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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The Analytic Funds
Analytic Enhanced Equity Fund
Analytic Defensive Equity Fund
Analytic Master Fixed Income Fund
Analytic Short-Term Government Fund
Institutional Class Shares
Statement of Additional Information
April 7, 1999
This Statement of Additional Information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of Analytic Funds dated
April 7, 1999. You may obtain a prospectus by contacting the UAM Funds at the
address listed above.
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TABLE OF CONTENTS
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Definitions............................................................ 3
The Company............................................................ 3
Description of Permitted Investments................................... 3
Equity Securities................................................... 3
Debt Securities..................................................... 3
Derivatives......................................................... 8
Illiquid Investments................................................ 12
Investment Companies................................................ 12
Repurchase Agreements............................................... 12
Restricted Securities............................................... 12
Investment Limitations................................................. 13
fundamental Policies................................................ 13
Non-fundamental Policies............................................ 13
Management of the Company.............................................. 15
Code of Ethics......................................................... 16
Principal Holders of Securities........................................ 16
Investment Advisory and Other Services................................. 17
Investment Adviser.................................................. 17
Distributor......................................................... 20
Administrative Services............................................. 20
Custodian........................................................... 21
Independent Public Accountant....................................... 21
Brokerage Allocation and Other Practices............................... 22
Selection Of Brokers................................................ 22
Simultaneous Transactions........................................... 22
Brokerage Commissions............................................... 22
Capital Stock and Other Securities..................................... 22
Description Of Shares And Voting Rights............................. 22
Dividends And Capital Gains Distributions........................... 23
Purchase, Redemption, and Pricing of Shares............................ 23
Purchase Of Shares.................................................. 23
Exchange Privilege.................................................. 25
Transfer Of Shares.................................................. 25
Valuation Of Shares................................................. 25
Performance Calculations............................................... 26
Total Return........................................................ 26
Yield............................................................... 27
Comparisons......................................................... 27
Taxes.................................................................. 27
Financial Statements................................................... 29
Appendix A: Description Of Securities And Ratings..................... A-1
Moody's Investors Service, Inc...................................... 1
Standard & Poor's Ratings Services.................................. 3
Duff & Phelps Credit Rating Co...................................... 5
FITCH IBCA RATINGS.................................................. 6
Appendix B - Comparisons............................................... B-1
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Definitions
The "Company" is UAM Funds, Inc. II (formerly PBHG Advisor Funds, Inc.)
The term "Adviser" means Analytic Investors, Inc., investment adviser of
the Analytic Funds.
UAM is United Asset Management Corporation.
UAMFSI is UAM Fund Services, Inc., the Company's administrator, transfer
agent, and shareholder-servicing agent.
UAMFDI is UAM Fund Distributors, Inc., the Company's distributor.
UAMSSC is UAM Fund Shareholder Servicing Center, the Company's sub-
shareholder-servicing agent.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds, Inc. II, UAM Funds
Trust, UAM Funds Trust II and all of their Funds.
The term "funds" is used to refer to The Analytic Funds as a group, while
"fund" refers to a single Analytic Fund.
The terms "board" and "governing board" refer to the Company's Board of
Directors as a group, while "board member" refers to a single member of the
board.
"1933 Act" means the Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
All other defined terms, which are not otherwise defined in this SAI, have
the same meaning in the SAI as they do in the prospectus of The Analytic
Funds.
The Company
This SAI relates to the Company and each of the funds listed on the first
page of this SAI. Each Fund is a separate series of the Company, which was
organized under the name "PBHG Advisor Funds, Inc." as a Maryland
corporation on January 9, 1998 and is registered as an open-end management
investment company under the 1940 Act. On April 6, 1999, the Company
changed its name to "UAM Funds, Inc. II." The Company's principal
executive office is located at 211 Congress Street, 4/th/ Floor, Boston, MA
02110; shareholders should direct all correspondence to the address listed
on the cover of this SAI.
The Funds are diversified series of the Company. Each share of a fund
represents an equal proportionate interest in that Fund. You cannot invest
in a fund without first reading the fund's Prospectus.
Description of Permitted Investments
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other resects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking
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fund preferred stock. Generally, the market values of preferred stock with
a fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle to the holder to buy the new common stock at a
lower price than the public offering price. Warrants are securities that
are usually issued together with a debt security or preferred stock and
that give the holder the right to buy proportionate amount of common stock
at a specified price. Warrants are freely transferable and are traded on
major exchanges. Unlike rights, warrants normally have a life that
measured in years and entitle the holder to buy common stock of a company
at a price that is usually higher than the market price at the time the
warrant is issued. Corporation often issue warrants to make the
accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry
the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the
assets of the issuer. In addition, their value does not necessarily change
with the value of the underlying securities, and they cease to have value
if they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits
of owning a company, the portfolio must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders
of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the over-the-
counter market and might not be traded in volumes
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typical of securities traded on a national securities exchange. Thus, the
securities of small and medium capitalization companies are likely to be
less liquid, and subject to more abrupt or erratic market movements, than
securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
DEBT SECURITIES
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Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at
a discount from their face value. Debt securities may include, among other
things, all types of bills, notes, bonds, mortgage-backed securities or
asset-backed securities.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the United States Treasury
has issued (treasury securities) and securities that a federal agency or a
government-sponsored entity has issued (agency securities). Treasury
securities include treasury notes, which have initial maturities of one to
ten years and treasury bonds, which have initial maturities of at least ten
years and certain types of mortgage-backed securities that are described
under "Mortgage-Backed and Other Asset-Backed Securities." This SAI
discusses mortgage-backed treasury agency securities in detail in the
section called "Mortgage-Backed and other Asset-Backed Securities.
The full faith and credit of the U.S. government supports treasury
securities. Unlike treasury securities, the full faith and credit of the
United States government generally do not back agency securities. Agency
securities are typically supported in one of three ways:
. By the right of the issuer to borrow from the United States Treasury.
. By the discretionary authority of the United States government to buy
the obligations of the agency
. By the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and
interest, their market value is not guaranteed. U.S. government securities
are subject to the same interest rate and credit risks as other fixed
income securities. However, since U.S. government securities are of the
highest quality, the credit risk is minimal. The U.S. government does not
guarantee the net asset value of the assets of the portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or
for capital expenditures such as plant construction, equipment purchases
and expansion. In return for the money loaned to the corporation by
investors, the corporation promises to pay investors interest, and repay
the principal amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble
as securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal maturity specified call dates,
mortgage-backed securities make monthly payments that consist 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
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part
or all of the loan balance before maturity, the effective maturity of a
mortgage backed security is often shorter than its stated.
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Governmental entities, private insurers and the mortgage poolers may insure
or guaranty the timely payment of interest and principal of these pools
through various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit issue the
insurance and guarantees. The adviser will consider such insurance and
guarantees and the creditworthiness of the issuers thereof in determining
whether a mortgage-related security meets its investment quality standards.
It is possible that the private insurers or guarantors will not meet their
obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related
securities. GNMA is a wholly owned corporation of the U.S. government and
it falls within the Department of Housing and Urban Development. Securities
issued by GNMA are treasury securities, which means the faith and credit of
the U.S. government backs them. GNMA guarantees the timely payment of
principal and interest on securities issued by institutions approved by
GNMA and backed by pools of FHA-insured or VA-guaranteed mortgages. GNMA
does not guarantee the market value or yield of mortgage-backed securities
or the value of portfolio shares. To buy GNMA securities, the portfolio may
have to pay a premium over the maturity value of the underlying mortgages,
which the portfolio may lose if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions and mortgage bankers. Securities issued by FNMA are agency
securities, which means FNMA, but not the U.S. government, guarantees their
timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing.
FHLMC issues Participation Certificates (PCs) which represent interests in
conventional mortgages from its national portfolio. Like FNMA, 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 U.S.
government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these
issuers generally offer a higher rate of interest than pools created by
GNMA, FNMA & FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant of
which are that mortgage-backed securities:
. Their payments of interest and principal are more frequent (usually
monthly).
. They usually have adjustable interest rates.
. The may pay off their entire principal substantially earlier than their
final distribution dates so that the price of the security will
generally decline when interest rates rise.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the
loans underlying a mortgage-backed security sooner than expected. If the
prepayment rates increase, the portfolio may have to reinvest its principal
at a rate of interest that is lower than the rate on existing mortgage-
backed securities.
Other Asset-Backed Securities
These securities are interest in pools of a broad range of assets other
than mortgage, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral
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supporting these securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments with interest rate
fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the rated asset-backed securities. Due to
the quantity of vehicles involved and requirements under state laws, asset-
backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of asset-backed
securities depends in part on the characteristics of the underlying assets,
the coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepaid principal
semiannually. While whole mortgage loans may collateralize CMOs, portfolios of
mortgage-backed securities guaranteed by GNMA, FHLMC, or FNMA, and their
income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its assets
in:
. The short-term investments described below.
. U.S. government securities
. Investment-grade corporate debt securities.
Unless otherwise specified, a short-term debt security has a maturity of one
year or less.
Bank Obligations
The portfolio will only invest in a security issued by a commercial bank if
the bank:
. Has total assets of at least $1 billion, or the equivalent in other
currencies;
. Is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. Is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
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Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
The portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. A portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See Appendix A for a description of
commercial paper ratings.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
will have a longer duration than an ordinary debt security with the same
maturity. The portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include U.S. Treasury securities that have had their
interest payments ("coupons") separated from the underlying principal
("corpus") by their holder, typically a custodian bank or investment brokerage
firm. Once the holder of the security has stripped or separated corpus and
coupons, it may sell each component separately. The principal or corpus is
then sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Typically, the coupons are sold
separately or grouped with other coupons with like maturity dates and sold
bundled in such form. The underlying U.S. Treasury security is held in book-
entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the portfolio can record its beneficial ownership of the coupon
or corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt securities held by the portfolio, with the
maturity of each security weighted by the percentage of the assets of the
portfolio it represents.
