3.47 0.05
Value Fund 1.19 3.47 0.05
</TABLE>
-55-
<PAGE>
Distribution and Administrative Services Plans for Administrative Class Shares
The Trust has adopted an Administrative Services Plan with respect to the
Administrative Class shares of each Fund and Portfolio. The Trust also has
adopted a Distribution Plan (together with the Administrative Services Plan, the
"Administrative Plans") with respect to the Administrative Class shares of each
Fund and Portfolio except the Capital Appreciation and Small-Cap Growth Funds,
which are not subject to such Distribution Plan.
Under the terms of the Administrative Distribution Plan, the Trust is
permitted to reimburse, out of the assets attributable to the Administrative
Class shares of each applicable Fund or Portfolio, in an amount up to 0.25% on
an annual basis of the average daily net assets of that class, financial
intermediaries for costs and expenses incurred in connection with the
distribution and marketing of Administrative Class shares and/or the provision
of certain shareholder services to its customers that invest in Administrative
Class shares of the Funds or Portfolios. Such services may include, but are not
limited to, the following: providing facilities to answer questions from
prospective investors about a Fund or Portfolio; receiving and answering
correspondence, including requests for prospectuses and statements of additional
information; preparing, printing and delivering prospectuses and shareholder
reports to prospective shareholders; complying with federal and state securities
laws pertaining to the sale of Administrative Class shares; and assisting
investors in completing application forms and selecting dividend and other
account options.
Under the terms of the Administrative Services Plan, the Trust is permitted
to reimburse, out of the assets attributable to the Administrative Class shares
of each Fund or Portfolio, 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.
-56-
<PAGE>
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.
Payments Pursuant to the Administrative Plans
For the fiscal years ended June 30, 1998 and June 30, 1997, the Trust paid
qualified service providers an aggregate of $502,216 and $132,422, respectively,
pursuant to the Administrative Services Plan and the Administrative Distribution
Plan.
Of these aggregate totals, $362,416 and $111,468, respectively, were paid
pursuant to the Administrative Services Plan and/or the Administrative
Distribution Plan for the Funds listed below and were allocated as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund 06/30/98 06/30/97
- ---- -------- --------
<S> <C> <C>
Equity Income Fund $ 25,885 $ 16,938
Value Fund 11,304 0
Small-Cap Value Fund 22,930 12,276
Core Equity Fund 211,557 79,366
Mid-Cap Equity Fund 1,846 0
Mid-Cap Growth Fund 64,116 4,723
Micro-Cap Growth Fund 8,918 1,898
Enhanced Equity Fund 9,207 0
International Developed Fund 6,653 13,205
</TABLE>
The additional portions of the aggregate totals, $139,800 and $4,016,
respectively, were paid pursuant to the Administrative Services Plan only for
the Capital Appreciation, Emerging Markets and Small-Cap Growth Funds, and were
allocated among these Funds as follows (Administrative Class shares of the
Portfolios were initially offered beginning March 8, 1999):
<TABLE>
<CAPTION>
Year Ended Year Ended
Fund 06/30/98 06/30/97
- ---- -------- ---------
<S> <C> <C>
Capital Appreciation Fund $137,462 $3,297
Emerging Markets Fund 1,802 582
Small-Cap Growth Fund 536 137
</TABLE>
The remaining Funds did not make payments under either Administrative Plan.
The Administrative Plans were not in effect in prior fiscal years.
Plan for Class D Shares
As described above under "Management of the Trust - Fund Administrator,"
the Trust's Administration Agreement includes a plan (the "Class D Plan")
adopted in conformity with Rule 12b-1 under the 1940 Act which provides for the
payment of up to .25% of the Class D administrative fees as reimbursement for
expenses in respect of activities that may be deemed to be primarily intended to
result in the sale of Class D shares.
Specifically, the Administration Agreement provides that the Administrator
shall provide in respect of Class D shares (either directly or by procuring
through other entities, including various financial services firms such as
broker-dealers and registered investment advisers ("Service Organizations"))
some or all of the following services and facilities in connection with direct
purchases by shareholders or in connection with products, programs or accounts
offered by such Service Organizations ("Special Class D Services"): (i)
facilities for placing orders directly for the purchase of a Fund's Class D
shares and tendering a Fund's Class D shares for redemption; (ii) advertising
with respect to a Fund's Class D shares; (iii) providing information about the
Funds; (iv) providing facilities to answer questions from prospective investors
about the Funds; (v) receiving and answering correspondence, including requests
for prospectuses and statements of additional information; (vi) preparing,
printing and delivering prospectuses and
-57-
<PAGE>
shareholder reports to prospective shareholders; (vii) assisting investors in
applying to purchase Class D shares and selecting dividend and other account
options; and (viii) shareholder services provided by a Service Organization that
may include, but are not limited to, the following functions: receiving,
aggregating and processing shareholder orders; furnishing shareholder sub-
accounting; providing and maintaining elective shareholder services such as
check writing and wire transfer services; providing and maintaining pre-
authorized investment plans; communicating periodically with shareholders;
acting as the sole shareholder of record and nominee for shareholders;
maintaining accounting records for shareholders; answering questions and
handling correspondence from shareholders about their accounts; issuing
confirmations for transactions by shareholders; performing similar account
administrative services; providing such shareholder communications and
recordkeeping services as may be required for any program for which the Service
Organization is a sponsor that relies on Rule 3a-4 under the 1940 Act; and
providing such other similar services as may reasonably be requested to the
extent the Service Organization is permitted to do so under applicable statutes,
rules, or regulations.
The Administrator has entered into an agreement with the Distributor under
which the Distributor is compensated for providing or procuring certain of the
Special Class D Services at the rate of 0.25% per annum of all assets
attributable to Class D shares sold through the Distributor.
The Trust and the Administrator understand that some or all of the Special
Class D Services provided pursuant to the Administration Agreement may be deemed
to represent services primarily intended to result in the sale of Class D
shares. The Administration Agreement includes the Class D Plan to account for
this possibility. The Administration Agreement provides that any portion of the
fees paid thereunder in respect of Class D shares representing reimbursement for
the Administrator's and the Distributor's expenditures and internally allocated
expenses in respect of Class D Services of any Fund shall not exceed the rate of
0.25% per annum of the average daily net assets of such Fund attributable to
Class D shares.
In accordance with Rule 12b-1 under the 1940 Act, the Class D Plan may not
be amended to increase materially the costs which Class D shareholders may bear
under the Plan without the approval of a majority of the outstanding Class D
shares, and by vote of a majority of both (i) the Trustees of the Trust and (ii)
those Trustees ("disinterested Class D Plan Trustees") who are not "interested
persons" of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any agreements
related to it, cast in person at a meeting called for the purpose of voting on
the Plan and any related amendments. The Class D Plan may not take effect until
approved by vote of a majority of both (i) the Trustees of the Trust and (ii)
the disinterested Class D Plan Trustees. In addition, the Class D Plan may not
take effect unless it is approved by the vote of a majority of the outstanding
Class D shares and it shall continue in effect only so long as such continuance
is specifically approved at least annually by the Trustees and the disinterested
Class D Plan Trustees.
With respect to the Class D Plan, the Administration Agreement requires the
Administrator to present reports as to out-of-pocket expenditures and internal
expense allocations of the Administrator and the Distributor at least quarterly
and in a manner that permits the disinterested Class D Plan Trustees to
determine that portion of the Class D administrative fees paid thereunder which
represents reimbursements in respect of Special Class D Services.
Rules of the NASD limit the amount of distribution fees that may be paid by
mutual funds. "Service fees," defined to mean fees paid for providing
shareholder services or the maintenance of accounts (but not transfer agency
services) are not subject to the limits. The Trust believes that most, if not
all, of the fees paid pursuant to the Class D Plan will qualify as "service
fees" and therefore will not be limited by NASD rules.
Purchases, Exchanges and Redemptions
Purchases, exchanges and redemptions of the Trust's shares are discussed in
the Class A, B and C Prospectus, the Class D Prospectus and the Retail Portfolio
Prospectus under the headings "How to Buy Shares," "Exchange Privilege," and
"How to Redeem," and in the Institutional Prospectus and the Institutional
Portfolio Prospectus under the headings "Purchase of Shares," "Redemption of
Shares," and "Net Asset Value."
-58-
<PAGE>
Certain clients of the Adviser or a Sub-Adviser whose assets would be
eligible for purchase by one or more of the Funds may purchase shares of the
Trust with such assets. Assets so purchased by a Fund will be valued in
accordance with procedures adopted by the Board of Trustees.
One or more classes of shares of the Funds and Portfolios may not be
qualified or registered for sale in all States. Prospective investors should
inquire as to whether shares of a particular Fund or Portfolio, or class of
shares thereof, are available for offer and sale in their State of domicile or
residence. Shares of a Fund or Portfolio may not be offered or sold in any
State unless registered or qualified in that jurisdiction, unless an exemption
from registration or qualification is available.
As described in the Class A, B, and C Prospectus, the Class D Prospectus
and the Retail Portfolio Prospectus under the caption "Exchange Privilege," and
in the Institutional Prospectus and the Institutional Portfolio Prospectus under
the caption "Redemption of Shares," a shareholder may exchange shares of any
Fund or Portfolio for shares of the same class of any other Fund or Portfolio of
the Trust that is available for investment, or any series of PIMS, on the basis
of their respective net asset values. The original purchase date(s) of shares
exchanged for purposes of calculating any contingent deferred sales charge will
carry over to the investment in the new Fund or Portfolio. For example, if a
shareholder invests in Class C shares of one Fund and 6 months later (when the
contingent deferred sales charge upon redemption would normally be 1%) exchanges
his shares for Class C shares of another Fund, no sales charge would be imposed
upon the exchange, but the investment in the other Fund would be subject to the
1% contingent deferred sales charge until one year after the date of the
shareholder's investment in the first Fund as described in the Class A, B and C
Prospectus and the Retail Portfolio Prospectus under "Alternative Purchase
Arrangements." With respect to Class B or Class C shares, or Class A shares
subject to a contingent deferred sales charge, if less than all of an investment
is exchanged, any portion of the investment attributable to capital appreciation
and/or reinvested dividends or capital gains distributions will be exchanged
first, and thereafter any portions exchanged will be from the earliest
investment made in the Fund or Portfolio from which the exchange was made. 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 a particular Fund or
Portfolio, subsequently exchanges those shares for shares of a different Fund or
Portfolio and then exchanges back into the originally purchased Fund or
Portfolio. The Trust has the right to refuse any exchange for any investor who
completes (by making the exchange back into the shares of the originally
purchased Fund or Portfolio) more than six round trip exchanges in any twelve-
month period. Although the Trust has no current intention of terminating or
modifying the exchange privilege other than as set forth in the preceding
sentence, it reserves the right to do so 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 a Fund or
Portfolio not reasonably practicable.
The Trust is committed to paying in cash all requests for redemptions by
any shareholder of record of the Funds and Portfolios, limited in amount with
respect to each shareholder during any 90-day period to the lesser of (i)
$250,000, or (ii) 1% of the net asset value of the Trust at the beginning of
such period. Although the Trust will normally redeem all shares for cash, it may
redeem amounts in excess of the lesser of (i) or (ii) above by payment in kind
of securities held by the particular Fund or Portfolio.
-59-
<PAGE>
Due to the relatively high cost of maintaining smaller accounts, the Trust
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to shareholder
redemption, the shares in the account do not have a value of at least a
specified amount, the minimums of which are currently set at $250 for Class A,
Class B and Class C shares, $2,000 for Class D shares, and $100,000 with respect
to Institutional Class and Administrative Class shares. The Prospectuses may
set forth higher minimum account balances for one or more classes from time to
time depending upon the Trust's current policy. An investor will be notified
that the value of the account is less than the minimum and allowed at least 30
days to bring the value of the account up to at least the specified amount
before the redemption is processed. The Trust's Agreement and Declaration of
Trust, as amended and restated (the "Declaration of Trust"), also authorizes the
Trust to redeem shares under certain other circumstances as may be specified by
the Board of Trustees. The Funds and Portfolios may also charge periodic
account fees for accounts that fall below minimum balances as described in the
Prospectuses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment Decisions
Investment decisions for the Trust and for the other investment advisory
clients of the Adviser and Sub-Advisers are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved
(including the Trust). Thus, a particular security may be bought or sold for
certain clients even though it could have been bought or sold for other clients
at the same time. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the security. In some instances,
one client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in the Adviser's or the 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 Trust usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Trust includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Trust of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction.
Transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
The Adviser and/or each 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 Trust 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 Trust's best
interests, considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Because the Portfolios invest
exclusively in Institutional Class shares of Underlying PIMCO Funds, they
generally do not pay brokerage commissions and related costs, but do indirectly
bear a proportionate share of these costs incurred by the Underlying PIMCO Funds
in which they invest.
-60-
<PAGE>
For the fiscal years ended June 30, 1998, June 30, 1997 and June 30, 1996
(the fiscal year ended June 30, 1996 being an eight-month period), the following
amounts of brokerage commissions were paid by the Funds:
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
6/30/98 6/30/97 6/30/96
------- ------- -------
<S> <C> <C> <C>
Fund
- ----
Equity Income Fund $ 239,458 $ 161,012 $ 221,694
Value Fund 437,002 203,403 65,062
Small-Cap Value Fund 810,211 146,551 74,170
Capital Appreciation Fund 1,384,393 889,931 467,569
Mid-Cap Growth Fund 1,115,609 634,436 382,764
Micro-Cap Growth Fund 237,969 315,009 124,194
Small-Cap Growth Fund 71,734 113,103 76,333
Enhanced Equity Fund 61,193 196,460 114,363
Emerging Markets Fund 238,241 591,312 622,328
International Developed Fund 326,193 498,041 306,741
Balanced Fund 91,788 197,598 95,606
Core Equity Fund 219,194 114,173 54,049
Mid-Cap Equity Fund 44,404 31,940 16,691
Renaissance Fund* 2,539,296 717,040 N/A
Growth Fund* 4,154,740 2,632,126 N/A
Target Fund* 5,577,623 2,584,198 N/A
Opportunity Fund* 1,345,809 1,187,818 N/A
Innovation Fund* 412,457 224,529 N/A
International Fund* 785,827 748,412 N/A
International Growth Fund** 26,179 N/A N/A
Precious Metals Fund* 98,635 81,251 N/A
Tax Exempt Fund* N/A 0 N/A
----------- ----------- ----------
TOTAL $20,217,955 $12,268,343 $2,624,832
</TABLE>
__________________
*Amounts for the year ending June 30, 1997 are for the period 1/18/97 through
6/30/97.