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Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of fixed income securities as
compensation for assuming risk, although short-term U.S. treasury securities,
such as 3 month treasury bills, are considered "risk free." Corporate
securities offer higher yields than U.S. treasuries because their payment of
interest and complete repayment of principal is less certain. The credit
rating or financial condition of an issuer may affect the value of a debt
security. Generally, the lower the quality rating of a security, the greater
the risks that the issuer will fail to pay interest and return principal. To
compensate investors for taking on increased risk, issuers with lower credit
ratings usually offer their investors a higher "risk premium" in the form of
higher interest rates above comparable U.S. treasuries.
Changes in investor confidence regarding the certainty of interest and
principal payments of a fixed income corporate security will result in an
adjustment to this "risk premium." Since an issuer's outstanding debt carries
a fixed coupon, adjustments to the risk premium must occur in the price, which
effects the yield to maturity of the bond. If an issuer defaults or becomes
unable to honor its financial obligations, the bond may lose some or all of
its value
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
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rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause the portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Standard and
Poor's Ratings Services, Duff & Phelps Rating Co., Fitch IBCA, Inc. and,
Moody's Investor Services. Credit ratings are only an agency's opinion, not an
absolute standard of quality, and they do not reflect an evaluation of market
risk. Appendix A contains further information concerning the ratings of
certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. The portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, or an underlying economic factor, such as an
interest rate or an index. A fund may use derivatives in an attempt to gain
full market exposure or to hedge its investments. When a fund hedges its
investments it is trying to minimize its loss by investing in derivatives to
protect them from broad fluctuations in market prices, interest rates or
foreign currency exchange rates. When hedging is successful, the fund will
have substantially offset any depreciation in the value of its fund securities
by the appreciation in the value of the derivative position. Although
techniques other than the sale and purchase of derivatives could be used to
control the exposure of a fund to market fluctuations, the use of derivatives
may be a more effective means of hedging this exposure.
Futures
A futures contract is an agreement between two parties whereby one party is
obligated to buy and the other is obligated to sell a financial instrument at
an agreed upon price and time. The parties to a futures contract do not have
to pay for or deliver the underlying financial instrument until the delivery
date. The parties to a futures contract can hold the contract until its
delivery date, although in many cases they close the contract early by taking
an opposite position in an identical contract. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. A fund will
incur commission expenses in both opening and closing futures positions.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts. Contract markets
require both the purchaser and seller to deposit "initial margin" with a
futures broker, known as a futures commission merchant, when they enter into
the contract. Initial margin deposits are typically equal to a percentage of
the contract's value. After they open a futures contract, the parties to the
transaction must compare the purchase price of the contract to its daily
market value. If the value of the futures contract changes in such a way that
a party's position declines, that party must make additional "variation
margin" payments so that the margin payment is adequate. On the other hand,
the value of the contract may change in such a way that there is excess margin
on deposit, possibly entitling the party that has a gain to receive all or a
portion of this amount.
A fund may take a "short position" by selling futures contracts on securities
it owns or on securities with characteristics similar to those of securities
it owns. For example, when a fund expects interest rates to rise or securities
prices to fall, it can seek to offset a decline in the value of its holdings
by selling futures contracts so that a fund is obligated to sell the
securities at a future lower price. When a fund's short hedging position is
successful, the appreciation in the value of the futures position will offset
substantially any depreciation in the value of the holdings of the fund. On
the other hand, a decline in the value of the futures position would
substantially offset any unanticipated appreciation in the value of the
holdings of the fund.
On other occasions, a fund may take a "long" position by purchasing futures
contracts. For example, when a fund expects interest rates to fall or
securities' prices to rise, it can seek to secure a better rate or price than
might later be available by
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purchasing a futures contract. A fund may also buy futures contracts as a
substitute for transactions in securities, to alter the investment
characteristics of fund securities or to gain or increase its exposure to a
particular securities market.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or OTC options). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When a fund purchases a put option, it buys the right to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
fund pays the current market price for the option (known as the "option
premium"). A fund may purchase put options to offset or hedge against a
decline in the market value of its securities ("protective puts") or to
benefit from a decline in the price of securities that it does not own. The
fund would ordinarily realize a gain if, during the option period, the value
of the underlying securities decreased below the exercise price sufficiently
to cover the premium and transaction costs. However, if the price of the
underlying instrument does not fall enough to offset the cost of purchasing
the option, a put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the fund obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. A fund would normally purchase call options in anticipation of
an increase in the market value of securities it owns or wants to buy. A fund
would ordinarily realize a gain if, during the option period, the value of the
underlying instrument exceeded the exercise price plus the premium paid and
related transaction costs. Otherwise, a fund would realize either no gain or
a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When a fund writes a call option it assumes an obligation to sell specified
securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. Similarly, when a fund
writes a put option it assumes an obligation to purchase specified securities
from the option holder at a specified price if the option is exercised at any
time before the expiration date. A fund may terminate its position in an
exchange-traded put option before exercise by buying an option identical to
the one it has written. Similarly, it may cancel an over-the-counter option
by entering into an offsetting transaction with the counter-party to the
option.
A fund could try to hedge against an increase in the value of securities it
would like to acquire by writing a put option on those securities. If
security prices rise, a fund would expect the put option to expire and the
premium it received to offset the increase in the security's value. If
security prices remain the same over time, the fund would hope to profit by
closing out the put option at a lower price. If security prices fall, a fund
may lose an amount of money equal to the difference between the value of the
security and the premium it received. Writing covered put options may deprive
a fund of the opportunity to profit from a decrease in the market price of the
securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. A fund could try to hedge against a decline in the value of
securities it already owns by writing a call option. If the price of that
security falls as expected, a fund would expect the option to expire and the
premium it received to offset the decline of the security's value. However, a
fund must be prepared to deliver the underlying instrument in return for the
strike price, which may deprive it of the opportunity to profit from an
increase in the market price of the securities it holds.
A fund is permitted only to write covered options. A fund can cover a call
option by owning, at the time of selling the option:
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. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract.
. In the case of an index, a fund of securities that corresponds to the
index.
. A fund can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities equal to the difference between the exercise
prices.
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option).
If the option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures contract is
subject to initial and variation margin requirements on the option position.
Options on futures contracts are traded on the same contract market as the
underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
A fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. A fund may buy a put option on a futures
contract for the same reasons it would sell a futures contract. It also may
purchase such put options in order to hedge a long position in the underlying
futures contract. A fund may buy call options on futures contracts for the
same purpose as the actual purchase of the futures contracts, such as in
anticipation of favorable market conditions.
A fund may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the fund would retain the option premium, which would offset, in part, any
decline in the value of its fund securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if market price declines, the fund
would pay more than the market price for the underlying instrument. The
premium received on the sale of the put option, less any transaction costs,
would reduce the net cost to the fund.
Combined Positions
A fund may purchase and write options in combination with each other, or in
combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, a fund could construct a
combined position whose risk and return characteristics are similar to selling
a futures contract by purchasing a put option and writing a call option on the
same underlying instrument. Alternatively, a fund could write a call option at
one strike price and buy a call option at a lower
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price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Additional Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the fund than if it had not entered into any
derivatives transactions. Derivatives may magnify a fund's gains or losses,
causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities a
fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the fund to greater risks.
Correlation of Prices
A fund's ability to hedge its securities through derivatives depends on the
degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities a fund is hedging may not move in the
same amount, or even in the same direction as the hedging instrument. The
adviser will try to minimize this risk by investing only in those contracts
whose behavior it expects to resemble the fund securities it is trying to
hedge. However, if a fund's prediction of interest and currency rates, market
value, volatility or other economic factors is incorrect, the fund may lose
money, or may not make as much money as it could have.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence.
. Current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops.
. Differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
. Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based
on a broad market index. Since narrower indices are made up of a smaller
number of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of a fund. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect a
fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of a fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the fund's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, a fund can
terminate it only by entering into a closing purchase or sale transaction.
This requires a secondary market for such instruments on the exchange where
the fund originally entered into the transaction. If there is no secondary
market for the contract, or the market is illiquid, a fund may have to
purchase or sell the instrument underlying the contract, make or receive a
cash settlement or meet ongoing variation margin requirements. The inability
to close out derivative positions could have an adverse impact on the ability
of the fund to hedge its investments and may prevent a fund from realizing
profits or limiting its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. During periods of market volatility, a commodity exchange may suspend or
limit trading in a particular derivative instrument, an entire category of
derivatives or all derivatives.
. A fund may have difficulty liquidating its existing positions or recovering
excess variation margin payments because of exchange or clearing house
equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other disruptions of normal trading activity.
. Investors may lose interest in a particular derivative or category of
derivatives.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, a
fund may lose money by investing in derivatives. For example, if a fund were
to write a call option based on its adviser's expectation that the price of
the underlying security would fall, but the price were to rise instead, the
fund could be required to sell the security upon exercise at a price below the
current market price. Similarly, if a fund were to write a put option based
on the adviser's expectation that the price of the underlying security would
rise, but the price were to fall instead, the fund could be required to
purchase the security upon exercise at a price higher than the current market
price.
Margin
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the fund and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, a fund may have to sell
securities at a time when it is disadvantageous to do so to meet its minimum
daily margin requirement. A fund may lose its margin deposits if a broker
with whom it has an open futures contract or related option becomes insolvent
or declares bankruptcy.
ILLIQUID INVESTMENTS
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Illiquid investments are investments that cannot be sold or disposed of in the
ordinary course of business within seven (7) days at approximately the prices
at which they are valued. Under the supervision of the board of the Company,
the Adviser determines the liquidity of each fund's investments and, through
reports from the Adviser, the Board monitors investments in illiquid
instruments. In determining the liquidity of a fund's investments, the
Adviser may consider various factors including: (i) the frequency of trades
and quotations; (ii) the number of dealers and prospective purchasers in the
marketplace; (iii) dealer undertakings to make a market; (iv) the nature of
the security (including any demand or tender features); and (v) the nature of
the marketplace for trades (including the ability to assign or offset a fund's
rights and obligations relating to the investment). Investments currently
considered by a fund to be illiquid include repurchase agreements not
entitling the holder to payment of principal and interest within seven days,
over-the-counter options, and non-government stripped fixed-rate mortgage
backed securities. Also, the Adviser may determine that some government-
stripped fixed-rate mortgage backed securities, loans and other direct debt
instruments, and swap agreements are illiquid. However, with respect to over-
the-counter options a fund writes, all or a portion of the value of the
underlying instrument may be illiquid depending on the assets held to cover
the option and the nature and terms of any agreement a fund may have to close
out the option before expiration. In the absence of market quotations,
illiquid investments are priced at fair value as determined in good faith by a
committee appointed by the board. If, through a change in values, net assets
or other circumstances, a fund was in a position where more than 15% of its
net assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
INVESTMENT COMPANIES
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A fund may invest up to 10% of its total assets, calculated at the time of
investment, in the securities of other open-ended or closed-end investment
companies. A fund may not invest more than 5% of its total assets in the
securities of any one investment company nor may it acquire more than 3% of
the voting securities of any other investment company. The fund will
indirectly bear its proportionate share of any management fees paid by an
investment company in which it invests in addition to the management fee paid
by the fund.
REPURCHASE AGREEMENTS
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In a repurchase agreement, a fund buys a security for a relatively short
period (usually not more than 7 days) and simultaneously agrees to sell it
back at a specified date and price. A fund normally uses repurchase agreements
to earn income on assets that are not invested. A fund will require the
counter-party to the agreement to deliver securities serving as collateral for
each repurchase agreement to its custodian either physically or in book-entry
form. The counter party must add to the collateral whenever the price of the
repurchase agreement rises (i.e., the borrower "marks to the market" on a
daily basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the fund's right to sell the
security may be restricted. In addition, the value of the security might
decline before the fund can sell it and the fund might incur expenses in
enforcing its rights.
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RESTRICTED SECURITIES
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Each fund may purchase restricted securities that are not registered for sale
to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the fund's board, the adviser determines the liquidity of
such investments by considering all relevant factors. Provided that a dealer
or institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of a fund's
investment limitations. The price realized from the sales of these securities
could be more or less than those originally paid by the fund or less than what
may be considered the fair value of such securities.
Investment Limitations
Whenever an investment limitation sets forth a percentage limitation on
investment or utilization of assets, such limitation shall (with the exception
of a limitation relating to borrowing) be determined immediately after and as
a result of a fund's acquisition of such security or other asset.
Accordingly, any later increase or decrease resulting from a change in values,
net assets or other circumstances will not be considered when determining
whether the investment complies with the investment limitations of the fund.
FUNDAMENTAL POLICIES
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The following investment limitations are fundamental, which means a fund
cannot change them without the approval by vote of a majority of the
outstanding voting securities of the fund, as defined in the 1940 Act. No fund
may:
. Make loans except that each fund, in accordance with its investment
objective and policies, may (a) purchase debt obligations, (b) enter into
repurchase agreements and (c) lend its fund securities.
. Act as an underwriter of securities of other issuers, except as it may be
deemed to be an underwriter under the 1933 Act in connection with the
purchase and sale of fund securities.
. Purchase or sell commodities or commodity contracts, except that a fund, in
accordance with its investment objective and policies, may: (i) invest in
readily marketable securities of issuers which invest or engage in such
activities; and (ii) enter into forward contracts, futures contracts and
options thereon.
. Purchase or sell real estate, or real estate partnership interests, except
that this limitation shall not prevent a fund from investing directly or
indirectly in readily marketable securities of issuers which can invest in
real estate, institutions that issue mortgages, or real estate investment
trusts which deal with real estate or interests therein.
. Issue senior securities (as defined in the 1940 Act) except as permitted in
connection with the fund's policies on borrowing and pledging, or as
permitted by rule, regulation or order of the SEC.
. Purchase more than 10% of the voting securities of any one issuer or
purchase securities of any one issuer if, at the time of purchase, more
than 5% of its total assets will be invested in that issuer except up to
25% of its assets may be invested without regard to these limits. For
purposes of this investment limitation, the term "issuer" does not include
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements collateralized by such
obligations.
. Invest 25% or more of its total assets at the time of purchase in
securities of issuers (other than obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations) whose principal business
activities are in the same industry. For purposes of this investment
limitation, state and municipal governments and their agencies and
authorities are not deemed to be industries; utility companies will be
divided according to their services (e.g., gas, gas transmission, electric,
electric and gas, and telephone), and financial service companies will be
classified according to end use of their service (e.g., automobile finance,
bank finance, and diversified finance).
. Borrow money (other than pursuant to reverse repurchase agreements) except
for temporary or emergency purposes and then only in amounts up to (a) 10%
of the total assets of the Analytic Defense Equity Fund and (b) 15% of the
total assets of the Analytic Enhanced Equity Fund, the Analytic Master
Fixed Income Fund and the Analytic Short-Term Government Fund. The
temporary borrowing will include, for example, borrowing to facilitate the
orderly sale of fund securities to accommodate substantial redemption
requests if they should occur, to facilitate the settlement of securities
transactions, and is not for investment purposes. All borrowings in excess
of 5% of a fund's total assets will be repaid before making additional
investments. The foregoing percentages will apply at the time of each
purchase of a security.
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NON-FUNDAMENTAL POLICIES
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In addition to the policies described above, the following limitations are
non-fundamental (i.e., the fund's governing board may change them without
shareholder approval) policies.
All funds
As a non-fundamental investment policy, no fund may:
. Pledge more than 10% of its total assets, except that each fund may pledge
assets to the extent permitted by the 1940 Act in order to (i) secure
permitted borrowings or (ii) as may be necessary in connection with the
fund's use of options and futures contracts.
. Purchase or hold the securities of an issuer if, at the time thereof, any
such purchase or holding would cause more than 15% of the fund's net assets
to be invested in illiquid securities. This limitation does not include any
Rule 144A security that has been determined by, or pursuant to procedures
established by, the board, based on trading markets for such security, to
be liquid.
. Purchase or sell puts, calls, straddles, spreads, and any combination
thereof except that a fund may, in accordance with its investment objective
and policies, write covered call options with respect to any of its fund
securities, write covered put options and enter into closing purchase
transactions with respect to such options, engage in put and call option
transactions and engage in interest rate and stock index futures contracts
and related options transactions.
. Purchase securities of open-end or closed-end investment companies, except
to the extent permitted by the 1940 Act.
. Invest in companies for the purpose of exercising control.
. With respect to the Analytic Defensive Equity Fund, the fund will not make
short sales of securities or maintain a short position, unless at all times
when a short position is open, the fund owns an equal amount of such
securities or owns securities convertible into or exchangeable for
securities, without payment of additional consideration (except upon
exercise of covered call options on such securities with a strike price no
higher than the price at which the securities were sold short or, if
higher, if the difference between the strike price and the price at which
the securities were sold short is maintained in U.S. government securities
in a segregated account with the fund's custodian or a broker), which are
at least equal in an amount to and of the same issue as the securities sold
short and such securities are not subject to outstanding call options, and
unless not more than 10% of the fund's net assets (taken at current value)
are held as collateral for such sales at any one time.
. Purchase securities on margin, except that each fund may: (i) obtain short-
term credits as necessary for the clearance of security transactions; and
(ii) establish margin accounts as may be necessary in connection with the
fund's use of options and futures contracts.
. Invest in interests in oil, gas or other mineral leases, exploration or
development programs, except that this shall not prevent a fund from
investing in readily marketable securities of issuers that invest or engage
in oil, gas or other mineral leases, exploration or development programs or
issuers secured by interest in such activities.
. Invest more than 5% of the value of its net assets (total assets with
respect to the Analytic Defensive Equity Fund) in securities of issuers
which have a record of less than three years continuous operation,
including in such three years the operation of any predecessor company or
companies, partnership or individual proprietorship if the company whose
securities are to be purchased by the fund has come into existence as a
result of a distribution, merger, consolidation, reorganization or the
purchase of all or substantially all of the assets of such predecessor.
. Purchase or retain the securities of any issuer if, to the knowledge of the
fund, any of the officers or directors of the fund or its investment
adviser owns individually more than one-half of one percent of the
securities of such issuer and together own more than 5% of the securities
of such issuer.
Analytic Defensive Equity Fund
The fund may not:
. Invest more than 10% of the value of its total assets in securities
restricted as to disposition under the Federal securities laws.
. Participate on a joint or a joint and several basis in any trading account
in securities.
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. Sell or buy options which are not listed for trading on a national
securities exchange if, as a result, more than 5% of the fund's net assets
would be at risk in connection with all such unlisted options.
. Sell any covered put stock option if, as a result, the fund would then have
more than 50% of its total assets at current value subject to being
invested upon the exercise of put options.
. Make short sales "against the box," except for the purpose of deferring
realization of gain or loss for Federal income tax purposes and/or to
receive interest on the proceeds of such sales when made in connection with
convertible securities. Such sales will not be made of securities subject
to outstanding options.
Management of the Company
The business of the Company is managed by its governing board, which, in turn,
elects officers who are responsible for the day-to-day operations of the
Company and who execute policies formulated by the board. The Company pays
each board member who is not also an officer or affiliated person (independent
board member) a $150 quarterly retainer fee per active fund per quarter and a
$2,000 meeting fee. In addition, each independent board member is reimbursed
for travel and other expenses incurred while attending board meetings. The
$2,000 meeting fee and expense reimbursements are aggregated for all of the
board members and allocated proportionately among the funds of the UAM
Companys complex. The Company does not pay the remaining board members, each
of whom are affiliated with the Company, for their services as board members..
UAM or its affiliates or CGFSC pay the Company's officers.
The following table lists the board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Companys complex. Those people with an asterisk beside their name are
"interested persons" of the Company as that term is defined in the 1940 Act.
<TABLE>
<CAPTION>
Aggregate Total
Compensation Compensation
Position from From UAM Funds
UAM Registrant as Complex as
Name, Address, DOB funds, Inc. Principal Occupations During the Past 5 years of 12/31/99** of 12/31/99***
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
John T. Bennett, Jr. Director President of Squam Investment Management Company, Inc. and $4,100 $40,000
College Road -- RFD 3 Great Island Investment Company, Inc. since 1993, President
Meredith, NH 03253 of Bennett Management Company from 1988 to 1993.
1/26/29
- -----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Director Financial Officer of World Wildlife fund since 1999. $4,100 $40,000
10 Garden Street Formerly, Vice President for Finance and Administration and
Cambridge, MA 02138 Treasurer of Radcliffe College from 1991 to 1999.