**Amounts for the year ended June 30, 1998 are for the period from 12/31/97
through 6/30/98.
For the fiscal period ended January 17, 1997 and the fiscal year ended
September 30, 1996, the following amounts of brokerage commissions were paid by
the predecessors of the Funds listed below (each of which was a series of PAF
during such periods and reorganized as a Fund of the Trust on January 17, 1997):
<TABLE>
<CAPTION>
10/1/96 Year
TO Ended
Fund 1/17/97 9/30/96
- ---- ------- -------
<S> <C> <C>
Renaissance Fund $ 363,501 $ 993,617
Growth Fund 1,064,573 2,985,777
Target Fund 1,375,601 3,080,238
Opportunity Fund 505,221 1,757,263
Innovation Fund 105,556 228,473
International Fund 393,808 1,530,476
Precious Metals Fund 53,096 79,838
Tax Exempt Fund 0 0
---------- -----------
TOTAL $3,861,356 $10,655,682
</TABLE>
-61-
<PAGE>
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-Advisers receive research services from many broker-dealers
with which the Adviser and Sub-Advisers place the Trust's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services are of value to
the Adviser and Sub-Advisers in advising various of their clients (including the
Trust), although not all of these services are necessarily useful and of value
in managing the Trust. The advisory fees paid by the Trust are not reduced
because the Adviser and Sub-Advisers 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-Advisers may cause the Trust to pay broker-dealers which provide them with
"brokerage and research services" (as defined in the 1934 Act) an amount of
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
Consistent with the Rules of the NASD and subject to seeking the most
favorable price and execution available and such other policies as the Trustees
may determine, the Adviser or Sub-Advisers may also consider sales of shares of
the Trust as a factor in the selection of broker-dealers to execute portfolio
transactions for the Trust.
The Adviser or a 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 a Fund on a national securities exchange of which the
broker-dealer is a member if the transaction is "executed" on the floor of the
exchange by another broker which is not an "associated person" of the affiliated
broker-dealer, and if there is in effect a written contract between the Adviser
or 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 a Fund on exchange transactions
not exceed "usual and customary brokerage commissions." The rules define "usual
and customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time."
Portfolio Turnover
Except as described in the Prospectuses, the Adviser and Sub-Advisers
manage the portfolios of the Funds without regard generally to restrictions on
portfolio turnover. The use of futures contracts and other derivative
instruments with relatively short maturities may tend to exaggerate the
portfolio turnover rate for some of the Funds. Trading in fixed income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. The higher
the rate of portfolio turnover of a Fund, the higher these transaction costs
borne by the Fund generally will be. 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 a Fund or Portfolio is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
particular fiscal year by (b) the monthly average of the value of the portfolio
securities owned by the Fund or Portfolio during the particular fiscal year. In
calculating the rate of portfolio
-62-
<PAGE>
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.
In connection with the change in Sub-Advisers of the Growth, Target,
Opportunity, Innovation, Renaissance, Core Equity, Mid-Cap Equity and
International Growth Funds, these Funds may experience increased turnover due to
the differences, if any, between the portfolio management strategies of Columbus
Circle and PIMCO Equity Advisors. See "Management of the Trust--Portfolio
Management Agreements."
NET ASSET VALUE
As indicated in the Class A, B and C Prospectus, the Class D Prospectus and
the Retail Portfolio Prospectus under the heading "How Net Asset Value is
Determined", and in the Institutional Prospectus and Institutional Portfolio
Prospectus under the heading "Net Asset Value," the Trust's net asset value per
share for the purpose of pricing purchase and redemption orders is determined on
each day the New York Stock Exchange is open as of the close of regular trading
(normally, 4:00 p.m. Eastern time) on the Exchange. The Trust expects that the
holidays upon which the Exchange will be closed are as follows: New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The values of portfolio securities that are traded on stock exchanges
outside the United States are based upon the price on the exchange as of the
close of business of the exchange immediately preceding the time of valuation.
Securities traded in over-the-counter markets in European and Pacific Basin
countries are normally completed well before 4:00 p.m. (Eastern time). In
addition, European and Pacific Basin securities trading may not take place on
all business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days in New York and on which net asset value of these Funds is not
calculated. The calculation of the net asset value of certain Funds that invest
in foreign securities may not take place contemporaneously with the
determination of the prices of portfolio securities used in such calculation. If
events materially affecting the values of portfolio securities occur between the
time their prices are determined and 4:00 p.m. (Eastern time), these securities
will be valued at fair value as determined by the Adviser or a Sub-Adviser and
approved in good faith by the Board of Trustees.
TAXATION
The following discussion is general in nature and should not be regarded as
an exhaustive presentation of all possible tax ramifications. All shareholders
should consult a qualified tax adviser regarding their investment in a Fund or
Portfolio.
Each Fund and Portfolio intends to qualify annually and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated
investment company, each Fund and Portfolio generally must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test") 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 or Portfolio's total assets is represented by cash, cash items
(including receivables), U.S. Government securities, securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's or Portfolio's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities (other than U.S.
Government securities or the securities of other regulated investment companies)
of any one issuer or of two or more issuers which the Fund or Portfolio controls
and which are engaged in the same, similar or related trades or businesses. In
order to qualify for the special tax treatment accorded regulated investment
companies, each Fund and Portfolio must distribute each taxable year the sum of
(i) at least 90% of its investment company taxable income (which includes
dividends, interest and net short-term capital gains in excess of any net long-
term capital losses) and
-63-
<PAGE>
(ii) 90% of its tax exempt interest, net of expenses allocable thereto. By
qualifying as a regulated investment company, each Fund and Portfolio will not
be subject to federal income taxes to the extent that its net investment income,
net short-term capital gains and net long-term capital gains are distributed. In
addition, the Treasury Department is authorized to promulgate regulations under
which gains from foreign currencies (and options, futures, and forward contracts
on foreign currency) would not constitute qualifying income for purposes of the
Qualifying Income Test if such gains are not directly related to investing in
securities (or options and futures with respect to stock or securities). To
date, such regulations have not been issued.
In years when a Fund or Portfolio distributes amounts in excess of its
earnings and profits, such distributions may be treated in part as a return of
capital. A return of capital is not taxable to a shareholder and has the effect
of reducing the shareholder's basis in the shares.
The proper tax treatment of income or loss realized by the Precious Metals
Fund from the retirement or sale of a Metal-Indexed Note is unclear. The
Precious Metals Fund will report such income or loss as capital or ordinary
income or loss in a manner consistent with any Internal Revenue Service position
on the subject following the publication of such a position. Gain or loss from
the sale or exchange of preferred stock indexed to the price of a natural
resource is expected to be capital gain or loss to the Precious Metals Fund.
Distributions
As a regulated investment company, each Fund and Portfolio generally will
not be subject to U.S. federal income tax on its investment company taxable
income and net capital gains (any net long-term capital gains in excess of the
sum of net short-term capital losses and capital loss carryovers from prior
years) designated by the Fund or Portfolio as capital gain dividends, if any,
that it distributes to shareholders on a timely basis. Each Fund and Portfolio
intends to distribute to its shareholders, at least annually, substantially all
of its investment company taxable income and any net capital gains. In
addition, amounts not distributed by a Fund or Portfolio on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, each Fund and Portfolio must
distribute during each calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses (and adjusted for certain ordinary losses) for the twelve month
period ending on October 31 of the calendar year, and (3) all ordinary income
and capital gains for previous years that were not distributed during such
years. A distribution will be treated as paid on December 31 of the calendar
year if it is declared by a Fund or Portfolio in October, November or December
of that year to shareholders of record on a date in such a month and paid by the
Fund or Portfolio during January of the following year. Such distributions will
be taxable to shareholders (other than those not subject to federal income tax)
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To avoid application of
the excise tax, each Fund and Portfolio intends to make its distributions in
accordance with the calendar year distribution requirement.
The tax status of each Fund and Portfolio and the distributions which it
may make are summarized in the Class A, B and C Prospectus, the Class D
Prospectus and the Retail Portfolio Prospectus under the captions
"Distributions" and "Taxes", and in the Institutional Prospectus and
Institutional Portfolio Prospectus under the caption "Dividends, Distributions
and Taxes." All dividends and distributions of a Fund or Portfolio, whether
received in shares or cash, are taxable and must be reported on each
shareholder's federal income tax return. Distributions received by tax-exempt
shareholders will not be subject to federal income tax to the extent permitted
under the applicable tax exemption.
A portion of the dividends paid by Funds that invest in stock of U.S.
corporations may qualify for the deduction for dividends received by
corporations (subject generally to a 46-day holding period requirement).
Dividends paid by the other Funds generally are not expected to qualify for the
deduction for dividends received by corporations.
Distributions of net capital gains, if any, designated as capital gain
dividends, are taxable as long-term capital gains (generally subject to a 20%
tax rate for shareholders who are individuals), regardless of how long the
shareholder has held a Fund's or Portfolio's shares and are not eligible for the
dividends received deduction. Any
-64-
<PAGE>
distributions that are not from a Fund's investment company taxable income or
net capital gains may be characterized as a return of capital to shareholders
or, in some cases, as capital gain. The tax treatment of dividends and
distributions will be the same whether a shareholder reinvests them in
additional shares or elects to receive them in cash. A Portfolio will not be
able to offset gains realized by one Fund in which such Portfolio invests
against losses realized by another Fund in which such Portfolio invests. A
Portfolio's use of a fund-of-funds structure could therefore affect the amount,
timing and character of distributions to shareholders. In addition, Funds that
invest in other investment companies will not be able to offset gains realized
by one underlying investment company against losses realized by another
underlying investment company. A Fund's investment in other investment companies
could therefore affect the amount, timing and character of distributions to
shareholders of such Fund.
Dividends and distributions on shares of a Fund or Portfolio are generally
subject to federal income tax as described herein to the extent they do not
exceed the Fund's or Portfolio'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 a Fund or Portfolio
reflects gains that are either unrealized, or realized but not distributed.
Such realized gains may be required to be distributed even when a Fund's or
Portfolio's net asset value also reflects unrealized losses.
Sales of Shares
Upon the disposition of shares of a Fund or Portfolio (whether by
redemption, sale or exchange), a shareholder will realize a gain or loss. Such
gain or loss will be capital gain or loss if the shares are capital assets in
the shareholder's hands, and will be long-term or short-term generally depending
upon the shareholder's holding period for the shares. Long-term capital gains
will generally be taxed at a 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. Depending on a
Portfolio's percentage ownership in an Underlying PIMCO Fund both before and
after a redemption, a Portfolio's redemption of shares of such Fund may cause
the Portfolio to be treated as not receiving capital gain income on the amount
by which the distribution exceeds the Portfolio's tax basis in the shares of the
Underlying PIMCO Fund, but instead to be treated as receiving a dividend taxable
as ordinary income on the full amount of the distribution. This could cause
shareholders of a Portfolio to recognize higher amounts of ordinary income than
if the shareholders had held the shares of the Underlying PIMCO Funds directly.
Backup Withholding
A Fund or Portfolio may be required to withhold 31% of all taxable
distributions payable to shareholders who fail to provide the Fund or Portfolio
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal tax liability.
Options, Futures, Forward Contracts and Swap Agreements
To the extent such investments are permissible for a Fund, the Fund's
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles and foreign currencies will be subject to special tax rules
(including mark-to-market, constructive sale, straddle, wash sale and short sale
rules), the effect of which may be to accelerate income to the Fund, defer
losses to the Fund, cause adjustments in the holding periods of the Fund's
securities, convert long-term capital gains into short-term capital gains and
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders, including the Portfolios.
-65-
<PAGE>
Passive Foreign Investment Companies
Investment by a Fund in certain "passive foreign investment companies"
could subject the Fund to a U.S. federal income tax (including interest charges)
on distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to Fund shareholders. However, the Fund may elect to treat a
passive foreign investment company as a "qualified electing fund," in which case
the Fund will be required to include its share of the company's income and net
capital gain annually, regardless of whether it receives any distribution from
the company. The Fund also may make an election to mark the gains (and to a
limited extent losses) in such holdings "to the market" as though it had sold
and repurchased its holdings in those PFICs on the last day of the Fund's
taxable year. Such gains and losses are treated as ordinary income and loss.
The QEF and mark-to-market elections may have the effect of accelerating the
recognition of income (without the receipt of cash) and increase the amount
required to be distributed for the Fund to avoid taxation. Making either of
these elections therefore may require a Fund to liquidate other investments
(including when it is not advantageous to do so) to meet its distribution
requirement, which also may accelerate the recognition of gain and affect a
Fund's total return.
Foreign Currency Transactions
A Fund's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned.