8/14/51
- -----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Director Executive Vice President and Chief Administrative Officer of $4,100 $40,000
100 King Street West Philip Services Corp.; Director, Hofler Corp.; Formerly, a
P.O. Box 2440, LCD-1, Partner in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads.
Canada L8N-4J6
4/21/42
- -----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Director President and Chief Executive Officer of Broventure Company, $4,100 $40,000
16 West Madison Street Inc.; Chairman of the Board of Chektec Corporation and Cyber
Baltimore, MD 21201 Scientific, Inc
8/5/48
- -----------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Director, Chairman, Chief Executive Officer and a Director of United 0 0
One International Place President Asset Management Corporation; Director, Partner or Trustee
Boston, MA 02110 and of each of the Investment Companies of the Eaton Vance Group
3/21/35 Chairman of Mutual funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Director President and Chief Investment Officer of Dewey Square 0 0
One Financial Center Investors Corporation since 1988; Director and Chief
Boston, MA 02111 Executive Officer of H.T. Investors, Inc., formerly a
7/1/43 subsidiary of Dewey Square.
- -----------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Director President of UAM Investment Services, Inc. since March 1999; 0 0
211 Congress Street Senior Vice President of UAM Trust Company since January
Boston, Ma 02110 1996; formerly Senior Vice President of UAM Investment
2/24/53 Services, Inc. from 1996-1999; Principal of UAM fund
Distributors, Inc. since December 12, 1995; formerly a
Director and Chief Operating Officer of CS First Boston
Investment Management from 1993-1995.
- -----------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer of 0 0
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total
Compensation Compensation
Position from From UAM Funds
UAM Registrant as Complex as
Name, Address, DOB funds, Inc. Principal Occupations During the Past 5 years of 12/31/99** of 12/31/99***
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One International Place President United Asset Management Corporation.
Boston, MA 02110
9/19/47
- ------------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAM fund Services, Inc. and UAM fund 0 0
211 Congress Street Distributors, Inc., formerly Vice President of Operations,
Boston, MA 02110 Development and Control of Fidelity Investments in 1995;
7/4/51 Treasurer of the Fidelity Group of Mutual funds from 1991 to
1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of UAM fund Services, 0 0
211 Congress Street Inc. and UAM fund Distributors, Inc.; Associate Attorney of
Boston, MA 02110 Ropes & Gray (a law firm) from 1993 to 1995.
2/28/68
- ------------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAM fund Services, Inc.; formerly Manager 0 0
211 Congress Street Treasurer of fund Administration and Compliance of Chase Global fund
Boston, MA 02110 Services Company from 1995 to 1996; Deloitte & Touche LLP
9/18/63 from 1985 to 1995, Senior Manager.
</TABLE>
** The fund has not completed its first year since its organization.
Consequently, the information provided regarding compensation reflects
payments for the period from January 1, 1999 through April 6, 1999, and
estimates of compensation for the period from April 7, 1999 through December
31, 1999.
*** Reflects total payments received from the fund Complex. As of April 6,
1999, there were 50 funds in the fund Complex.
Code of Ethics
The Company has adopted a Code of Ethics that restricts to a certain extent
personal transactions by access persons of the Company and imposes certain
disclosure and reporting obligations.
Principal Holders of Securities
As of March 26, 1999, the members of the governing board and officers of the
Company as a group owned less than 1% of each fund's outstanding shares.
As of March 26, 1999, the following persons or organizations held 5% or more
of the shares of a fund:
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Fund
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 51.01% Enhanced Equity
Special Custody Account
For Benef of Customers
101 Montgomery Street
San Francisco, CA 94104-4122
- --------------------------------------------------------------------------------------------------------------------------------
Analytic TSA Global Asset Management, Inc. 8.34% Enhanced Equity
Inv Mgr for Prison Law Office
700 S. Flower Street, Ste 2400
Los Angeles, CA 90017-4211
- --------------------------------------------------------------------------------------------------------------------------------
National Financial Services Corp. 11.42% Enhanced Equity
FBO Exclusive Benef of Our Customer
Attn: Mutual Funds
200 Liberty Street
New York, NY 10281-1003
- --------------------------------------------------------------------------------------------------------------------------------
SEI Trust Co Cust 9.50% Master Fixed Income
IRA R/O R Borzilleri
Attn: Stephen Monahan
4 Landmark Square
Stamford, CT 06901-2502
- --------------------------------------------------------------------------------------------------------------------------------
Analytic TSA Global Asset Management, Inc. 8.19% Master Fixed Income
Inv Mgr For Prison Law Office
700 S. Flower Street, Ste 2400
Los Angeles, CA 90017-4211
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Analytic TSA Global Asset Management, Inc. 14.39% Master Fixed Income
FBO Mountain Grove Cemetery Assn
700 S. Flower Street, Ste 2400
Los Angeles, CA 90017-4211
- --------------------------------------------------------------------------------------------------------------------------------
SEI Trust Co Cust 5.52% Master Fixed Income
IRA R/O Greg McMurran
2116 Westwood Avenue
Santa Ana, CA 92706-1924
- --------------------------------------------------------------------------------------------------------------------------------
Tucker Anthony, Inc. 10.57% Master Fixed Income
VMEP NHC Pension
Attn: Stephen T. Monahan
4 Landmark Square
Stamford, CT 06901-2502
- --------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 18.16% Defensive Equity
Special Custody Account
For Benef of Customers
101 Montgomery Street
San Francisco, CA 94104-4122
- --------------------------------------------------------------------------------------------------------------------------------
LaSalle National Bank 9.81% Defensive Equity
METZ Banking Pension Trust
DTD July 1, 1997
c/o Mutual Funds, 18th Floor
135 S. LaSalle Street
Chicago, IL 60603-4105
- ---------------------------------------------------------------------------------------------------------------------------------
Analytic TSA Global Asset Management Investment 47.74% Short-Term Government
FBO Southern Baptist Foundation
700 S. Flower Street, Ste 2400
Los Angeles, CA 90017-4211
- ---------------------------------------------------------------------------------------------------------------------------------
Analytic TSA Global Asset Management, Inc. 14.82% Short-Term Government
Inv Mgr For Prison Law Office
700 S. Flower Street, Ste 2400
Los Angeles, CA 90017-4211
- ---------------------------------------------------------------------------------------------------------------------------------
Analytic TSA Global Asset Management, Inc. 14.38% Short-Term Government
FBO Mountain Grove Cemetery ASSN
700 S. Flower Street, Ste 2400
Los Angeles, CA 90017-4211
</TABLE>
Any persons or organizations listed above as owning 25% or more of the
outstanding shares of a fund may be presumed to "control" (as that term is
defined in the 1940 Act) the fund. As a result, those persons or organizations
could have the ability to vote a majority of the shares of the fund on any
matter requiring the approval of shareholders of the fund.
Investment Advisory and Other Services
INVESTMENT ADVISER
- -------------------------------------------------------------------------------
Control of Adviser
The Adviser is located at 700 S. Flower Street, Suite 2400, Los Angeles, CA
90017. The Adviser is a wholly-owned subsidiary of UAM and has provided
investment management services to corporations, pension and profit-sharing
plans, 401(k) and thrift plans, trusts, estates and other institutions and
individuals since 1970.
UAM is a holding company incorporated in Delaware in December 1980 for the
purpose of acquiring and owning firms engaged primarily in institutional
investment management. Since its first acquisition in August 1983, UAM has
acquired or organized approximately 45 such affiliated firms (the "UAM
Affiliated Firms"). UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to allow
them to continue to provide investment management services that are intended
to meet the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name and with their own leadership and individual investment philosophy
and approach. Each UAM Affiliated Firm manages its own business independently
on a day-to-day basis. Investment strategies employed and securities selected
by UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or funds
of the UAM funds complex.
17
<PAGE>
Investment Advisory Agreement
Services Performed by Adviser
Pursuant to each Investment Advisory Agreement (Advisory Agreements) between
the Company, on behalf of each fund, and the Adviser, the Adviser has agreed
to:
. Manage the investment and reinvestment of the assets of the funds.
. Continuously review, supervise and administer the investment program of the
funds.
. Determine in its discretion the securities a fund will buy or sell and the
portion of its assets such fund will hold uninvested.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence of
the part of the Adviser in the performance of its obligations and duties under
the Advisory Agreements, (2) reckless disregard by the Adviser of its
obligations and duties under the Advisory Agreements, or (3) a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services, the Adviser shall not be subject to any liability whatsoever to
the fund, for any error of judgment, mistake of law or any other act or
omission in the course of, or connected with, rendering services under the
Advisory Agreements.
Continuing an Advisory Agreement
Unless sooner terminated, an Advisory Agreement shall continue for periods of
one year so long as such continuance is specifically approved at least
annually (a) by a majority of those members of the governing board of the
Company who are not parties to the Advisory Agreement or interested persons of
any such party and (b) by a majority of the governing board of the Company or
a majority of the shareholders of the fund. An Advisory Agreement may be
terminated at any time by the fund, without the payment of any penalty, by
vote of a majority of the funds' shareholders or of a majority of the
governing board on 60 days' written notice to the Adviser. The Adviser may
terminate the Advisory Agreements at any time, without the payment of any
penalty, upon 90 days' written notice to the fund. An Advisory Agreement will
automatically and immediately terminate if it is assigned.
Investment Advisory Fee
For its services, the Adviser receives an advisory fee calculated by applying
the annual percentage rates listed below to the average daily net assets of
the fund for the month. The Adviser's fee is paid in monthly installments.