Foreign Taxation
Income received by the Funds from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser and each Sub-Adviser intends to manage the
Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
such Fund will be eligible to elect to "pass-through" to the Fund's shareholders
the amount of eligible foreign income and similar taxes paid by the Fund. If
this election is made, a shareholder generally subject to tax will be required
to include in gross income (in addition to taxable dividends actually received)
his pro rata share of the foreign taxes paid by the Fund, and may be entitled
either to deduct (as an itemized deduction) his or her pro rata share of foreign
taxes in computing his taxable income or to use it as a foreign tax credit
against his or her U.S. federal income tax liability, subject to certain
limitations. In particular, shareholders must hold their shares (without
protection from risk of loss) on the ex-dividend date and for at least 15 more
days during the 30-day period surrounding the ex-dividend date to be eligible to
claim a foreign tax credit with respect to a gain dividend. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Each shareholder will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election
is made, the source of the electing Fund's income will flow through to
shareholders of the Trust. With respect to such Funds, gains from the sale of
securities will be treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency-denominated
debt securities, receivables and payables will be treated as ordinary income
derived from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source passive income, and to certain other types of
income. Shareholders may be unable to claim a credit for the full amount of
their proportionate share of the foreign taxes paid by the Fund. The foreign tax
credit can be used to offset only 90% of the revised alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income. Although a
Portfolio may itself be entitled to a deduction for such taxes paid by an
Underlying PIMCO Fund in which the Portfolio invests, the Portfolio will not be
able to pass any such credit or deduction through to its own shareholders. In
addition, a Fund which invests in other investment companies may not be able to
pass any such credit or deduction for taxes paid by the underlying investment
company through to its own shareholders.
-66-
<PAGE>
Original Issue Discount
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includable in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for U.S.
federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount is treated as ordinary income to the extent the gain, or
principal payment, does not exceed the "accrued market discount" on such debt
security. Market discount generally accrues in equal daily installments. A
Fund may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of
income.
Some debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Fund may be treated as having
acquisition discount, or OID in the case of certain types of debt securities.
Generally, the Fund will be required to include the acquisition discount, or
OID, in income over the term of the debt security, even though payment of that
amount is not received until a later time, usually when the debt security
matures. The Fund may make one or more of the elections applicable to debt
securities having acquisition discount, or OID, which could affect the character
and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
Other Taxation
Pursuant to Treasury Department regulations, certain expenses of
nonpublicly offered regulated investment companies, including advisory fees, are
not deductible by those regulated investment companies for purposes of
calculating the income of certain shareholders, generally including individuals
and entities that compute their taxable income in the same manner as an
individual (thus, for example, a qualified pension plan is not subject to this
rule). The shareholder's pro rata portion of such expenses will be treated as
income to the shareholder and will be deductible by the shareholder, subject to
the 2% "floor" on miscellaneous itemized deductions and other limitations on
itemized deductions set forth in the Code. A regulated investment company
generally will be classified as nonpublicly offered unless it either has 500
shareholders at all times during a taxable year or continuously offers shares
pursuant to a public offering.
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the laws of
various states, distributions of investment company taxable income generally are
taxable to shareholders even though all or a substantial portion of such
distributions may be derived from interest on certain federal obligations which,
if the interest were received directly by a resident of such state, would be
exempt from such state's income tax ("qualifying federal obligations").
However, some states may exempt all or a portion of such distributions from
income tax to the extent the shareholder is able to establish that the
distribution is derived from qualifying federal obligations. Moreover, for
state income tax purposes, interest on some federal obligations generally is not
exempt from taxation, whether received directly by a shareholder or through
distributions of investment company taxable income (for example, interest on
FNMA Certificates and GNMA Certificates). Each Fund and Portfolio will provide
information annually to shareholders indicating the amount and percentage of its
dividend distribution which is attributable to interest on federal obligations,
and will indicate to the extent possible from what types of federal obligations
such dividends are derived. The Trust is organized as a Massachusetts business
trust. Under current law, so long as each Fund and Portfolio qualifies for the
federal income tax treatment described above, it is believed that neither the
Trust nor any Fund or Portfolio will be liable for any
-67-
<PAGE>
income or franchise tax imposed by Massachusetts. Shareholders, in any event,
are advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Fund or Portfolio.
OTHER INFORMATION
Capitalization
The Trust is a Massachusetts business trust established under an Agreement
and Declaration of Trust as amended and restated on January 14, 1997. The
capitalization of the Trust consists solely of an unlimited number of shares of
beneficial interest. The Board of Trustees may establish additional series
(with different investment objectives and fundamental policies) at any time in
the future. Establishment and offering of additional series will not alter the
rights of the Trust's shareholders. When issued, shares are fully paid, non-
assessable, redeemable and freely transferable. Shares do not have preemptive
rights or subscription rights. In liquidation of a Fund or Portfolio, each
shareholder is entitled to receive his pro rata share of the net assets of that
Fund or Portfolio.
Performance Information
Performance information is computed separately for each class of a Fund or
Portfolio. Each Fund and Portfolio may from time to time include the total
return of each class of its shares in advertisements or in information furnished
to present or prospective shareholders. The Renaissance and Balanced Funds and
the 30/70 Portfolio may from time to time include the yield and total return of
each class of their shares in advertisements or information furnished to present
or prospective shareholders. Each Fund and Portfolio may from time to time
include in advertisements the total return of each class (and yield of each
class in the case of the Renaissance and Balanced Funds and the 30/70 Portfolio)
and the ranking of those performance figures relative to such figures for groups
of mutual funds categorized by Lipper Analytical Services as having the same
investment objectives. Information provided to any newspaper or similar listing
of the Fund's or Portfolio's net asset values and public offering prices will
separately present each class of shares. The Funds and Portfolios also may
compute current distribution rates and use this information in their
Prospectuses and Statement of Additional Information, in reports to current
shareholders, or in certain types of sales literature provided to prospective
investors.
Calculation of Yield
Quotations of yield for certain of the Funds and Portfolios will be based
on all investment income per share (as defined by the SEC) during a particular
30-day (or one month) period (including dividends and interest), less expenses
accrued during the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per share on the
last day of the period, according to the following formula:
YIELD = 2[( a-b + 1)/6/ -1]
---
cd
where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
-68-
<PAGE>
For the one month period ended December 31, 1998, the yields of the
Balanced Fund and Renaissance Fund were as follows (Class D shares were not
offered during the period listed):
<TABLE>
<CAPTION>
Institutional Administrative
------------- --------------
Fund Class Class Class A Class B Class C Class D
- ---- ----- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund 2.48% N/A 1.96% 1.31% 1.30% N/A
Renaissance Fund 0.39% 0.29% 0.01% -0.75% -0.75% -0.01%
</TABLE>
The yield of a Fund or Portfolio will vary from time to time depending upon
market conditions, the composition of its portfolio and operating expenses of
the Trust allocated to the Fund or Portfolio or its classes of shares. These
factors, possible differences in the methods used in calculating yield should be
considered when comparing a Fund's or Portfolio's yield to yields published for
other investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of a Fund's or Portfolio's various
classes of shares. These yields do not take into account any applicable
contingent deferred sales charges.
The Trust, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time
in the future, yields and total return may be higher or lower than past yields
and there can be no assurance that any historical results will continue.
Calculation of Total Return
Quotations of average annual total return for a Fund or Portfolio, or a
class of shares thereof, will be expressed in terms of the average annual
compounded rate of return of a hypothetical investment in the Fund, Portfolio or
class over periods of one, five, and ten years (up to the life of the Fund or
Portfolio), calculated pursuant to the following formula: P (1 + T)/n/ = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). Except as
noted below, all total return figures reflect the deduction of a proportionate
share of Fund, Portfolio or class expenses on an annual basis, and assume that
(i) the maximum sales load (or other charges deducted from payments) is deducted
from the initial $1,000 payment and that the maximum contingent deferred sales
charge, if any, is deducted at the times, in the amounts, and under the terms
disclosed in the Prospectuses and (ii) all dividends and distributions are
reinvested when paid. Quotations of total return may also be shown for other
periods. The Funds and Portfolios may also, with respect to certain periods of
less than one year, provide total return information for that period that is
unannualized. Under applicable regulations, any such information is required to
be accompanied by standardized total return information.
-69-
<PAGE>
The table below sets forth the average annual total return of certain
classes of shares of the following Funds for periods ended December 31, 1998.
For periods prior to the "Inception Date" of a particular class of a Fund's
shares, total return presentations for the class are based on the historical
performance of Institutional Class shares of the Fund (the oldest class)
adjusted, as necessary, to reflect any current sales charges (including any
contingent deferred sales charges) associated with the newer class and any
different operating expenses associated with the newer class, such as 12b-1
distribution and servicing fees (which are not paid by the Institutional Class)
and administrative fee charges.
Average Annual Total Return for Periods Ended December 31, 1998*
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Since
Inception Inception Inception
Fund Class** 1 Year 5 Years Of Fund Date Of Date Of
(Annualized) Fund Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Income Institutional 8.37% 17.83% 16.51% 03/08/91 03/08/91
Administrative 8.12% 17.54% 16.22% 11/30/94
Class A 2.09% 16.07% 15.22% 1/20/97
Class B 2.52% 16.30% 15.20% 1/20/97
Class C 6.36% 16.53% 15.21% 1/20/97
Class D 8.07% 17.39% 16.06% 4/8/98
- ----------------------------------------------------------------------------------------
Value Institutional 10.17% 17.39% 16.74% 12/30/91 12/30/91
Administrative 9.77% 17.10% 16.45% 8/21/97
Class A 3.72% 15.62% 15.35% 1/13/97
Class B 4.14% 15.86% 15.43% 1/13/97
Class C 8.06% 16.08% 15.43% 1/13/97
Class D 9.86% 16.96% 16.30% 4/8/98
- ----------------------------------------------------------------------------------------
Small-Cap Value Institutional -9.16% 13.62% 14.78% 10/1/91 10/1/91
Administrative -9.37% 13.33% 14.49% 11/1/95
Class A -14.46% 11.90% 13.44% 1/20/97
Class B -14.50% 12.08% 13.48% 1/20/97
Class C -11.06% 12.33% 13.48% 1/20/97
- ----------------------------------------------------------------------------------------
Capital Institutional 17.59% 21.32% 19.74% 3/8/91 3/8/91
Appreciation Administrative 17.26% 21.02% 19.45% 7/31/96
Class A 10.73% 19.49% 18.42% 1/20/97
Class B 11.33% 19.78% 18.40% 1/20/97
Class C 15.32% 19.96% 18.40% 1/20/97
Class D 17.14% 20.84% 19.27% 4/8/98
- ----------------------------------------------------------------------------------------
Mid-Cap Growth Institutional 7.93% 19.08% 18.23% 8/26/91 8/26/91
Administrative 7.81% 18.81% 17.95% 11/30/94
Class A 1.55% 17.27% 16.85% 1/13/97
Class B 1.66% 17.52% 16.89% 1/13/97
Class C 5.66% 17.73% 16.89% 1/13/97
Class D 7.80% 18.68% 17.81% 4/8/98
- ----------------------------------------------------------------------------------------
Micro-Cap Institutional -3.88% 17.50% 19.21% 6/25/93 6/25/93
Growth Administrative -4.08% 17.21% 18.92% 4/1/96
- ----------------------------------------------------------------------------------------
Small-Cap Institutional -8.50% 10.66% 18.44% 1/7/91 1/7/91
Growth Administrative -8.89% 10.49% 18.22% 9/27/95
- ----------------------------------------------------------------------------------------
Enhanced Equity Institutional 26.51% 21.82% 17.39% 2/11/91 2/11/91
Administrative 26.14% 21.50% 17.09% 8/21/97
- ----------------------------------------------------------------------------------------
International Institutional 39.40% N/A 39.40% 12/31/97 12/31/97
Growth
- ----------------------------------------------------------------------------------------
Balanced Institutional 12.23% 14.25% 13.43% 6/25/92 6/25/92
Class A 5.67% 12.50% 11.99% 1/20/97
Class B 6.28% 12.72% 12.14% 1/20/97
Class C 10.04% 12.97% 12.16% 1/20/97
- ----------------------------------------------------------------------------------------
</TABLE>
-70-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core Equity Institutional 41.06% N/A 27.77% 12/28/94 12/28/94
Administrative 40.47% N/A 27.41% 5/31/95
- ----------------------------------------------------------------------------------------
Mid-Cap Equity Institutional 29.89% N/A 23.53% 12/28/94 12/28/94
Administrative 29.56% N/A 23.23% 8/21/97
- ----------------------------------------------------------------------------------------
Value 25 Institutional N/A N/A -14.51% 7/10/98 7/10/98
Class A N/A N/A -19.36% 7/10/98
Class B N/A N/A -19.22% 7/10/98
Class C N/A N/A -15.76% 7/10/98
- ----------------------------------------------------------------------------------------
Structured Institutional N/A N/A -7.04% 6/30/98 6/30/98
Emerging
Markets
- ----------------------------------------------------------------------------------------
Tax-Efficient Institutional N/A N/A -5.37% 6/30/98 6/30/98
Structured
Emerging
Markets
- ----------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of
shares assume payment of the current maximum sales charge (if any)
applicable to that class at the time of purchase and assume that the
maximum CDSC (if any) for Class A, Class B and Class C shares was deducted
at the times, in the amounts, and under the terms discussed in the Class A,
B and C Prospectus.
** For all Funds listed above, Class A, Class B, Class C, Class D and
Administrative Class total return presentations for periods prior to the
Inception Date of a particular class reflect the prior performance of
Institutional Class shares of the Fund (the oldest class) adjusted to
reflect the actual sales charges (none in the case of Class D and the
Administrative Class) of the newer class. The adjusted performance also
reflects the higher Fund operating expenses applicable to Class A, Class B,
Class C, Class D and Administrative Class shares. These include (i) 12b-1
distribution and servicing fees, which are not paid by the Institutional
Class and are paid by Class B and Class C (at a maximum rate of 1.00% per
annum) and Class A and the Administrative Class (at a maximum rate of .25%
per annum), and may be paid by Class D (at a maximum rate of .25% per
annum) and (ii) administrative fee charges associated with Class A, Class B
and Class C shares (a maximum differential of .15% per annum) and Class D
shares (a maximum differential of 0.40% per annum).