<TABLE>
<CAPTION>
Annual Percentage Rate
- ------------------------------------------------------------------------
<S> <C>
Analytic Enhanced Equity Fund 0.60%
- ------------------------------------------------------------------------
Analytic Defensive Equity Fund 0.60%
- ------------------------------------------------------------------------
Analytic Master Fixed Income Fund 0.45%
- ------------------------------------------------------------------------
Analytic Short-Term Government Fund 0.30%
</TABLE>
Expense Limitation and Fee Waiver
The Adviser has currently agreed to waive or limit its advisory fees or assume
other expenses in an amount that operates to limit the aggregate annual total
of certain operating expenses of each Analytic fund as follows: 0.99% of the
Analytic Defensive Equity Fund and the Analytic Enhanced Equity Fund; 0.80% of
the Analytic Master Fixed Income Fund; and 0.60% of the Analytic Short-Term
Government Fund. The expenses subject to such limitation exclude: (i)
interest, taxes, brokerage commissions, and other expenditures which are
capitalized in accordance with generally accepted accounting principles; (ii)
transfer agency fees; and (iii) other extraordinary expenses not incurred in
the ordinary course of a fund's business. The fee waiver/expense reimbursement
arrangement for each fund is expected to remain in effect for the current
fiscal year and can be terminated at any time at the option of the fund. Each
waiver of advisory fees or assumption of other expenses by the Adviser is
subject to a possible reimbursement by each fund in future years if such
reimbursement can be made within the foregoing annual expense limits.
History
The Adviser was founded in 1970 as Analytic Investment Management, Inc., one
of the first independent investment counsel firms specializing in the creation
and continuous management of optioned equity and optioned debt funds for
fiduciaries and
18
<PAGE>
other long term investors. It is one of the oldest investment management firms
in this specialized area. In 1985 it became a wholly-owned affiliate of United
Asset Management (NYSE:UAM). UAM is an investment management holding company,
with 51 affiliated management firms, managing more than $206 billion in
assets. In January 1996, Analytic Investment Management, Inc. acquired and
merged with TSA Capital Management which emphasizes U.S. and global tactical
asset allocation, currency management, quantitative equity and fixed income
management, as well as option and yield curve strategies. The Adviser serves,
among others, pension and profit-sharing plans, endowments, foundations,
corporate investment funds, mutual savings banks, and insurance companies, for
which it manages approximately $1 billion.
Philosophy
Analytic Investors utilizes state of the art quantitative investment
management techniques to deliver superior investment performance. We believe
that the use of such techniques allows us to fulfill our clients' objectives
through rational, systematic identification of market opportunities, while
minimizing the impact of human emotions which often dominate investment
decision making. The firm has based its investment decisions on quantitative
techniques for more than 25 years.
Investment Process and Style
Enhanced Equity fund
The Adviser believes the characteristics that drive stock prices can be
systematically identified and measured. There are five primary elements used
to determine a stock's attractiveness: 1) Relative Valuation 2) Growth
Potential 3) Historical Return Momentum 4) Liquidity 5) Risk. The valuation
process examines dozens of financial measures within these five elements. The
Adviser accepts, however, that the predictive power of each of these financial
measures has changed over time and will continue to change into the future.
As a result, the Adviser has developed a unique weighting process for each of
these financial measures which allows our approach to adapt to constantly
changing market conditions. The adaptive approach increases the weight of
those variables that have contributed most heavily to recent performance and
decreases the weight to those measures that have lost their predictive
capacity. The Enhanced Equity process commences by developing rankings for
all the companies in the Equity Universe based on the combined attractiveness
of the five elements. This requires extensive analysis and necessitates the
assistance of a computer model to simultaneously evaluate all the data for
each stock. Once the stocks are ranked, a highly diversified portfolio is
constructed by selecting that combination of stocks which represents the best
potential return while maintaining a risk profile that is similar to theEquity
Universe. In the process, our quantitative approach greatly reduces the
exposures to firm size, market style, and economic sector biases. This is
referred to as being Size Neutral, Style Neutral and Sector Neutral. The
portfolio is monitored daily, and re-balanced monthly to ensure optimum
performance. Individual security positions are limited to a maximum of a 3%
active position relative to their respective weights in the Equity Universe.
The portfolio seeks to be fully invested at all times.
Defensive Equity
The Analytic Defensive Equity Fund is a stock fund which combines a
quantitative approach to stock selection with a unique hedging style. As the
name suggests, the goal of the Fund is to allow shareholders to enjoy
substantial protection against a declining stock market while still allowing
for the shareholder to participate to a large degree in a rising stock market.
The core strategy of the Fund is based on a belief that there are five primary
elements that drive an individual stock's performance: 1) Relative Valuation,
2) Growth Potential, 3) Historical Return Momentum, 4) Liquidity and 5) Risk.
The valuation process examines dozens of financial measures within these five
elements. We accept, however, that the predictive power of each of these
financial measures has changed over time and will continue to change into the
future. As a result, Analytic Investors has developed a unique weighting
process for each of these financial measures which allows our approach to
adapt to constantly changing market conditions. The adaptive approach
increases the weight of those variables that have contributed most heavily to
recent performance and decreases the weight to those measures that have lost
their predictive capacity. The stock selection process commences by developing
rankings for all the companies in the Equity Universe based on the combined
attractiveness of the five elements. This requires extensive analysis and
necessitates the assistance of a computer model to simultaneously evaluate all
the data for each stock. Once the stocks are ranked, a highly diversified
portfolio is constructed by selecting that combination of stocks which
represents the best potential return while maintaining a risk profile that is
similar to the Equity Universe. Individual security positions are limited to a
maximum of a 3% active position relative to their respective weights in the
Equity Universe. Once established, this portfolio is strategically hedged to
reduce the risk to the overall portfolio when individual stocks become
excessively volatile.
Master Fixed Income
The Master Fixed Income Fund is an intermediate term bond fund that seeks to
outperform other intermediate term bond funds through three sources of value:
(1) Analyzing shifts in the yield curve ; (2) Tactically increasing and
decreasing the
19
<PAGE>
allocation of the Fund to the corporate bond sector; and (3) ) Utilizing a
unique method of creating "synthetic" corporatebonds . Analytic believes that
through careful quantitative analysis these three methods can add value
without significantly increasing the volatility of the Fund above that of the
intermediate-term bond market.
The core strategy of the fund begins with the selection of a diversified mix
of Treasuries, agencies, mortgage-related bonds, and high-grade corporate
bonds. Additional value is found in the corporate sector through the creation
of synthetic high-grade corporate instruments using Analytic's option
valuation model. The usefulness of this procedure is in its ability to make
available to the Fund a far broader array of corporate bond choices than can
typically be found in the traditional corporate bond market. This broader
array of choices offered by the creation of synthetic bonds includes (1) bonds
free from the callability feature that so often adds unnecessary risk to the
use of traditional corporate bonds; (2) bonds that have a level of credit
quality that can be higher or lower than the credit quality of existing
corporate bonds; (3) bonds associated with corporations that don't typically
offer corporate bonds. The Fund varies exposure to the synthetic bond market
depending on the availability of mispriced offerings, as identified by
Analytic's real-time, proprietary valuation approach. Finally, the Fund uses a
sophisticated approach to assess the shape of the yield curve and to find
arbitrage opportunities to provide additional value.
Short-Term Government
The Short-Term Government Fund is, a fixed income fund that invests primarily
in high-grade debt instruments of short maturities, three years or less. While
the Fund invests more than half its assets in US Treasury and Agency
securities, the portfolio management team enhances performances through three
sources of value: (1) Selected use of short-term corporate securities; (2) A
sophisticated approach to finding and exploiting yield curve arbitrage
opportunities; and (3) Tactical investments in short-term interest rate
differentials between major global economies.
DISTRIBUTOR
- -------------------------------------------------------------------------------
UAMFDI serves as the Company's distributor. The Company offers its shares
continuously. While UAMFDI will use its best efforts to sell shares of the
Company, it is not obligated to sell any particular amount of shares. UAMFDI
receives no compensation for its services. UAMFDI, an affiliate of UAM, is
located at 211 Congress Street, Boston, Massachusetts 02110.
ADMINISTRATIVE SERVICES
- -------------------------------------------------------------------------------
Administrator
Pursuant to a fund Administration Agreement with the Company, UAMFSI manages,
administers and conducts the general business activities of the Company. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Company. UAMFSI, an affiliate of UAM, has
its principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the fund Administration Agreement. Other expenses to be
incurred in the operation of the Company will be borne by the Company or other
parties, including
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and members of the board who are not
officers, directors, shareholders or employees of an affiliate of UAM,
including UAMFSI, UAMFDI or the Adviser.
. SEC fees and states Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
20
<PAGE>
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Company.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company expenses.
. Unless sooner terminated, the fund Administration Agreement shall continue
in effect from year to year provided the board specifically approves such
continuance at least annually. The board or UAMFSI may terminate the fund
Administration Agreement, without penalty, on not less than ninety (90)
days' written notice. The fund Administration Agreement shall automatically
terminate upon its assignment by UAMFSI without the prior written consent
of the Company.
. UAMFSI will from time to time employ or associate with such person or
persons as may be fit to assist them in the performance of the fund
Administration Agreement. Such person or persons may be officers and
employees who are employed by both UAMFSI and the Company. UAMFSI will pay
such person or persons for such employment. The Company will not incur any
obligations with respect to such persons.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to SEI Investments Mutual funds Services (formerly SEI fund
Resources) under a Mutual funds Service Agreement dated April 6, 1999. SEI is
located at One Freedom Valley Road Oaks, PA 19456.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and DST
Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas City,
Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Company under an
agreement between UAMSSC and UAMFSI. The principal place of business of UAMSSC
is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
In exchange for administrative services, the fund pays a five-part fee to
UAMFSI as follows:
1. An annual base fee calculated at the annual rate equal to $14,500 for the
first operational class and $3,000 for each additional class.
2. A fund specific fee to UAMFSI calculated from the aggregate net assets of
each fund at the following rates:
<TABLE>
<CAPTION>
Annual Rate
<S> <C>
- ------------------------------------------------------------
Analytic Enhanced Equity Fund 0.04%
- ------------------------------------------------------------
Analytic Defensive Equity Fund 0.06%
- ------------------------------------------------------------
Analytic Master Fixed Income Fund 0.04%
- ------------------------------------------------------------
Analytic Short-Term Government Fund 0.04%
</TABLE>
1. An annual base fee that UAMFSI pays to SEI Investments Mutual funds
Services for its sub-administration and other services calculated at the
annual rate of $35,500 for the first operational class; $5,000 for each
additional operational class; and 0.03% of their pro rata share of the
combined assets of the funds.
2. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
3. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational class
and $2,500 for each additional class.
The fund also pays certain account and transaction fees and out-of-pocket
expenses that may be based on the number of open and closed accounts, the type
of account or the services provided to the account.
21
<PAGE>
Shareholder Servicing Arrangements
UAM and any of its affiliates may, at its own expense, compensate a Service
Agent or other person for marketing, shareholder servicing, record-keeping
and/or other services performed with respect to the Company, a fund or any
class of shares of a fund. The person making such payments may do so out of
its revenues, its profits or any other source available to it. Such service
arrangements, when in effect, are made generally available to all qualified
service providers. The Adviser may also compensate its affiliated companies
for referring investors to the funds.
CUSTODIAN
- ------------------------------------------------------------------------------
First Union National Bank (successor to CoreStates Bank, N.A.) 530 Walnut
Street Philadelphia, PA 19106, provides for the custody of the Company's
assets pursuant to the terms of a custodian agreement with the Company.
INDEPENDENT PUBLIC ACCOUNTANT
- ------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serves as independent accountant for the Company.
Brokerage Allocation and Other Practices
SELECTION OF BROKERS
- -------------------------------------------------------------------------------
The Advisory Agreements authorize the Adviser to select the brokers or dealers
that will execute the purchases and sales of investment securities for a fund.
The Advisory Agreement also directs the Adviser to use its best efforts to
obtain the best execution with respect to all transactions for a fund. The
Adviser may select brokers based on research, statistical and pricing services
they provide to the Adviser. Information and research provided by a broker
will be in addition to, and not instead of, the services the Adviser is
required to perform under the Advisory Agreement. In so doing, a fund may pay
higher commission rates than the lowest rate available when the Adviser
believes it is reasonable to do so in light of the value of the research,
statistical, and pricing services provided by the broker effecting the
transaction. The Adviser may place fund orders with qualified broker-dealers
who refer clients to the Adviser.
It is not the practice of the Company to allocate brokerage or effect
principal transactions with dealers based on sales of shares that a broker-
dealer firm makes. However, the Company may place trades with qualified
broker-dealers who recommend the Company or who act as agents in the purchase
of Company shares for their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The Adviser makes investment decisions for a fund independently of decisions
made for its other clients. When a security is suitable for the investment
objective of more than one client, it may be prudent for the Adviser to engage
in a simultaneous transaction, that is, buy or sell the same security for more
than one client. The Adviser strives to allocate such transactions among its
clients, including the funds, in a fair and reasonable manner. Although there
is no specified formula for allocating such transactions, the Company's
governing board periodically reviews the various allocation methods used by
the Adviser, and the results of such allocations.
BROKERAGE COMMISSIONS
- -------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, each fund will not
pay brokerage commissions for such purchases. When a debt security is bought
from an underwriter, the purchase price will usually include an underwriting
commission or concession. The purchase price for securities bought from
dealers serving as market makers will similarly include the dealer's mark up
or reflect a dealer's mark down. When a fund executes transactions in the
over-the-counter market, it will deal with primary market makers unless prices
that are more favorable are otherwise obtainable.
22
<PAGE>
Capital Stock and Other Securities
DESCRIPTION OF SHARES AND VOTING RIGHTS
- -------------------------------------------------------------------------------
The Company's Articles of Incorporation, as amended, provide that: (i) all
consideration received by the Company for shares of any fund and all assets in
which such consideration is invested would belong to that fund and would be
subject to the liabilities related thereto; (ii) each share of stock shall
entitle the holder thereof to one vote for each dollar (and each fractional
dollar thereof) of net asset value (number of shares owned times net asset
value per share) of shares of stock outstanding in such holder's name on the
books of the Company, and all shares of stock shall be voted in the aggregate;
provided, however, that to the extent series voting is required by the 1940
Act or Maryland law, or otherwise directed by the board, as to any such
matter, shares of stock shall be voted by series; (iii) in the event of the
liquidation or dissolution of any series of stock of the Company, stockholders
of such series shall be entitled to receive out of the assets of such series
available for distribution to stockholders the assets belonging to such
series; and the assets so distributable to the stockholders of such series
shall be distributed among such stockholders in proportion to the number of
shares of such series held by them and recorded on the books of the Company;
and (iv) no holder of shares of stock of the Company shall, as such holders,
have any preemptive rights to purchase or subscribe for any additional shares
of stock of the Company or any other security of the Company.
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- -------------------------------------------------------------------------------
The Company tries to distribute substantially all of the net investment income
of a fund and net realized capital gains so as to avoid income taxes on its
dividends and distributions and the imposition of the federal excise tax on
undistributed income and capital gains. However, the Company cannot predict
the timing or amount of any such dividends or distributions.
Distributions by a fund reduce its net asset value ("NAV"). A distribution
that reduces the NAV of a fund below its cost basis may be taxable, although
from an investment standpoint, it is a return of capital. If you buy shares of
a fund on or before the "record date" - the date that establishes which
shareholders will receive an upcoming distribution - for a distribution, you
will receive some of the money you invested as a taxable distribution.
Unless the shareholder elects otherwise in writing, all dividend and capital
gains distributions are automatically received in additional shares of a fund
at net asset value (as of the business day following the record date). This
will remain in effect until the Company is notified by the shareholder in
writing at least three days prior to the record date that either the Income
Option (income dividends in cash and capital gains distributions in additional
shares at net asset value) or the Cash Option (both income dividends and
capital gains distributions in cash) has been elected. An account statement is
sent to shareholders whenever an income dividend or capital gains distribution
is paid.
Each fund will be treated as a separate entity (and hence as a separate
"regulated investment company") for federal tax purposes. Each fund will
distribute its net capital gains to its investors, but will not offset (for
federal income tax purposes) such gains against any net capital losses of
another fund.
Purchase, Redemption, and Pricing of Shares
PURCHASE OF SHARES
- -------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. If shares of a fund are purchased in this manner, the Service Agent
must receive your investment order before the close of trading on the New York
Stock Exchange ("NYSE") and transmit it to UAMSSC before the close of its
business day to receive that day's share price. UAMSSC must receive proper
payment for the order by the time the fund is priced on the following business
day. Service Agents are responsible to their customers and the Company for
timely transmission of all subscription and redemption requests, investment
information, documentation, and money.
Purchases of shares of a fund will be made in full and fractional shares of
the fund calculated to three decimal places. Certificates for fractional
shares will not be issued. Certificates for whole shares will not be issued
except at the written request of the shareholder.
The Company reserves the right in its sole discretion to reduce or waive the
minimum for initial and subsequent investment for certain fiduciary accounts
such as employee benefit plans or under circumstances where certain economies
can be achieved in sales of a fund's shares.
23
<PAGE>
In-Kind Purchases
If accepted by the Company, shareholders may purchase shares of a fund in
exchange for securities that are eligible for acquisition by the fund.
Securities to be exchanged that are accepted by the Company will be valued as
described under "VALUATION OF SHARES" at the next determination of net asset
value after acceptance. Shares issued by a fund in exchange for securities
will be issued at net asset value determined as of the same time. All
dividends, interest, subscription, or other rights pertaining to such
securities shall become the property of the fund and must be delivered to the
Company by the investor upon receipt from the issuer. Securities acquired
through an in-kind purchase will be acquired for investment and not for
immediate resale.
The Company will not accept securities in exchange for shares of a fund
unless:
. At the time of exchange, such securities are eligible to be included in the
fund (current market quotations must be readily available for such
securities).
. The investor represents and agrees that all securities offered to be
exchanged are liquid securities and not subject to any restrictions upon
their sale by the fund under the 1933 Act, or otherwise.
. The value of any such securities (except U.S. government securities) being
exchanged together with other securities of the same issuer owned by the
fund will not exceed 5% of the net assets of the fund immediately after the
transaction.
. Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for Federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such
exchanges should contact the Adviser.
REDEMPTION OF SHARES
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the fund.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued.
. A letter of instruction or an assignment specifying the number of shares or
dollar amount to be redeemed, signed by all registered owners of the shares
in the exact names in which they are registered.
. Any required signature guarantees (see "SIGNATURE GUARANTEES").
. Any other necessary legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
By Telephone
The following tasks cannot be accomplished by telephone:
. Changing the name of the commercial bank or the account designated to
receive redemption proceeds (this can be accomplished only by a written
request signed by each shareholder, with each signature guaranteed).
. Redemption of certificated shares by telephone.
The Company and its Sub-Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine, and they may
be liable for any losses if they fail to do so. These procedures include
requiring the investor to provide certain personal identification at the time
an account is opened, as well as prior to effecting each transaction requested
by telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions of such transaction requests. The Company or Sub-Transfer Agent
may be liable for any losses due to unauthorized or fraudulent telephone
instructions if the Company or the Sub-Transfer Agent does not employ the
procedures described above. Neither the Company nor the Sub-Transfer Agent
will be responsible for any loss, liability, cost, or expense for following
instructions received by telephone that it reasonably believes to be genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Company to make payment wholly or
partly in cash, the Company may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by a fund in lieu of cash in
conformity with applicable rules of the SEC. Investors may incur brokerage
charges on the sale of fund securities received in payment of redemptions.
24
<PAGE>
However, the Company has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Company at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in cash,
as the Directors may deem advisable; however, payment will be made wholly in
cash unless the governing board believes that economic or market conditions
exist which would make such a practice detrimental to the best interests of
the Company. If redemptions are paid in investment securities, such securities
will be valued as set forth under "Valuation of Shares." A redeeming
shareholder would normally incur brokerage expenses if these securities were
converted to cash.
Signature Guarantees
To protect your account, the Company and its Sub-Transfer Agent from fraud,
signature guarantees are required for certain redemptions. The purpose of
signature guarantees is to verify the identity of the person who has
authorized a redemption from your account.
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible
guarantor institutions include banks, brokers, dealers, credit unions,
national securities exchanges, registered securities associations, clearing
agencies, and savings associations. A complete definition of eligible
guarantor institutions is available from the Company's Sub-Transfer Agent.
Broker-dealers guaranteeing signatures must be a member of a clearing
corporation or maintain net capital of at least $100,000. Credit unions must
be authorized to issue signature guarantees. Signature guarantees will be
accepted from any eligible guarantor institution that participates in a
signature guarantee program.
The signature guarantee must appear either (1) on the written request for
redemption, (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed, or (3) on all stock
certificates tendered for redemption and, if shares held by the Company are
also being redeemed, on the letter or stock power.