-71-
<PAGE>
The table below sets forth the average annual total return of certain
classes of shares of the following Funds (each of which, except for the Tax-
Efficient Equity Fund, was a series of PAF prior to its reorganization as a Fund
of the Trust on January 17, 1997) for periods ended December 31, 1998.
Accordingly, "Inception Date of Fund" for these Funds refers to the inception
date of the PAF predecessor series. Since Class C shares were offered since the
inception of each PAF series, total return presentations for periods prior to
the Inception Date of the other classes (with the exception of Class D,
Institutional Class and Administrative Class shares of the Innovation Fund,
Institutional Class and Administrative Class shares of the Target Fund and
Administrative Class shares of the Tax-Efficient Equity Fund) are based on the
historical performance of Class C shares, adjusted to reflect any current sales
charges (including any contingent deferred sales charges) associated with the
newer class and any different operating expenses associated with the newer
class, such as 12b-1 distribution and servicing fees and administrative fee
charges. As described below, performance presentations for periods prior to the
Inception Date of Class D, Institutional Class and Administrative Class shares
of the Innovation Fund, Institutional Class and Administrative Class shares of
the Target Fund and Administrative Class Shares of the Tax-Efficient Equity Fund
are based on the historical performance of Class A shares.
Average Annual Total Return for Periods Ended December 31, 1998*
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Since Inception Inception Inception
of Fund Date of Fund Date of Class
Fund Class*** 1 Year 5 Years 10 Years (Annualized)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Renaissance** Class A 5.37% 17.17% 14.14%(#) 13.80%(#) 4/18/88 2/1/91
Class B 5.73% 17.39% 13.92% 13.53% 5/22/95
Class C 9.76% 17.62% 13.93% 13.54% 4/18/88
Class D 11.66%(#) 18.52%(#) 14.79%(#) 14.40%(#) 4/8/98
Institutional 11.83%(#) 18.93%(#) 15.22%(#) 14.83%(#) 12/30/97
Administrative 11.57%(#) 18.64%(#) 14.93%(#) 14.54%(#) 8/31/98
- ---------------------------------------------------------------------------------------------------------------------
Growth Class A 32.24% 19.82% 18.77%(#) 18.40%(#) 2/24/84 10/26/90
Class B 33.88% 20.08% 18.57% 17.98% 5/23/95
Class C 37.90% 20.27% 18.57% 17.98% 2/24/84
Institutional 40.45%(#) 21.64%(#) 19.93%(#) 19.32%(#) 4/1/99
Administrative 40.11%(#) 21.34%(#) 19.63%(#) 19.03%(#) 4/1/99
- ---------------------------------------------------------------------------------------------------------------------
Target Class A 17.32% 16.76% N/A 18.27% 12/17/92 12/17/92
Class B 18.27% 16.99% N/A 18.48% 5/22/95
Class C 22.27% 17.20% N/A 18.48% 12/17/92
Institutional 24.62%(#) 18.56%(#) N/A 19.84%(#) 4/1/99
Administrative 24.31%(#) 18.27%(#) N/A 19.55%(#) 4/1/99
- ---------------------------------------------------------------------------------------------------------------------
Opportunity Class A -3.62% 7.30% 18.03%(#) 16.79%(#) 2/24/84 12/17/90
Class B -2.82% 7.51% 17.84% 16.39% 4/1/99
Class C 0.47% 7.73% 17.84% 16.39% 2/24/84
Institutional 2.46%(#) 8.97%(#) 19.19%(#) 17.71%(#) 4/1/99
Administrative 2.20%(#) 8.70%(#) 18.90%(#) 17.42%(#) 4/1/99
- ---------------------------------------------------------------------------------------------------------------------
Innovation Class A 69.54% N/A N/A 34.67% 12/22/94 12/22/94
Class B 73.02% N/A N/A 35.35% 5/22/95
Class C 77.13% N/A N/A 35.55% 12/22/94
Class D 79.65% N/A N/A 36.63% 4/8/98
Institutional 80.13%(#) N/A N/A 37.09%(#) 3/5/99
Administrative 79.70%(#) N/A N/A 36.75%(#) Not yet offered
- ---------------------------------------------------------------------------------------------------------------------
International** Class A 3.30% 2.18% 6.58%(#) 6.74%(#) 8/25/86 2/1/91
Class B 3.39% 2.22% 6.38% 6.42% 5/22/95
Class C 7.30% 2.53% 6.37% 6.41% 8/25/86
Institutional 9.68%(#) 3.74%(#) 7.61%(#) 7.65%(#) 9/30/98
Administrative 9.10%(#) 3.43%(#) 7.31%(#) 7.36%(#) 9/30/98
- ---------------------------------------------------------------------------------------------------------------------
Precious Class A -12.50% -17.02% -5.64%(#) -6.01%(#) 10/10/88 2/1/91
Metals** Class B -13.00% -17.10% -5.86% -6.25% 6/15/95
Class C -9.61% -16.81% -5.88% -6.26% 10/10/88
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-72-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Efficient Class A N/A N/A N/A -0.47% 7/10/98 7/10/98
Equity Class B N/A N/A N/A -0.10% 7/10/98
Class C N/A N/A N/A 3.90% 7/10/98
Class D N/A N/A N/A 5.30% 7/10/98
Administrative N/A N/A N/A 5.30%(#) 9/30/98
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of
shares assume payment of the current maximum sales charge (if any)
applicable to that class at the time of purchase and assume that the
maximum CDSC (if any) for Class A, B and C shares was deducted at the
times, in the amounts, and under the terms discussed in the Class A, B and
C Prospectus.
** The investment objective and policies of the Renaissance Fund and
International Fund were changed effective February 1, 1992 and September 1,
1992, respectively. The investment objective and policies of the Precious
Metals Fund were changed effective November 15, 1994. Performance
information for prior periods does not necessarily represent results that
would have been obtained had the current investment objective and policies
been in effect for all periods.
*** Class A, Class B, Class D, Institutional Class and Administrative Class
total return presentations for the Funds listed for periods prior to the
Inception Date of the particular class of a Fund (with the exception of
Class D, Institutional Class and Administrative Class shares of the
Innovation Fund, Institutional Class and Administrative Class shares of the
Target Fund and Administrative Class shares of the Tax-Efficient Equity
Fund) reflect the prior performance of Class C shares of the Fund, adjusted
to reflect the actual sales charges (or no sales charges in the case of
Class D, Institutional Class and Administrative Class shares) of the newer
class. The adjusted performance also reflects any different operating
expenses associated with the newer class. These include (i) 12b-1
distribution and servicing fees, which are paid by Class C and Class B (at
a maximum rate of 1.00% per annum) and Class A and the Administrative Class
(at a maximum rate of .25% per annum), may be paid by Class D (at a maximum
rate of .25% per annum), and are not paid by the Institutional Class and
(ii) administrative fee charges, which are lower than Class C charges for
the Institutional and Administrative Classes (a maximum differential of
.15% per annum) and higher for Class D (a maximum differential of .25% per
annum). (Administrative fee charges are the same for Class A, B and C
shares.) Performance presentations for periods prior to the Inception Date
of Class D, Institutional Class and Administrative Class shares of the
Innovation Fund, Institutional Class and Administrative Class shares of the
Target Fund and Administrative Class Shares of the Tax-Efficient Equity
Fund are based on the historical performance of Class A shares (which were
also offered since inception of the Fund), adjusted in the manner described
above.
Note also that, prior to January 17, 1997, Class A, Class B and Class C
shares of the former PAF series were subject to a variable level of
expenses for such services as legal, audit, custody and transfer agency
services. As described in the Class A, B and C Prospectus, for periods
subsequent to January 17, 1997, Class A, Class B and Class C shares of the
Trust are subject to a fee structure which essentially fixes these expenses
(along with other administrative expenses) under a single administrative
fee based on the average daily net assets of a Fund attributable to Class
A, Class B and Class C shares. Under the current fee structure, the Growth
Fund, Target Fund, Opportunity Fund and International Fund are expected to
have higher total Fund operating expenses than their predecessors had under
the fee structure for PAF (prior to January 17, 1997). All other things
being equal, such higher expenses have an adverse effect on total return
performance for these Funds after January 17, 1997.
(#) Where noted, the method of adjustment used in the table above for
periods prior to the Inception Date of the noted classes of the noted Funds
resulted in performance for the period shown which is higher than if the
historical Class C or Class A share performance (i.e., the older class used
for prior periods) were not adjusted to reflect the lower operating
expenses of the newer class. The following table shows the lower
performance figures that would be obtained if the performance for newer
classes with lower operating expenses were calculated by essentially
tacking to such classes' actual performance the actual performance (with
adjustment for actual sales charges) of the older Class of shares, with
their higher operating expenses, for periods prior to the initial offering
date of the newer class (i.e., the total return presentations below are
based, for periods prior to the Inception Date of the noted classes, on the
historical performance of the older class adjusted to reflect the current
sales charges (if any) associated with the newer class, but not reflecting
---
lower operating expenses associated with the newer class, such as lower
administrative fee charges and/or 12b-1 distribution and servicing fee
charges).
-73-
<PAGE>
(Total Return for Periods Ended December 31, 1998
(with no adjustment for operating expenses of the noted
classes for periods prior to their inception dates)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Since Inception
of Fund
Fund Class 1 Year 5 Years 10 Years (Annualized)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Renaissance Class A -- -- 13.96% 13.57%
Class D 11.45% 17.77% 14.00% 13.61%
Institutional 11.83% 17.86% 14.04% 13.65%
Administrative 10.90% 17.66% 13.95% 13.55%
-------------------------------------------------------------------------------------
Growth Class A -- -- 18.61% 18.00%
Institutional 38.90% 20.27% 18.57% 17.98%
Administrative 38.90% 20.27% 18.57% 17.98%
-------------------------------------------------------------------------------------
Target Institutional 24.15% 18.09% -- 19.38%
Administrative 24.15% 18.09% -- 19.38%
-------------------------------------------------------------------------------------
Opportunity Class A -- -- 17.86% 16.40%
Institutional 1.29% 7.73% 17.84% 16.39%
Administrative 1.29% 7.73% 17.84% 16.39%
-------------------------------------------------------------------------------------
Innovation Institutional 79.41% -- -- 36.58%
Administrative 79.41% -- -- 36.58%
-------------------------------------------------------------------------------------
International Class A -- -- 6.42% 6.45%
Institutional 8.73% 2.61% 6.41% 6.45%
Administrative 8.36% 2.54% 6.38% 6.42%
-------------------------------------------------------------------------------------
Precious Metals Class A -- -- -5.79% -6.18%
-------------------------------------------------------------------------------------
Tax-Efficient Administrative -- -- -- 5.30%
Equity
-------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the average annual total return of each
class of shares of the Portfolios for periods ended December 31, 1998. Total
return presentations for periods prior to the Inception Date of Institutional
Class and Administrative Class shares are based on the historical performance of
Class A shares (which were offered since the inception of the Portfolios),
adjusted to reflect that there are no sales charges associated with
Institutional Class and Administrative Class shares and any different operating
expenses associated with these newer classes, such as lower 12b-1 distribution
and servicing fees and/or administrative fee charges.
-74-
<PAGE>
Average Annual Total Return for Periods Ended December 31, 1998*
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Since Inception Inception Inception
of Portfolio Date of Date of Class
Portfolio Class** 1 Year (Annualized) Portfolio
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
90/10 Portfolio Class A N/A 7.97% 9/30/98 9/30/98
Class B N/A 9.09% 9/30/98
Class C N/A 13.09% 9/30/98
Institutional N/A 14.39%(#) 3/1/99
Administrative N/A 14.32%(#) 3/1/99
---------------------------------------------------------------------------------------
60/40 Portfolio Class A N/A 4.04% 9/30/98 9/30/98
Class B N/A 4.94% 9/30/98
Class C N/A 8.94% 9/30/98
Institutional N/A 10.22%(#) 3/1/99
Administrative N/A 10.15%(#) 3/1/99
---------------------------------------------------------------------------------------
30/70 Portfolio Class A N/A 0.21% 9/30/98 9/30/98
Class B N/A 0.80% 9/30/98
Class C N/A 4.76% 9/30/98
Institutional N/A 6.17%(#) 3/1/99
Administrative N/A 6.10%(#) 3/1/99
---------------------------------------------------------------------------------------
</TABLE>
* Average annual total return presentations for a particular class of shares
assume payment of the current maximum sales charge (if any) applicable to that
class at the time of purchase and assume that the maximum CDSC (if any) for
Class A, B and C shares was deducted at the times, in the amounts, and under the
terms discussed in the Retail Portfolio Prospectus.
*** Institutional Class and Administrative Class total return presentations for
the Portfolios for periods prior to the Inception Date of these classes reflect
the prior performance of Class A shares, adjusted to reflect that there are no
sales charges associated with Institutional Class and Administrative Class
shares. The adjusted performance also reflects any different operating expenses
associated with the newer classes. These include (i) 12b-1 distribution and
servicing fees, which are the same for Class A and the Administrative Class but
are not paid by the Institutional Class and (ii) administrative fee charges,
which are lower than Class A charges for the Institutional and Administrative
Classes (a differential of .30% per annum).
(#) Where noted, the method of adjustment used in the table above for periods
prior to the Inception Date of the noted classes of the Portfolios resulted in
performance for the period shown which is higher than if the historical Class A
share performance were not adjusted to reflect the lower operating expenses of
the newer class. The following table shows the lower performance figures that
would be obtained if the performance for the newer classes with lower operating
expenses were calculated by essentially tacking to such classes' actual
performance the actual performance (with adjustment for actual sales charges) of
Class A shares, with their higher operating expenses, for periods prior to the
initial offering date of the newer class (i.e., the total return presentations
below are based, for periods prior to the Inception Date of the noted classes,
on the historical performance of Class A shares adjusted to reflect the current
sales charges (if any) associated with the newer class, but not reflecting lower
---
operating expenses associated with the newer class, such as lower administrative
fee charges and/or 12b-1 distribution and servicing fee charges).
-75-
<PAGE>
Total Return for Periods Ended December 31, 1998
(with no adjustment for operating expenses of the noted
classes for periods prior to their inception dates)
<TABLE>
<CAPTION>
------------------------------------------------------------
Since Inception
of Portfolio
Portfolio Class** 1 Year (Annualized)
------------------------------------------------------------
<S> <C> <C> <C>
90/10 Portfolio Institutional N/A 14.24%
Administrative N/A 14.24%
------------------------------------------------------------
60/40 Portfolio Institutional N/A 10.07%
Administrative N/A 10.07%
------------------------------------------------------------
30/70 Portfolio Institutional N/A 6.02%
Administrative N/A 6.02%
------------------------------------------------------------
</TABLE>
Performance information for a Fund or Portfolio may also be compared to:
(i) the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average, the Morgan Stanley Capital International EAFE (Europe,
Australasia, Far East) Index, the Morgan Stanley Capital International Emerging
Markets Free Index, the International Finance Corporation Emerging Markets
Index, the Baring Emerging Markets Index, or other unmanaged indexes that
measure performance of a pertinent group of securities; (ii) other groups of
mutual funds tracked by Lipper Analytical Services ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Funds. Unmanaged indexes
(i.e., other than Lipper) generally do not reflect deductions for administrative
and management costs or expenses. The Adviser and any of the Sub-Advisers may
also report to shareholders or to the public in advertisements concerning the
performance of the Adviser and/or the Sub-Advisers as advisers to clients other
than the Trust, and on the comparative performance or standing of the Adviser
and/or the Sub-Advisers in relation to other money managers. Such comparative
information may be compiled or provided by independent ratings services or by
news organizations. Any performance information, whether related to the Funds
or Portfolios, the Adviser or the Sub-Advisers, should be considered in light of
the Funds' or Portfolios' investment objectives and policies, characteristics
and quality, and the market conditions during the time period indicated, and
should not be considered to be representative of what may be achieved in the
future.
The total return of each class (and yield of each class in the case of the
Renaissance and Balanced Funds and the 30/70 Portfolio) may be used to compare
the performance of each class of a Fund's or Portfolio's shares against certain
widely acknowledged standards or indexes for stock and bond market performance,
against interest rates on certificates of deposit and bank accounts, against the
yield on money market funds, against the cost of living (inflation) index, and
against hypothetical results based on a fixed rate of return.
The S&P's Composite Index of 500 Stocks (the "S&P 500") is a market value-
weighted and unmanaged index showing the changes in the aggregate market value
of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The 500 companies
represented include 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
-76-
<PAGE>
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.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market value-weighted
and unmanaged index showing the changes in the aggregate market value of
approximately 3,500 stocks relative to the base measure of 100.00 on February 5,
1971. The NASDAQ Index is composed entirely of common stocks of companies
traded over-the-counter and often through the NASDAQ system. Only those over-
the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest securities in the Russell 3000 Index, representing approximately 7% of
the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of
the U.S. equity market by capitalization. The Russell 1000 Index is composed of
the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Index
represents the universe of stocks from which most active money managers
typically select. This large cap index is highly correlated with the S&P 500.
The Russell 1000 Value Index contains stocks from the Russell 1000 Index with a
less-than-average growth orientation. It represents the universe of stocks from
which value managers typically select.
The Lehman Government Bond Index (the "SL Government Index") is a measure
of the market value of all public obligations of the U.S. Treasury; all
publicly-issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the SL Government Index.
The Lehman Government/Corporate Bond Index (the "SL Government/Corporate
Index") is a measure of the market value of approximately 5,000 bonds. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher by an NRSRO.
BanXquote Money Market, a service of Masterfund Inc., provides the average
rate of return paid on 3-month certificates of deposit offered by major banks
and the average rate paid by major banks on bank money market funds. The
Donoghue Organization, Inc., a subsidiary of IBC USA Inc., publishes the Money
Fund Report which lists the 7-day average yield paid on money market funds.
From time to time, the Trust may use, in its advertisements or information
furnished to present or prospective shareholders, data concerning the
performance and ranking of certain countries' stock markets, including
performance and ranking data based on annualized returns over one-, three-,
five- and ten-year periods. The Trust may also use data about the portion of
world equity capitalization represented by U.S. securities. As of December 31,
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.
-77-
<PAGE>
From time to time, the Trust may use, in its advertisements and other
information relating to certain of the Funds and Portfolios, data concerning the
performance of stocks relative to that of fixed income investments and relative
to the cost of living over various periods of time. The table below sets forth
the annual returns for each calendar year from 1973 through 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
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:
P\\t\\ = [1- rd]
---
[ 360]
where,
r = decimal yield on the bill at time t (the average of
bid and ask quotes); and
d = the number of days to maturity as of time t.
-78-
<PAGE>
Advertisements and information relating to the Target Fund may use data
comparing the performance of stocks of medium-sized companies to that of other
companies. The following table sets forth the annual returns for each year from
March 1981 (inception of Mid-Cap Index) through December 31, 1998 (as well as a
cumulative return and average annual return for this period) for stocks of
medium-sized companies (based on the Standard & Poor's Mid-Cap Index), stocks
of small companies (based on the Russell 2000 Index) and stocks of larger
companies (based on the S&P 500).
<TABLE>
<CAPTION>
Small Mid-Size Large
Period Companies Companies Companies
- ------ ---------- ---------- ----------
<S> <C> <C> <C>
1981 (2/28 -12/31) 1.8 10.6 -2.5
1982 25.0 22.7 21.4
1983 29.1 26.1 22.5
1984 -7.3 1.2 6.3
1985 31.1 36.0 32.2
1986 5.7 16.2 18.5
1987 -8.8 -2.0 5.2
1988 24.9 20.9 16.8
1989 16.2 35.6 31.5
1990 -19.5 -5.1 -3.2
1991 46.1 50.1 30.5
1992 18.4 11.9 7.7
1993 18.9 14.0 10.1
1994 -1.8 -3.6 1.3
1995 28.4 30.9 37.6
1996 16.5 19.2 22.9
1997 22.8 32.3 33.4
1998 -2.6 19.1 28.6
- -----------------------------------------------------------
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>
From time to time, the Trust may use, in its advertisements and other
information relating to the Precious Metals Fund, data concerning the relevant
performance and volatility of portfolios consisting of all stocks, portfolios
consisting of all bonds and portfolios consisting of stocks and bonds blended
with stocks of companies engaged in the extraction, processing, distribution or
marketing of gold and other precious metals. The following table shows the
annual returns for each calendar year from 1988 through 1998 (as well as
cumulative return and average annual return for this period) for an all-stock
portfolio (using the S&P 500), an all-bond portfolio (using the Ibbotson's Long-
Term Corporate Bond Index), and for a hypothetical portfolio with 45% of its
assets in stocks comprising the S&P 500, 45% in bonds comprising the Ibbotson's
Long-Term Corporate Bond Index and 10% in stocks comprising the Philadelphia
Gold & Silver Index.
-79-
<PAGE>
Return and Cumulative Values of Stocks, Bonds, Savings Rates
vs. Balanced Portfolio (Assuming Rebalancing at Year-Ends)
----------------------------------------------------------
ANNUAL RETURNS
--------------
<TABLE>
<CAPTION>
Small Co. S&P 500 LT. Corp.
Stocks Stocks Bonds T-Bills Gold Index Balanced*
------ -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1988 22.87% 16.81% 10.70% 6.35% -20.70% 9.03%
1989 10.18% 31.49% 16.23% 8.37% 37.83% 26.43%
1990 -21.56% -3.17% 6.78% 7.83% -19.09% -0.97%
1991 44.63% 30.55% 19.89% 5.59% -16.75% 21.71%
1992 23.35% 7.67% 9.39% 3.51% -11.75% 5.07%
1993 20.98% 9.99% 13.17% 2.89% 85.01% 23.46%
1994 3.11% 1.31% -5.76% 3.90% -17.12% -3.12%
1995 34.46% 37.43% 27.20% 5.60% 10.14% 29.01%
1996 17.62% 23.07% 1.40% 5.21% -3.05% 10.46%
1997 22.78% 33.36% 12.95% 5.26% -36.45% 17.19%
1998 -7.31% 28.58% 10.76% 4.86% -12.43% 16.46%
Standard
Deviation 17.80% 13.34% 8.37% 1.60% 32.69% 10.35%
88-98
Cumulative
88-98 325.3% 575.6% 210.2% 78.0% -40.8% 349.5%
Annualized
88-98 19.0% 17.8% 10.8% 5.4% -4.7% 12.4%
</TABLE>
_________________________________
*Balanced:
--------
Stocks 45%
Bonds 45%
Gold 10%
Small Co. 0%
T-Bills 0%
From time to time, the Trust may use, in its advertisements and other
information, data concerning the average price-to-earnings ("P/E") ratios of
"Value Stocks" and "Growth Stocks." For these purposes, the P/E ratios of Value
Stocks are measured by the P/E ratios of the stocks comprising the Russell 1000
Value Index, and the P/E ratios of Growth Stocks are measured by the P/E ratios
of the stocks comprising the Russell 1000 Growth Index. Both the Russell 1000
Value Index and Russell 1000 Growth Index are unmanaged indexes, and it is not
possible to invest directly in either index. The table below sets forth the
average P/E ratio of Value Stocks and the Average P/E ratio of Growth Stocks for
the period beginning December 31, 1992 and ending March 31, 1999.
<TABLE>
<CAPTION>
Average P/E ratio
-------------------
Period
Ending Growth Stocks Value Stocks
- ------ ------------- ------------
<S> <C> <C>
12/31/92 21.76 21.40
3/31/93 21.59 22.36
6/30/93 20.86 21.41
9/30/93 20.25 21.05
12/31/93 18.33 17.84
3/31/94 18.07 17.69
6/30/94 16.70 16.31
</TABLE>
-80-
<PAGE>
<TABLE>
<S> <C> <C>
9/30/94 15.98 15.28
12/31/94 15.98 14.97
3/31/95 15.80 14.62
6/30/95 16.50 14.87
9/30/95 17.85 16.17
12/31/95 17.91 15.82
3/31/96 18.24 16.07
6/30/96 18.57 15.93
9/30/96` 18.88 15.80
12/31/96 20.45 17.03
3/31/97 20.28 16.78
6/30/97 22.85 18.44
9/30/97 23.80 19.60
12/31/97 22.93 19.06
3/31/98 26.46 21.32
6/30/98 26.55 20.69
9/30/98 25.77 19.31
12/31/98 31.31 22.92
3/31/99 39.46 24.33
</TABLE>
Advertisements and information relating to the Growth Fund may use
data comparing the performance of a hypothetical investment in Growth Stocks,
Value Stocks, "Bonds" and "Savings Accounts." For these purposes, the
performance of an investment in "Bonds" is measured by the Lehman Aggregate Bond
Index, an unmanaged index representative of the U.S. taxable fixed income
universe. It is not possible to invest in this index. The performance of an
investment in "Savings Accounts" is measured by the return on 3-month U.S.
Treasury bills. Similarly, advertisements and information relating to the
Renaissance Fund may use data comparing the performance of a hypothetical
investment in "Stocks," Bonds and Savings Accounts. For these purposes, the
performance of the investment in "Stocks" is measured by the S&P 500, while the
performance of Bonds and Savings Accounts is measured as discussed above. The
table below sets forth the value at March 31, 1999 of a hypothetical $10,000
investment in Stocks, Growth Stocks, Value Stocks, Bonds and Savings Accounts
made at March 31, 1979.
<TABLE>
<CAPTION>
Asset Category March 31, 1999 Value of $10,000 Investment made at March 31, 1979
- ------------------ -----------------------------------------------------------------
<S> <C>
Growth Stocks $247,076
Value Stocks $231,697
Stocks $126,624
Bonds $ 67,584
Savings Accounts $ 39,985
</TABLE>
Advertisements and information may compare the average annual total
return of the Growth, Renaissance and Innovation Funds with that of the Lipper
Growth Fund Average, Lipper Equity Income Fund Average and Lipper Science &
Technology Fund Average, respectively. The Innovation Fund may also be compared
to the S&P 500. The Lipper Growth Fund Average is a total-return performance
average of funds that are tracked by Lipper, Inc. and have an investment
objective of long-term growth. The Lipper Equity Income Fund Average is a
total-return performance average of funds tracked by Lipper that have an
investment objective of income and growth through investment in stocks. The
Lipper Science and Technology Fund Average is a total-return performance average
of funds tracked by Lipper with an investment objective of capital appreciation
through investment in technology-oriented companies. None of the averages take
into account sales charges. It is not possible to invest directly in the
averages. The average annual total return of the Growth Fund, the Renaissance
Fund, the Innovation Fund, the Lipper Growth Fund Average, the Lipper Equity
Income Fund Average and the Lipper Science and Technology Fund Average are set
forth below. The inception date of the Growth and Opportunity Funds is February
24, 1984. The inception date of the Innovation Fund is December 27, 1994. The
inception date of the Mid-Cap Growth Fund is August 26, 1991.