Other Redemption Information
Normally, the Company will pay for all shares redeemed under proper procedures
within one business day of and no more than seven days after the receipt of
the request, or earlier if required under applicable law. The Company may
suspend the right of redemption or postpone the date at times when both the
NYSE and Custodian Bank are closed, or under any emergency circumstances
determined by the SEC.
The Company may suspend redemption privileges or postpone the date of payment:
. During any period that both the NYSE and Custodian Bank are closed, or
trading on the NYSE is restricted as determined by the Commission.
. During any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for a fund
to dispose of securities owned by it, or to fairly determine the value of
its assets.
. For such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- -------------------------------------------------------------------------------
The exchange privilege is only available with respect to funds that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class Shares of UAM funds do not
charge a sales commission or charge of any kind.
Neither the Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Company may restrict the exchange privilege at any
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Company and its shareholders.
TRANSFER OF SHARES
- -------------------------------------------------------------------------------
Shareholders may transfer shares of each fund to another person by making a
written request to the Company. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
25
<PAGE>
VALUATION OF SHARES
- ------------------------------------------------------------------------------
The Company does not price its shares on those days when the New York Stock
Exchange is closed, which are currently: New Year's Day; Dr. Martin Luther
King, Jr. Day; Presidents' Day; Good Friday; Memorial Day; Independence Day;
Labor Day; Thanksgiving Day; and Christmas Day.
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed securities
not traded on the valuation date for which market quotations are readily
available are valued neither exceeding the asked prices nor less than the bid
prices. Quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents. The converted value is based upon the bid price of
the foreign currency against U.S. dollars quoted by any major bank or by a
broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the board determines that amortized cost reflects fair value.
Foreign Securities
Foreign securities are valued on the basis of quotations from the primary
market in which they are traded and are translated from the local currency
into U.S. dollars using current exchange rates. In addition, if quotations
are not readily available, or if the values have been materially affected by
events occurring after the closing of a foreign market, assets may be valued
by another method that the board believes accurately reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
Performance Calculations
The funds measure performance by calculating yield and total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. Performance quotations by investment
companies are subject to rules adopted by the SEC, which require the use of
standardized performance quotations or, alternatively, that every non-
standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual compounded total return quotations used by
the Company are based on the standardized methods of computing performance
mandated by the SEC. An explanation of the method used to compute or express
performance follows.
Total Return
- -------------------------------------------------------------------------------
Total return is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
or aggregate total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The average annual total return of a fund is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each one, five and ten-year period and the deduction of all
applicable fund expenses on an annual basis.
These figures are calculated according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
26
<PAGE>
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
The average annual total rates of return of the funds as of December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
One Year Ended Five Years Ended 10 Year Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Analytic Enhanced Equity Fund 37.82% 24.33% N/A 22.76% 6/30/93
- -----------------------------------------------------------------------------------------------------------------------------------
Analytic Defensive Equity Fund 28.89% 17.21% 13.01% N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Analytic Master Fixed Income Fund 3.80% 6.82% N/A 6.87% 6/30/93
- -----------------------------------------------------------------------------------------------------------------------------------
Analytic Short-Term Government Fund 7.10% 5.66% N/A 5.53% 6/30/93
</TABLE>
YIELD
- -------------------------------------------------------------------------------
Yield refers to the income generated by an investment in the portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all funds. As this
differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. Since Advisor Class Shares bear additional service and
distribution expenses, their yield will generally be lower than that of the
Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
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 income distributions
d = the maximum offering price per share on the last day of the period.
The funds' yields and adjusted yields for the month ended December 31, 1998
were:
<TABLE>
<CAPTION>
Yield
- -------------------------------------------------------------
<S> <C>
Analytic Master Fixed Income Fund 3.81%
- -------------------------------------------------------------
Analytic Short-Term Government Fund 3.80%
</TABLE>
COMPARISONS
- ------------------------------------------------------------------------------
The funds' performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, and various indices as further
described in this SAI. This information may also be included in sales
literature and advertising.
To help investors better evaluate how an investment in a fund might satisfy
their investment objective, advertisements regarding the funds may discuss
various measures of fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and averages.
Please see Appendix B for publications, indices and averages that may be used.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages
is not identical to the composition of investments in each fund, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by each
fund to calculate its performance. In addition, there can be no assurance that
each fund will continue this performance as compared to such other averages.
27
<PAGE>
Taxes
In order for a fund to continue to qualify for federal income tax treatment as
a regulated investment company under the Internal Revenue Code of 1986, as
amended, at least 90% of its gross income for a taxable year must be derived
from qualifying income; i.e., dividends, interest, income derived from loans
of securities, and gains from the sale of securities or foreign currencies, or
other income derived with respect to its business of investing in such
securities or currencies, as applicable.
Each fund will distribute to shareholders annually any net capital gains that
have been recognized for federal income tax purposes. Shareholders will be
advised on the nature of the payments.
If for any taxable year a fund does not qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code, all of the fund's
taxable income would be subject to tax at regular corporate rates without any
deduction for distributions to shareholders. In this event, a fund's
distributions to shareholders would be taxable as ordinary income to the
extent of the current and accumulated earnings and profits of the particular
fund, and would be eligible for the dividends received deduction in the case
of corporate shareholders. The funds intend to qualify as a "regulated
investment company" each year.
Dividends and interest received by each fund may give rise to withholding and
other taxes imposed by foreign countries. These taxes would reduce each fund's
dividends but are included in the taxable income reported on your tax
statement if each fund qualifies for this tax treatment and elects to pass it
through to you. Consult a tax adviser for more information regarding
deductions and credits for foreign taxes.
28
<PAGE>
Expenses
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Administrator Brokerage
Fees Paid* Fees Waived* Fee+ Commissions
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Analytic Enhanced Equity Fund $ 40,830 $ 66,917 $ 48,987 $ 64,668
1998
- ------------------------------------------------------------------------------------------------------------------------------------
1997 -0- $ 40,662 $ 21,124 $ 16,005
- ------------------------------------------------------------------------------------------------------------------------------------
1996 $ 3,860 $ 50,426 $ 7,140 $ 24,710
- ------------------------------------------------------------------------------------------------------------------------------------
Analytic Defensive Equity Fund $253,110 $105,594 $ 80,296 $258,118
1998
- ------------------------------------------------------------------------------------------------------------------------------------
1997 $389,998 -0- $115,544 $159,674
- ------------------------------------------------------------------------------------------------------------------------------------
1996 $363,576 -0- $126,424 $149,614
- ------------------------------------------------------------------------------------------------------------------------------------
Analytic Master Fixed Income Fund $ 11,870 $ 10,391 $ 33,890 $ 27,405
1998
- ------------------------------------------------------------------------------------------------------------------------------------
1997 $ 65,462 $ 40,662 $ 55,769 $ 43,983
- ------------------------------------------------------------------------------------------------------------------------------------
1996 $ 70,152 $ 50,426 $ 57,248 $ 27,017
- ------------------------------------------------------------------------------------------------------------------------------------
Analytic Short-Term Government Fund $ 5,656 $ 5,012 $ 32,639 $ 2,737
1998
- ------------------------------------------------------------------------------------------------------------------------------------
1997 -0- $ 2,791 $ 24,891 -0-
- ------------------------------------------------------------------------------------------------------------------------------------
1996 $ 36,314 $ 40,090 $ 54,386 -0-
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* From July 27, 1998 to December 31, 1998, Pilgrim Baxter & Associates, Ltd.
("Pilgrim Baxter") was the investment adviser to Analytic Enhanced Equity,
Master Fixed Income and Short-Term Government Funds and Analytic Investors,
Inc., was the funds' sub-adviser. During that period, any fees paid to
Analytic Investors were paid from Pilgrim Baxter advisory fees. Before July
27, 1998 Analytic Investors was to investment adviser to the funds. From
August 31, 1998 to December 31, 1998, Pilgrim Baxter was the investment
adviser to Analytic Defensive Equity Fund and Analytic Investors, Inc., was
the fund's sub-adviser. During that period, any fees paid to Analytic
Investors were paid from Pilgrim Baxter advisory fees. Before August 31,
1998 Analytic Investors was to investment adviser to the funs.
+ From July 27, 1998, to December 31, 1998 PBHG Fund Services, Inc. was
the administrator to Analytic Enhanced Equity, Master Fixed Income and
Short-Term Government Funds. From May 15, 1997 to July 27, 1998, UAM Fund
Services, Inc. was the administrator to Funds. Before May 15, 1997,
Analytic Investors was the administrator to Funds. From August 31, 1998,
to December 31, 1998 PBHG Fund Services, Inc. was the administrator to
Analytic Defensive Equity Fund. From May 15, 1997 to August 31, 1998, UAM
Fund Services, Inc. was the administrator to Fund. Before May 15, 1997,
Analytic Investors was the administrator to Funds.
Financial Statements
The financial statements and financial highlights for each fund for the fiscal
period ended December 31, 1998, and the report thereon by
PricewaterhouseCoopers LLP, the Company's independent accountant appear in
funds' 1998 Annual Report and are incorporated by reference into this SAI. No
other parts are incorporated by reference herein. Copies of the 1998 Annual
Report may be obtained free of charge by telephoning the Company at the
telephone number appearing on the front page of this SAI.
29
<PAGE>
Appendix A: Description Of Securities And Ratings
MOODY'S INVESTORS SERVICE, INC.
- -------------------------------------------------------------------------------
Preferred Stock Ratings
<TABLE>
<S> <C>
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good
asset protection and the least risk of dividend impairment within the universe of preferred stock.
aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is
a reasonable assurance the earnings and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are
judged to be somewhat greater than in the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock, neither highly protected
nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over
any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any long periods of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does
not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with
little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock. Issues so rated can thus be regarded as
having extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: 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.
Debt Ratings - Taxable Debt & Deposits Globally
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than the 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 which suggest a susceptibility to impairment sometime in the future.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
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 the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time may be
small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
<TABLE>
<S> <C>
Prime-1 Issuers rated Prime-1 (or supporting institution) 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:
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and ample asset protection.
. Broad leading market positions in well-established industries.
. margins in earnings coverage of fixed financial charges and high internal cash generation.