-81-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
(for periods ending 3/31/99)
---------------------------------------
Fund
1 Year 3 Years 5 Years 10 Years Inception
------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Growth Fund 29.0% 27.4% 23.6% 19.4% 19.1%
Lipper Growth Fund Average 13.6% 21.7% 20.4% 16.3% 15.6%
Renaissance Fund 5.5% 23.9% 20.7% 15.0% --
Lipper Equity Income Fund Average 0.7% 16.9% 17.2% 13.6% --
Innovation Fund 68.7% 39.0% -- -- 38.3%
Lipper Science and Technology 52.3% 27.3% -- -- 27.4%
Fund Average
S&P 500 18.5% 28.1% -- -- 30.0%
Opportunity Fund -- -- -- 17.6% 16.9%
Lipper Capital Appreciation -- -- -- 13.6% 12.8%
Fund Average
Target Fund 12.6% 17.5% 19.0% -- 18.8%
Lipper Mid-Cap Fund 0.2% 14.0% 15.8% -- 14.0%
Average
Capital Appreciation Fund -- 23.2% `22.0% -- 18.9%
Lipper Capital Appreciation -- 15.1% 16.5% -- 14.4%
Fund Average
Mid-Cap Growth Fund -- 14.9% 16.8% -- 15.7%
Lipper Capital Appreciation -- 14.0% 15.8% -- 14.2%
Fund Average
</TABLE>
From time to time, the Trust may use, in its advertisements and other
information, data comparing the average annual total return of "Small-Caps,"
which are stocks represented by the Ibbotson Small Company Stock Total Return
Index, and "Large-Caps," which are stocks represented by the Ibbotson Large
Company Stock Total Return Index. Both indexes are unmanaged indexes, and it is
not possible to invest directly in either index. For example, for the period
from December 31, 1925 through December 31, 1998, the average annual total
return of Small-Caps was 12.4%, and for Large-Caps was 11.2%.
Advertisements and other information and other information relating to the
Balanced Fund may list the annual total returns of certain asset classes during
specified years. In such advertisements, the return of "Small Company Stocks"
will be measured by the Russell 2000 Index of small company stocks, the returns
of "Large Company Stocks" will be measured by the S&P 500, and the return of
"Intermediate-Term Government Bonds" will be measured by a one-bond portfolio
with a 5-year maturity as measured by Ibbotson Associates. The following table
sets for the average return of these asset classes for the specified years.
Domestic Asset Class Annual Total Return
-------------------- -------------------
1990 Intermediate-Term Government Bonds +9.7%
1991 Small Company Stocks +22.9%
1992 Small Company Stocks +31.5%
1993 Small Company Stocks +21.0%
1994 U.S. Treasury Bills +3.9%
-82-
<PAGE>
1995 Large Company Stocks +37.4%
1996 Large Company Stocks +23.0%
1997 Large Company Stocks +33.4%
1998 Large Company Stocks +28.6%
Advertisements and other information relating to the Innovation Fund may
include information pertaining to the number of home internet subscriptions and
cellular phone users and sales of personal computers.
From time to time, the Trust 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 Trust is making no prediction regarding what
will be the actual growth rate in the cost of a college education, which may be
greater or less than 3% per year and may vary significantly from year to year.
The Trust makes no representation that an investment in any of the Funds will
grow at or above the rate of growth of the cost of a college education.
Potential College Cost Table
<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.
-83-
<PAGE>
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 any of the Funds or Portfolios of PIMCO Funds:
Multi-Manager Series. Stocks is 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.
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%
</TABLE>
-84-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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 any of the Funds or Portfolios of PIMCO Funds:
Multi-Manager Series. 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.
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 a
Fund or Portfolio of PIMCO Funds: Multi-Manager Series.
There can be no guarantee that you will be able to find
an investment that would provide such a return at the
times you invest and an investor in any of the Funds or
Portfolio of PIMCO Funds: Multi-Manager Series should be
aware that certain of the Funds and Portfolios of PIMCO
Funds: Multi-Manager Series have experienced and may
experience in the future periods of negative growth.
-85-
<PAGE>
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:
% of Income for Individuals
Aged 65 Years and Older in 1997*
-------------------------------
Social Security
Year and Pension Plans Other
---- ----------------- -----
1997 43% 57%
* For individuals with an annual income of at least $51,000. Other includes
personal savings, earnings and other undisclosed sources of income. Source:
Social Security Administration.
Articles or reports which include information relating to performance,
rankings and other characteristics of the Funds and Portfolios may appear in
various national publications and services including, but not limited to: The
Wall Street Journal, Barron's, Pensions and Investments, Forbes, Smart Money,
Mutual Fund Magazine, The New York Times, Kiplinger's Personal Finance, Fortune,
Money Magazine, Morningstar's Mutual Fund Values, CDA Investment Technologies
and The Donoghue Organization. Some or all of these publications or reports may
publish their own rankings or performance reviews of mutual funds, including the
Funds, and may provide information relating to the Adviser and the Sub-Advisers,
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-Advisers who have portfolio management responsibility. From time to
time, the Trust may include references to or reprints of such publications or
reports in its advertisements and other information relating to the Funds and
Portfolios.
From time to time, the Trust may set forth in its advertisements and other
materials information about the growth of a certain dollar-amount invested in
one or more of the Funds or Portfolios over a specified period of time and may
use charts and graphs to display that growth.
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-Advisers who assist with portfolio management and research
activities on behalf of the Funds. The following lists various analysts and the
Sub-Adviser with whom they are associated: Pacific Investment Management --
Jane Howe, Mark Hudoff, Doris Nakamura and Ray Kennedy.
Ibbotson Associates ("Ibbotson") has analyzed the risk and returns of the
Funds and relevant benchmark market indexes in a variety of market conditions.
Based on its independent research and analysis, Ibbotson may develop, from time
to time, model portfolios of the Funds and series of PIMS which indicate how, in
Ibbotson's opinion, a hypothetical investor with a 5+ year investment horizon
might allocate his or her assets among the Funds and series of PIMS. Ibbotson
bases its model portfolios on five levels of investor risk tolerance which it
developed and defines as ranging from "Very Conservative" (low volatility;
emphasis on capital preservation, with some growth potential) to "Very
Aggressive" (high volatility; emphasis on long-term growth potential). However,
neither Ibbotson nor the Trust offers Ibbotson's model portfolios as
investments. Moreover, neither the Trust, the Adviser, the Sub-Advisers 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 Funds,
are taking steps to
-86-
<PAGE>
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 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 in which the Fund invests due to a potential lack of Year 2000
compliance efforts in foreign markets or 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 Funds 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.
-87-
<PAGE>
Voting Rights
Under the Declaration of Trust, the Trust is not required to hold annual
meetings of Trust shareholders to elect Trustees or for other purposes. It is
not anticipated that the Trust will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Trust will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the Board
if, at any time, fewer than a majority of the Trustees have been elected by the
shareholders of the Trust. Shareholders may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to do so by the
holders of not less than 10% of the outstanding shares of the Trust. In the
event that such a request was made, the Trust has represented that it would
assist with any necessary shareholder communications. Shareholders of a class
of shares have different voting rights with respect to matters that affect only
that class.
All classes of shares of the Funds and Portfolios have identical voting
rights except that each class of shares has exclusive voting rights on any
matter submitted to shareholders that relates solely to that class, and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class. These
shares are entitled to vote at meetings of shareholders. Matters submitted to
shareholder vote must be approved by each Fund and Portfolio separately except
(i) when required by the 1940 Act shares shall be voted together and (ii) when
the Trustees have determined that the matter does not affect all Funds and
Portfolios, then only shareholders of the Fund(s) or Portfolio(s) affected shall
be entitled to vote on the matter. All classes of shares of a Fund or Portfolio
will vote together, except with respect to the Distribution and Servicing Plan
applicable to Class A, Class B or Class C shares, to the Distribution or
Administrative Services Plans applicable to Administrative Class shares, to the
Administration Agreement as applicable to a particular class or classes, or when
a class vote is required as specified above or otherwise by the 1940 Act.
The Trust's shares do not have cumulative voting rights. Therefore, the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
To avoid potential conflicts of interest, the 90/10 Portfolio, 60/40
Portfolio and 30/70 Portfolio will vote shares of each Underlying PIMCO Fund
which they own in proportion to the votes of all other shareholders in the
Underlying PIMCO Fund.
Certain Ownership of Trust Shares
As of March 10, 1999, the Trust believes that the Trustees and officers of
the Trust, as a group, owned less than one percent of each class of each Fund
and Portfolio and of the Trust as a whole. As of March 10, 1999, the following
persons owned of record or beneficially 5% or more of the noted class of shares
of the following Funds:
-88-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
Equity Income Fund
- ------------------
<S> <C> <C>
Institutional
Bank of New York Western Trust Co. 1,596,590.722 17.05%
as Trustee for
Pacific Life Insurance Company R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
AM Castle & Co Emp Pension Equity Seg 1,110,620.192 11.86%
A/C #22-39912
P.O. Box 92956
Chicago, Illinois 60675-2956
Santa Barbara Foundation 827,338.480 8.84%
15 East Carrillo Street
Santa Barbara, California 93101-2780
AM Castle & Company Employee P/S/P Equity Fund 792,451.763 8.46%
A/C #22-39919
P.O. Box 92956
Chicago, Illinois 60675-2956
Northern Trust Company as Trustee for 698,200.084 7.46%
Brush Wellman Inc.
P.O. Box 92956
Chicago, Illinois 60675-0001
Bank of America NT&SA as Trustee for 622,439.676 6.65%
Mazda Motor of America
P.O. Box 3577, Terminal Annex
Los Angeles, California 90051-1577
</TABLE>
-89-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Administrative
First Union National Bank** 642,713.805 66.57%
401 S. Tyon Street, FRB-3
CMG Fiduciary Operations Funds Group
Mail Code CMG-2-1151
Charlotte, North Carolina 28288-1151
Invesco Trust Co. TTEE FBO Lykes Retirement 292,197.983 30.27%
Savings Plan
P.O. Box 77405
Atlanta, Georgia 30357
Class A
Carn & Co.** 232,673.427 21.51%
USI Insurance Services Corporation
401(k) Plan
P.O. Box 96211
Washington, D.C. 20090-6211
Merrill Lynch Pierce Fenner & Smith Inc.** 139,173.858 12.87%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Khosrow B. Semnani 80,450.418 7.44%
P.O. Box 3508
Salt Lake City, Utah 84110-3508
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 155,688.363 12.00%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 151,028.362 9.58%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-90-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
Value Fund
- ----------
<S> <C> <C>
Institutional
Pacific Life Insurance Company 2,603,373.475 40.45%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
The Northern Trust Company as Trustee for 1,007,082.875 15.65%
Great Lakes Chemical Corporation
P.O. Box 92956
Chicago, Illinois 00006-0690
CMTA-GMPP & Allied Workers Pension Trust 804,467.423 12.50%
c/o Associated Third Party Administrator
1640 South Loop Road
Alameda, California 94502
BAC Local #19 Pension Trust 498,085.448 7.74%
Attn: Allied Administrators Inc.
777 Davis Street
San Francisco, California 94126-2500
Pacific Life Foundation 355,120.450 5.52%
Attn: Michele Myszka
700 Newport Center Drive
Newport Beach, California 92660-6307
California Race Track Association 342,172.277 5.32%
P.O. Box 60014
Arcadia, California 91006-6014
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 161,913.220 11.99%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 490,647.737 20.45%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-91-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 499,971.158 9.06%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
FTC & Co.** 307,787.457 5.58%
Datalynx House Acct.
P.O. Box 1731736
Denver, Colorado 80217-3736
Value 25 Fund
- -------------
Institutional
PIMCO Advisors L.P. 18,879.408 100.00%
Attn: R. M. Fitzgerald
800 Newport Center Drive
Newport Beach, California 92660
Class A
Larry Bouman 28,686.387 46.35%
7428 Old Maple Square
McLean, Virginia 22102-2817
Donaldson Lufkin Jenrette 10,712.440 17.31%
Securities Corporation Inc.**
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Class B
Painewebber for the Benefit of 6,127.451 16.27%
B & K Tool and Die Corp. TTEE
B & K Employees Retirement Plan UA DTD 43063
2528 Mount Royal Road
Pittsburgh, Pennsylvania 15217-2541
Raul Llanos Trust 5,981.800 15.88%
APMC Pension Profit Sharing Plan
3749 N. Causeway Blvd., Suite B
Metairie, Louisiana 70002-1740
</TABLE>
-92-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
BSDT CUST 403-B Plan 3,332.676 8.85%
St. Lukes Hospital
For the Benefit of Patricia A. Krenn
2 S. Halstead Street
Allentown, Pennsylvania 18103-2602
BSDT CUST Rollover IRA 3,081.106 8.18%
For the Benefit of Ellen J. Stetler
411 E. Oxford Street
Coopersburg, Pennsylvania 18036-1534
Class C
PIMCO Advisors L.P. 18,791.978 20.86%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Raymond James & Associates, Inc. CSDN 12,717.359 14.12%
Sandra J. Jordan IRA
71 Silo Ridge Road, E
Orland Park, Illinois 60467-7329
Merrill Lynch Pierce Fenner & Smith Inc.** 6,444.032 7.15%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
BSDT CUST IRA For the Benefit of 6,229.131 6.92%
Howard G. Wold
1002 City Park Blvd.
Alexandria, Louisiana 71301-5113
Small Cap Value Fund
- --------------------
Institutional
Pacific Mutual Life Insurance Company 421,949.197 11.78%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
Mac & Company Account #855-577 356,739.470 9.96%
Mellon Bank NA
Mutual Funds
P.O. Box 320
Pittsburgh, Pennsylvania 15230-0320
</TABLE>
-93-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Little Company Of Mary Hospital 313,164.978 8.74%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Lucile Packard Foundation for Children 230,162.916 6.43%
725 Welch Road
Palo Alto, California 94304
Charles Schwab & Co., Inc. Rein** 214,705.165 5.99%
Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, California 94104-4122
Administrative
National Financial Services Corporation for the 608,719.058 45.43%
Exclusive Benefit of Our Customers**
1 World Trade Center
200 Liberty Street
New York, New York 10281
First Union National Bank** 378,706.202 28.26%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
Wells Fargo Bank TTEE FBO 88,477.392 6.60%
Choicemaster (First Interstate)
P. O. Box 9800 Mutual Funds
Calabasas, California 91302-9800
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 984,725.824 14.29%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Norwest Bank MN NA 839,362.908 12.18%
Dain Rauscher Retirement Plan
#13281312 DTD 1/97
Attn: EBS MS 0035
510 Marquette, Suite 500
Minneapolis, MN 55479-0035
</TABLE>
-94-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 1,591,200.478 24.15%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 1,879,253.079 25.69%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Capital Appreciation Fund
- -------------------------
Institutional
Donaldson Lufkin & Jenrette** 6,394,176.608 23.47%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Charles Schwab & Co., Inc. - Reinvest** 2,248,722.640 8.25%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Administrative
Invesco Trust Company FBO 2,392,331.559 25.98%
Reynolds & Reynolds 401k Plan
P. O. Box 77405
Atlanta, Georgia 30357
Certain Employee (Fidelity)** 2,053,077.110 22.30%
100 Magetian KWIC
Covington, Kentucky 41015
New York Life Trust Company** 1,896,222.994 20.59%
51 Madison Avenue, Room 117A
New York, New York 10010
First Union National Bank** 1,113,766.650 12.10%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
</TABLE>
-95-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Owneship Class Owned
-------- -----------
<S> <C> <C>
National Financial Services Corporation for** 724,654.053 7.87%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 1,006,574.540 26.33%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Carn & Co. 02087501 461,471.357 12.07%
American Yazaki Employee Savings
and Retirement Plan
Attn: Mutual Funds - Star
P. O. Box 96211
Washington, D.C. 20090-6211
Wachovia Bank FBO VIT Pension Plan 213,859.642 5.59%
Attn: Mutual Fund Department, 5th Floor
P. O. Box 27602
Richmond, Virginia 23261-7602
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 361,213.611 16.96%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 393,767.006 12.45%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class D
Charles Schwab & Co., Inc.** 11,236.293 96.45%
Special Custody Accounts FBO Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, California 94104
</TABLE>
-96-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
Mid Cap Growth Fund
- -------------------
<S> <C> <C>
Institutional
Charles Schwab & Co., Inc. - Reinvest** 5,110,502.727 20.81%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
PIMCO Mid Cap Growth Fund
Norwest Bank Minnesota NA Custodian FBO 1,438,254.601 5.86%
Parkview Memorial Hospital
c/o Mutual Fund Processing
733 Marquette Avenue MS 0036
Minneapolis, Minnesota 55479-0036
Donald Lufkin & Jenrette** 1,248,834.982 5.09%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Administrative
National Financial Services Corporation for** 1,714,751.550 29.85%
the Exclusive Benefit of Our Customers
1 World Financial Center
200 Liberty Street
New York, New York 10281
Certain Employee (Fidelity)** 1,555,424.959 27.08%
100 Magellan KW1C
Covington, Kentucky 41015
UMB TTEE FBO 456,597.513 7.95%
Andrew Profit Sharing Trust
c/o American Century Services
4500 Main
Kansas City, Missouri 64111
University of South Dakota Foundation 449,766.926 7.83%
P.O. Box 5555
Vermillion, South Dakota 57069-5555
First Union National Bank** 289,170.727 5.03%
1525 West WT Harris Boulevard NC 1151
Charlotte, North Carolina 28288-1151
</TABLE>
-97-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
Mid Cap Growth Fund
- -------------------
<S> <C> <C>
Class A
Merrill Lynch Employee Services 1,181,261.225 23.38%
Merrill Lynch Trust Company FSB FBO
401k Plans Masterworks
P. O. Box 62000
San Francisco, California 94162-0001
Merrill Lynch Pierce Fenner & Smith Inc.** 1,143,034.499 22.63%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 813,825.945 20.01%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 938,135.214 16.57%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Micro Cap Growth Fund
- ---------------------
Institutional
Charles Schwab & Co., Inc. - Reinvest.** 3,130,091.063 24.54%
The Schwab Building
101 Montgomery Street
San Francisco, California 94104-4122
Donald Lufkin & Jenrette** 1,992,483.878 15.62%
Pershing Division
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Bost & Co. A/C DOMF 8526562 1,218,835.616 9.56%
Dominion Resources
Attn: Mutual Fund Operations
P. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
</TABLE>
-98-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
University of Southern California 1,054,372.511 8.27%
Treasurer's Office
University Park, BKS 402
Los Angeles, California 90089-2541
Mac & Co. A/C 054-024 883,353.905 6.93%
Mellon Bank N.A.
Public Service of New Mexico
P. O. Box 3198
Mutual Funds Operations
Pittsburgh, Pennsylvania 15230-3198
Mac & Co. A/C OBRF 3331012 FBO 759,898.614 5.96%
Oberlin College
Attn: Mutual Fund Operations
P. O. Box 3198
Pittsburgh, Pennsylvania 15230-3198
Administrative
Northern Trust as Trustee for 105,642.120 61.83%
Sunday School Board
dba LifeWay Christian Resources
P.O. Box 92956
Chicago, Illinois 60675
New York Life Trust Company** 59,079.618 34.58%
51 Madison Avenue, Room 117A
New York, New York 10010
Small Cap Growth Fund
- ---------------------
Institutional
The Jewish Federation of 962,059.558 16.77%
Metropolitan Chicago
One South Franklin Street, Room 625
Chicago, Illinois 60606-4609
DMNH Foundation 779,461.357 13.59%
2001 Colorado Blvd.
City Park
Denver, Colorado 00008-0205
Pacific Mutual Life Insurance Company 587,412.233 10.24%
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
</TABLE>
-99-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Employees Retirement System of Jersey City 568,704.115 9.91%
325 Palisade Avenue
Jersey City, New Jersey 07307-1714
Berklee College of Music, Inc. 527,683.879 9.20%
1140 Boylston Street
Boston, Massachusetts 02215-3693
ESOR & Co. A/C 1-429-144-9 473,581.005 8.25%
Associated Bank Green Bay
Trust Operations Dept.
P. O. Box 19006
Green Bay, Wisconsin 54307-9006
Auburn Theological Seminary 330,487.906 5.76%
3041 Broadway
New York, New York 10027-5710
Core Equity Fund
- ----------------
Institutional
California Race Track Association 28,523.401 32.28%*
P. O. Box 60014
Arcadia, California 91006-6014
Pacific Life Foundation 29,627.208 33.53%*
700 Newport Center Drive
Newport Beach, California 92660
90/10 Portfolio 8,979.119 10.16%
Mr. Bob Venable
Pimco Advisors LP
800 Newport Center Drive
Newport Beach, California 92660
60/40 Portfolio 8,403.212 9.51%
Mr. Bob Venable
Pimco Advisors LP
800 Newport Center Drive
Newport Beach, California 92660
Michele A. Ward 4,768.500 5.40%
40 Crossbow Lane
Easton, Connecticut 06612-1256
</TABLE>
-100-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Administrative
Pimco Advisors L.P. 461.894 94.89%
800 Newport Center Dr., 6th Floor
Attn: Jesse Jue
Newport Beach, California 92660
Mid Cap Equity Fund
- -------------------
Institutional
Pacific Mutual Life Insurance Company 361,856.905 52.81%*
700 Newport Center Drive
Newport Beach, California 92660
IFTC as Custodian for 85,615.824 12.49%
John W. Barnum
5175 Tilden Street, N.W.
Washington, D.C. 20016-1961
Pacific Life Foundation 83,180.637 12.14%
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 80,122.144 11.69%
P.O. Box 60014
Arcadia, California 91006-6014
Enhanced Equity Fund
- --------------------
Institutional
Pacific Mutual Life Insurance Company 1,622,977.785 50.54%*
Employee's Retirement Plan Trust
700 Newport Center Drive
Newport Beach, California 92660
CMTA-GMPP & Allied Workers Pension 471,882.305 14.69%
c/o Associated Third Party Administrator
1640 South Loop Road
Alameda, California 94502
BAC Local #19 Pension Trust 292,087.721 9.10%
Attn: Allied Administrators Inc.
777 Davis Street
San Francisco, California 94126-2500
</TABLE>
-101-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Pacific Life Foundation 213,093.693 6.64%
700 Newport Center Drive
Newport Beach, California 92660
California Race Track Association 205,296.722 6.39%
P.O. Box 60014
Arcadia, California 91006-6014
Balanced Fund
- -------------
Institutional
Bank of New York Western Trust Co. 1,292,106.322 36.54%
as Trustee for
Pacific Life Insurance Company R.I.S.P.
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
Redlands Community Hospital Retirement Plan 726,294.104 20.54%
350 Terracina Boulevard
Redlands, California 92373-4850
Dominguez Services Corporation 580,383.061 16.41%
21718 South Alameda Street
Long Beach, California 90810-0351
Bank of America as Trustee for 356,611.525 10.08%
The Music Center Operating Co.
P.O. Box 2788
Los Angeles, California 90051-0788
The Northern Trust Company as Trustee for 306,609.677 8.67%
Ameron 401(k)
P.O. Box 92956
Chicago, Illinois 60675
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 374,741.153 40.46%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-102-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Prudential Securities Inc. 157,295.506 40.46%
FBO the PRU R K for DC Clients TTEE
MSSA-ILA Local 1985 401 K
P.O. Box 15040
New Brunswick, New Jersey 08906-5040
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 367,159.851 32.06%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 227,871.172 19.27%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Target Fund
- -----------
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 1,523,323.890 17.92%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 1,680,386.738 34.75%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 14,877,537.930 25.67%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Precious Metals Fund
- --------------------
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 66,357.292 9.90%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-103-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 51,238.817 6.13%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 308,256.086 10.34%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Renaissance Fund
- ----------------
Institutional Class
National Investors Services Corp. For The 4,640.052 98.51%
Exclusive Benefit of Our Customers**
55 Water Street, 32nd Floor
New York, New York 10041-3299
Administrative
Chase Manhattan Bank TTEE FBO MetLife 12,380.033 62.26%
Defined Contribution Group
770 Broadway 10th Floor
New York, New York 10003-9598
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 707,919.152 13.40%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 1,439,514.059 20.15%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 3,697,406.070 14.38%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-104-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class D
PIMCO Advisors, L.P. 6,072.615 91.93%
800 Newport Center Drive
Newport Beach, California 92660
Charles Schwab & Co., Inc.** 532.837 8.07%
Special Custody Accounts FBO Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, California 94104
Growth Fund
- -----------
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 424,001.424 6.88%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 974,397.858 25.52%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 8,465,982.691 12.72%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Opportunity Fund
- ----------------
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 895,096.886 16.74%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
American Express Trust Company 366,582.461 6.85%
FBO WESCO Distribution Inc.
Retirement Savings Plan
733 Marquette Avenue
Minneapolis, Minnesota 55402-2309
</TABLE>
-105-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 3,436,418.609 22.36%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Innovation Fund
- ---------------
Institutional Class
Michael C. Hirsh 9,006.304 53.93%
2701 Lighthouse Lane
Corona del Mar, California 92625
Friedmar & CO
c/o The Mechanics Bank 3,055.301 18.29%
Trust Operations Dept.
3170 Hilltop Mall Road
Michael C. Hirsh 1,679.363 10.06%
2701 Lighthouse Lane
Corona del Mar, California 92625
Hamilton Limited Partnership 1,527.650 9.15%
800 15th Street
Bellingham, Washington 98225
American Society for Technion #6 1,432.430 8.58%
810 7th Avenue
New York, New York 10019
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 1,020,856.098 15.37%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 2,019,942.386 15.15%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-106-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class D
Charles Schwab & Co., Inc.** 350,633.271 99.02%
Special Custody Accounts FBO Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, California 94104
International Fund
- ------------------
Institutional
90/10 Portfolio 122,451.239 45.82%
PIMCO Funds Asset Allocation Series
800 Newport Center Drive
Newport Beach, California 92660
60/40 Portfolio 113,631.486 42.52%
PIMCO Funds Asset Allocation Series
800 Newport Center Drive
Newport Beach, California 92660
30/70 Portfolio 31,173.031 11.66%
PIMCO Funds Asset Allocation Series
800 Newport Center Drive
Newport Beach, California 92660
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 84,857.176 7.99%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
CIBC Oppenheimer Corp. 78,057.242 7.35%
FBO 033-59550-19
P.O. Box 3484
Church Street Station
New York, New York 10008-8484
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 125,220.436 15.31%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-107-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 1,159,356.646 12.56%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
International Growth Fund
- -------------------------
Institutional
Pacific Asset Management LLC 500,000.000 99.26%*
700 Newport Center Drive
Newport Beach, California 92660-6307
Structured Emerging Markets Fund
- --------------------------------
Institutional
Rhode Island Foundation 895,124.811 23.84%
Attn: Robert Rosendale
150 Royall Street
Canton, Massachusetts 02021
Berklee College of Music, Inc. 526,744.087 14.03%
1140 Boylston Street
Boston, Massachusetts 02215-3693
Hartford Foundation 335,941.996 8.95%
159 E. Main Street
Rochester, New York 14638
Munsen-Williams-Proctor Institute 297,905.432 7.93%
Attn: Anthony Spiridigloizzi
310 Genesee Street
Utica, New York 13502
The Reeves Foundation 268,739.950 7.16%
115 Summit Avenue
Summit, New Jersey 07901
Deseret Mutual Retiree Med. & Life Pl. Tr. 240,847.151 6.41%
c/o Doug Burton
60 East South Temple Street
Salt Lake City, Utah 84147
</TABLE>
-108-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Brockton Health Corp. Endowment 208,235.989 5.55%
Attn: Steven Connolly
680 Centre Street
Brockton, Massachusetts 02402-3395
Tax-Efficient Equity Fund
- -------------------------
Administrative
PIMCO Advisors L.P. 6,422.018 6.12%
Attn: R. M. Fitzgerald
800 Newport Center Drive
Newport Beach, California
Class A
Merrill Lynch Pierce Fenner & Smith Inc.** 73,485.260 18.32%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
NFSC FEBO #0C8-332321 49,164.208 12.26%
The Robb Charitable Trust
Richard A. Robb
U/A 09/04/90
56 Pilgrim Road
Marblehead, Massachusetts 01945-1750
Larry Bouman 25,182.025 6.28%
7428 Old Maple Square
McLean, Virginia 22102-2817
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 128,644.222 36.81%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
Donaldson Lufkin Jenrette 19,944.584 5.71%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, New Jersey 07303-2052
Class C
Merrill Lynch Pierce Fenner & Smith Inc.** 131,286.145 18.64%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
</TABLE>
-109-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Prudential Securities Inc. FBO 54,361.877 7.72%
Tinius Olsen International Co.
1105 North Market Street, Suite 1300
P.O. Box 8985
Wilmington, Delaware 19899-8985
Class D
PIMCO Advisors L.P. 75,000.000 100.00%
800 Newport Center Drive
Newport Beach, California 92660
Institutional
Alscott Investments, LLC 994,743.878 20.49%
501 Baybrook Court
Boise, Idaho 83706
Verb & Company (Weyerhaeuser) 810,937.720 16.70%
4380 S.W. Macadam, Suite 450
Portland, Oregon 97201
Waycrosse, Inc./International Equity Fund II 624,830.101 12.87%
P. O. Box 9300, MS 28
Minneapolis, Minnesota 55440-9300
Ruby Trust 588,903.067 12.13%
499 Park Avenue
New York, New York 10022
Alscott Investments, LLC 479,994.043 9.89%
501 Baybrook Court
Boise, Idaho 83706
Topaz Trust 348,346.312 7.17%
499 Park Avenue
New York, New York 10022
30/70 Portfolio
- ---------------
Institutional
PIMCO Advisors L.P. 991.080 100.00%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
</TABLE>
-110-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Administrative
PIMCO Advisors L.P. 991.080 100.00%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Class A
Donaldson Lufkin Jenrette 6,046.512 27.84%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, New Jersey
Raymond James & Assoc. Inc. 2,490.040 11.47%
FAO Carolyn Union Grdn
FBO Carol L. Pearce (PASS)
A/C# 79537625
Route 3, Box 364
Lake City, Florida 32025
Raymond James & Assoc. Inc. 2,490.040 11.47%
FAO Carolyn Union Grdn
FBO Jessica M. Pearce
A/C# 79537625 (PASS)
Route 3, Box 364
Lake City, Florida 32025
Robert Selecky 2,360.314 10.87%
25 Alyea Street
Newark, New Jersey 07105-3201
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 24,382.896 16.10%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
BSDT CUST IRA 24,023.026 15.87%
FBO Miriam P. Squillace
1941 E. River Road
Livingston, Montana 59047-9146
A. G. Edwards & Sons, Inc. C/F 22,621.708 14.94%
Dr. James R. Drake
IRA Account
3004 Brownwood Drive
Chattanooga, Tennessee 37404-6309
</TABLE>
-111-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Janney Montgomery Scott, Inc. 13,682.201 9.04%
A/C 1021-6717
Joseph L. Abriola & Gloria C. Abriola JT TEN
1801 Market Street
Philadelphia, Pennsylvania 19103-1675
N. F. Verratti, Inc. 9,725.016 6.42%
Profit Sharing Plan DTD 1-1-83
Nicholas F. Verratti, Jr. TTEE
450 Knowlton Road
Media, Pennsylvania 19063
Joseph L. Abriola (IRA) 8,794.903 5.81%
JMS Inc. CUST FBO
A/C 1021-6665
2 Steeplechase Lane
Blue Bell, Pennsylvania 19422-2460
Raymond James & Assoc. Inc. CSDN 2,490.040 11.47%
Cynthia Neff IRA
1664 Lewis Drive
Lakewood, Ohio 44107
Class C
Everen Securities, Inc. 43,857.450 15.41%
A/C 1608-3222
Bohlman Drugstore, Inc.
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Everen Securities, Inc. 21,546.115 7.57%
A/C 6072-0770
Gilbert R. Parker
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Everen Securities, Inc. 19,587.377 6.88%
A/C 2229-9937
Castle Rock Marine Plan #4935
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
</TABLE>
-112-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
George Goldie & Associates 18,101.895 6.36%
Money Purchase Plan
FBO George Goldie
155 Normandy Court
San Carlos, California 94070-1542
BSDT CUST Rollover IRA FBO 14,742.915 5.18%
Patricia C. Gabriel
1680 Lithia Way
Talent, Oregon 97540
90/10 Portfolio
- ---------------
Institutional
PIMCO Advisors L.P. 916.590 100.00%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Administrative
PIMCO Advisors L.P. 916.590 100.00%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Class A
Raymond James & Associates, Inc. CSDN 3,134.674 11.76%
Deborah L. Lean RIRA
3919 Chestnut Drive
Tacoma, Washington 98466
Raymond James & Associates, Inc. CSDN 2,649.020 9.94%
Daniel R. Lean RIRA
3919 Chestnut Drive
Tacoma, Washington 98466
Holly E. Allingham 2,595.745 9.74%
6044 S. Oakes Street
Tacoma, Washington
Raymond James & Associates, Inc. CSDN 1,736.208 6.51%
Bobby G. Nelson SEP IRA
P.O. Box 570
Live Oak, FL 32060
</TABLE>
-113-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Raymond James & Associates, Inc. CSDN 1,736.203 6.51%
Collins M. Fenton SEP IRA
13625 N. Meridian Road
Tallahassee, Florida 32312
Susan Toth CUST 1,337.944 5.02%
FBO Kelsey A. Toth UTMA MT
26 Harmony Circle Court
Missoula, Montana 59802-3341
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 24,093.708 22.88%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
McDonald Investments Inc. C/FBO 7,361.648 6.99%
Joe Scott IRA
1932 Klingensmith No. 55-A
Bloomfield Hills, Michigan 48302
Raymond James & Associates, Inc. CSDN 5,654.579 5.37%
Elise C. Arneal IRA R/O
9679 Redmont Road N.E.
Albuquerque, New Mexico 87109-6813
Class C
James A. Kamish & Phillip O. Messner TRS 33,079.106 7.94%
UA May 01 87
Kamish & Sons Inc., Profit Sharing Plan
6010 Concord Blvd.
Inver Grove Heights, Minnesota 55076-1806
60/40 Portfolio
- ---------------
Institutional
PIMCO Advisors L.P. 947.867 100.00%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
Administrative
PIMCO Advisors L.P. 947.867 100.00%
Attn: Vinh Nguyen
800 Newport Center Drive
Newport Beach, California 92660
</TABLE>
-114-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Class A
Donaldson Lufkin Jenrette 9,650.333 13.47%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, New Jersey 07303-9998
Donaldson Lufkin Jenrette 9,341.637 13.04%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, New Jersey 07303-9998
BSDT CUST IRA FBO 8,272.294 11.55%
Barbara L. Kistner
11611 S. Normandy
Worth, Illinois 60482
BSDT CUST Rollover IRA FBO 4,221.436 5.89%
Gwynneth A. Jones
48N. Allen Drive
Lodi, California 95242-2809
BSDT CUST Rollover IRA FBO 3,888.742 5.43%
Christi M. Fried
6400 Analitas Dr.
Lodi, California 95240-0801
BSDT CUST IRA FBO 3,827.394 5.34%
Franklyn N. Smith
2301 E. Oakland, Suite 1
Bloomington, Illinois 61701-5866
Raymond James & Associates, Inc. DSDN 3,757.511 5.25%
Winona M. Delaney IRA
5607 N. 41st Street
Tacoma, Washington 98407-2703
Class B
Merrill Lynch Pierce Fenner & Smith Inc.** 22,651.441 9.02%
Attn: Book Entry Department
4800 Deer Lake Drive E., Fl. 3
Jacksonville, Florida 32246-6484
BSDT CUST IRA FBO 20,728.953 8.26%
Rodney W. Spears
6409 State Road BB
W. Plains, Missouri 65775
</TABLE>
-115-
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding
Beneficial Shares of
Ownership Class Owned
--------- -----------
<S> <C> <C>
Painewebber For the Benefit of 18,455.134 7.35%
Painewebber FBO
Elizabeth B. Stoeffler
P.O. Box 3321
Weehawken, New Jersey 07087-8154
BSDT CUST Rollover IRA FBO 16,029.733 6.39%
Sue L. Wheeler
3874 County Road 6920
West Plains, Missouri 65775-7621
BSDT CUST Rollover IRA FBO 15,500.269 6.18%
Ronald E. Frommel
2837 State Route 76
Willow Springs, Missouri 65793-8259
Raymond James & Associates, Inc. CSDN 13,972.815 5.57%
James L. Carnathan IRA
1301 East St.
Tarentum, Pennsylvania 15084
Class C
Everen Securities, Inc. 48,327.138 10.07%
A/C 5650-1283
Jeffrey LE B Morse
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Everen Securities, Inc. 41,551.247 8.66%
A/C 2884-6490
Sheila T. Fitzgerald
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Everen Securities, Inc. 34,132.841 7.11%
A/C 6318-1885
Rachel G. Pontzer
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
</TABLE>
_____________________________________________
* Entity owned 25% or more of the outstanding shares of beneficial interest of
the Fund, and therefore may be presumed to "control" the Fund, as that term is
defined in the 1940 Act.
** Shares are believed to be held only as nominee.
-116-
<PAGE>
Custodian
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas City,
Missouri 64105, serves as custodian for assets of all Funds and Portfolios.
Pursuant to a sub-custody agreement between IFTC and State Street Bank and Trust
Company ("State Street"), State Street serves as subcustodian of the Trust for
the custody of the foreign securities acquired by those Funds 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 Funds 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 Funds and Portfolios.
PricewaterhouseCoopers LLP provides audit services, accounting assistance, and
consultation in connection with SEC filings.
Registration Statement
This Statement of Additional Information and the Prospectuses do not
contain all of the information included in the Trust's registration statements
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statements, including the exhibits
filed therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the relevant registration statement, each such
statement being qualified in all respects by such reference.
Financial Statements
Audited financial statements for the Funds, as of June 30, 1998, for the
fiscal year then ended, including notes thereto, and the reports of
PricewaterhouseCoopers LLP thereon, each dated August 17, 1998, are incorporated
by reference from the Trust's three June 30, 1998 Annual Reports. One Annual
Report (the "Retail Annual Report") corresponds to the Class A, B and C
Prospectus, another (the "Institutional Annual Report") corresponds to the
Institutional Prospectus, and another (the "Class D Annual Report") corresponds
to the Class D Prospectus. The Trust's June 30, 1998 Annual Reports are on file
electronically with the SEC (Retail Annual Report - filed on
-117-
<PAGE>
September 8, 1998, Accession No. 0001017062-98-001959; Institutional Annual
Report - filed on September 4, 1998, Accession No. 00010107062-98-001952; Class
D Annual Report -filed on September 8, 1998, Accession No. 0001017062-98-
001961). The Portfolios were not operational during the reporting periods ended
June 30, 1998.
Unaudited financial statements for the Funds and Portfolios, as of December
31, 1998, for the semi-annual period then ended, including notes thereto, are
incorporated by reference from the Trust's four December 31, 1998 Semi-Annual
Reports. One Semi-Annual Report (the "Retail Semi-Annual Report") corresponds
to the Class A, B And C Prospectus, another (the "Institutional Semi-Annual
Report") corresponds to the Institutional Prospectus, another (the "Class D
Semi-Annual Report") corresponds to the Class D Prospectus and the fourth (the
"Retail Portfolio Semi-Annual Report") corresponds to the Retail Portfolio
Prospectus. The Trust's December 31, 1998 Semi-Annual Reports are on file
electronically with the SEC (Retail Semi-Annual Report - filed on March 9, 1999,
Accession No. 0001017062-99-000418; Institutional Semi-Annual Report - filed on
March 9, 1999, Accession No. 0001017062-99-000419; Class D Semi-Annual Report -
filed on March 9, 1999, Accession No. 0001017062-99-000423; Retail Portfolio
Semi-Annual Report - filed on March 9, 1999, Accession No. 0001017062-99-
000421). The Portfolios did not offer Institutional Class or Administrative
Class shares during the reporting period ended December 31, 1998.
-118-
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Certain of the Funds make use of average portfolio credit quality standards
to assist institutional investors whose own investment guidelines limit their
investments accordingly. In determining a Fund's overall dollar-weighted
average quality, unrated securities are treated as if rated, based on the
Adviser's or Sub-Adviser's view of their comparability to rated securities. A
Fund's use of average quality criteria is intended to be a guide for those
investors whose investment guidelines require that assets be invested according
to comparable criteria. Reference to an overall average quality rating for a
Fund does not mean that all securities held by the Fund will be rated in that
category or higher. A Fund's investments may range in quality from securities
rated in the lowest category in which the Fund is permitted to invest to
securities rated in the highest category (as rated by Moody's or S&P or, if
unrated, determined by the Adviser or a Sub-Adviser to be of comparable
quality). The percentage of a Fund's assets invested in securities in a
particular rating category will vary. Following is a description of Moody's and
S&P's ratings applicable to fixed income securities.
Moody's Investors Service, Inc.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
A-1
<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as letters
of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Services
Corporate and Municipal Bond Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A-2
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood
A-3
<PAGE>
of, or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest only and
principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Commercial Paper Rating Definitions
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from A for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished
to Standard & Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
A-4