. Well-established access to a range of financial markets and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong 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 obligation. 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.
</TABLE>
A-2
<PAGE>
STANDARD & POOR'S RATINGS SERVICES
- -------------------------------------------------------------------------------
Preferred Stock Ratings
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and indicates
an extremely strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated AA also qualifies as a high-quality, fixed-income security. The capacity to pay
preferred stock obligations is very strong, although not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred stock obligations, although it is
somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay the preferred stock obligations.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in this
category than for issues in the A category.
BB, B, CCC Preferred stock rated BB, B, and CCC are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay preferred stock obligations. BB indicates the lowest degree of speculation and
CCC the highest. While such issues will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in arrears on dividends or sinking fund
payments, but that is currently paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in default on debt instruments.
N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a
rating, or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
Plus (+) or To provide more detailed indications of preferred stock quality, ratings from AA to CCC may be modified by
minus (-) the addition of a plus or minus sign to show relative standing within the major rating categories.
</TABLE>
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
Likelihood of payment-capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
Nature of and provisions of the obligation;
Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA An obligation rated AAA have the highest rating assigned by Standard & Poor's. The obligor's capacity to
meet its financial commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's
capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher- rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the obligator to meet its financial
commitment on the obligation.
</TABLE>
A-3
<PAGE>
Obligations rated BB, B, CCC , CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major risk exposures to adverse conditions.
<TABLE>
<S> <C>
BB An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposures to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently
has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment
on the obligation.
CCC An obligation rated CCC is currently vulnerable to non-payment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligations.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action
has been taken, but payments on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
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.
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligation linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk-such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Short-Term Issue Credit Ratings
Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means
obligations with an original maturity of no more than 365 days - including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating in which the short-term rating
addresses the put feature, in addition to the usual long-term rating. Medium-
term notes are assigned long-term ratings.
<TABLE>
<S> <C>
A-1 A short-term obligation rated A-1 is rated in the highest category by Standard & Poor's. The obligor's
capacity to meet its financial commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligation in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet
its financial commitment on the obligation.
</TABLE>
A-4
<PAGE>
<TABLE>
<S> <C>
B A short-term obligation rated B is regarded as having significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating category is used when payments on an
obligation are not made on the date due even if the applicable grace period has not expired, unless Standard
& Poors' believes that such payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are
jeopardized.
</TABLE>
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
<TABLE>
<CAPTION>
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA+/AA High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk factors are more variable in periods of greater
economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+/BB/BB- Below investment grade but deemed likely to meet obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions. Overall quality may move up or down
frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will not be net when due. Financial protection
factors will fluctuate widely according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into a higher or lower rating
grade.
CCC Well below investment-grade securities. Considerable uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments. Issuer
failed to meet scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
Short-Term Debt
High Grade
<TABLE>
<S> <C>
D-1+ Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C>
D-1- High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
</TABLE>
Good Grade
<TABLE>
<S> <C>
D-2 Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are
small.
</TABLE>
Satisfactory Grade
<TABLE>
<S> <C>
D-3 Satisfactory liquidity and other protection factors qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
</TABLE>
Non-Investment Grade
<TABLE>
<S> <C>
D-4 Speculative investment characteristics. Liquidity is not sufficient to insure against disruption in debt
service. Operating factors and market access may be subject to a high degree of variation.
</TABLE>
Default
<TABLE>
<CAPTION>
<S> <C>
D-5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
FITCH IBCA RATINGS
- -------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
<TABLE>
<S> <C>
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only
in case of exceptionally strong capacity for timely payment for financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very
strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment
of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher ratings.
B Good credit quality. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
</TABLE>
Speculative Grade
<TABLE>
<S> <C>
BB Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in this category are not investment
grade.
B Highly speculative. 'B' ratings indicate that significant credit risk is present, but a limited margin of
safety remains. Financial commitments are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic environment.
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C>
CCC,CC,C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default
of some kind appears probable. 'C' ratings signal imminent default.
DDD,DD,D Default. Securities are not meeting current obligations and are extremely speculative. 'DDD' designates
the highest potential for recovery of amounts outstanding on any securities involved. For U.S. corporates,
for example, 'DD' indicates expected recovery of 50% - 90% of such outstandings, and 'D' the lowest recovery
potential, i.e. below 50%.
</TABLE>
International Short-Term Credit Ratings
<TABLE>
<S> <C>
F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may
have an added "+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of
safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however,
near-term adverse changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely
reliant upon a sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
</TABLE>
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' long-term rating
category, to categories below 'CCC', or to short-term ratings other than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
A-7
<PAGE>
Appendix B - Comparisons
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time in
the price of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on
the New York Stock Exchange. It has been a widely followed indicator of
the stock market since October 1, 1928.
Dow Jones Industrial Average -- an unmanaged price weighted average of 30
blue-chip stocks.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper Analytical Services, Inc.,
Morningstar, Inc., New York Times, Personal Investor, Wall Street Journal
and Weisenberger Investment Companies Service -- publications that rate
fund performance over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable - an average of all major money market
fund yields, published weekly for 7- and 30-day yields.
IFC Investable Index - an unmanaged index maintained by the International
Finance Corporation. This index consists of 890 companies in 25 emerging
equity markets, and is designed to measure more precisely the returns
portfolio managers might receive from investment in emerging markets equity
securities by focusing on companies and markets that are legally and
practically accessible to foreign investors.
Lehman Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues,
agency issues, corporate bond issues and mortgage backed securities. It
includes fixed rate issuers of investment grade (BBB) or higher, with
maturities of at least one year and outstanding par values of at least $200
million for U.S. government issues and $25 million for others.
Lehman Corporate Bond Index - an unmanaged indices of all publicly issues,
fixed-rate, nonconvertible investment grade domestic corporate debt. Also
included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Government Bond Index -an unmanaged treasury bond index including
all public obligations of the U.S. Treasury, excluding flower bonds and
foreign-targeted issues, and the Agency Bond Index (all publicly issued
debt of U.S. government agencies and quasi-federal corporation, and
corporate debt guaranteed by the U.S. government). In addition to the
aggregate index, sub-indices cover intermediate and long term issues.
Lehman Government/Corporate Index -- an unmanaged fixed income market
value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and
yankee bonds. All issues are investment grade (BB) or higher, with
maturities of at least one year and outstanding par value of at least $100
million of r U.S. government issues and $25 million for others. Any
security downgraded during the month is held in the index until month end
and then removed. All returns are market value weighted inclusive of
accrued income.
Lehman High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity
and an outstanding par value of at least $100 million.
Lehman Intermediate Government/Corporate Index - an unmanaged fixed income
market value-weighted index that combines the Lehman Government Bond Index
(intermediate-term sub-index) and Lehman Corporate Bond Index.
B-1
<PAGE>
Lipper 1-5 Year Short Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of 5 years
or less.
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds
whose primary objective is to conserve principal by maintaining at all time
a balanced portfolio of both stocks and bonds. Typically, the stock/bond
ratio ranges around 60%/40%.
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing
60% or more of the portfolio in equities.
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds which by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase.
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase.
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest
funds by asset size in this investment objective.
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions,
exclusive of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an
unmanaged index composed of U.S. treasuries, agencies and corporates with
maturities from 1 to 4.99 years. Corporates are investment grade only (BBB
or higher).
Morgan Stanley Capital International EAFE Index -- arithmetic, market
value-weighted averages of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign
common stocks and ADRs..
New York Stock Exchange composite or component indices -- unmanaged indices
of all industrial, utilities, transportation and finance stocks listed on
the New York Stock Exchange.
Russell 1000 Index - an unmanaged index composed of the 1000 largest stocks
in the Russell 3000 Index.
Russell 2000 Growth Index - contains those Russell 2000 securities with
higher price-to-book ratios and higher forecasted growth values.
Russell 2000 Index -- an unmanaged index composed of the 2,000 smallest
stocks in the Russell 3000 Index.
Russell 2000 Value Index - contains those Russell 2000 securities with a
less-than-average growth orientation. Securities in this index tend to
exhibit lower price-to-book and price-earnings ratios, higher dividend
yields and lower forecasted growth values than the growth universe.
Russell 2500 Growth Index - contains those Russell 2500 securities with a
greater-than-average growth orientation. Securities in this index tend to
exhibit higher price-to-book and price-earnings ratios, lower dividend
yields and higher forecasted growth values than the value universe.
Russell 2500 Index - an unmanaged index composed of the 2,5000 smallest
stocks in the Russell 3000.
Russell 2500 Value Index - contains those Russell 2500 securities with a
less-than-average growth orientation. Securities in this index tend to
exhibit lower price-to-book and price-earnings ratios, higher dividend
yields and lower forecasted growth values then the Growth universe.
Russell 3000 Index - composed of the 3,000 largest U.S. publically traded
companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market.
Russell Mid-Cap Index -- is composed of the 800 smallest stocks in the
Russell 1000 Index, with an average capitalization of $1.96 billion.
B-2
<PAGE>
Salomon Smith Barney Global excluding U.S. Equity Index - an comprised of
the smallest stocks (less than $1 billion market capitalization) of the
Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill
issues.
Savings and Loan Historical Interest Rates -- as published by the U.S.
Savings and Loan League Fact Book.
Standard & Poors' 600 Small Cap Index - an unmanaged index comprised of 600
domestic stocks chosen for market size, liquidity, and industry group
representation. The index is comprised of stocks from the industrial,
utility, financial, and transportation sectors.
Standard & Poors' Midcap 400 Index -- consists of 400 domestic stocks
chosen for market size (medium market capitalization of approximately $700
million), liquidity, and industry group representation. It is a market-
value weighted index with each stock affecting the index in proportion to
its market value.
Standard & Poors' 500 Stock Index- an unmanaged index composed of 400
industrial stocks, 40 financial stocks, 40 utilities stocks and 20
transportation stocks.
Standard & Poors' Barra Value Index - is constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. This
index contains the securities with the lower price-to-book ratios; the
securities with the higher price-to-book ratios are contained in the
Standard & Poor's Barra Growth Index.
Standard & Poors' Utilities Stock Price Index - a market capitalization
weighted index representing three utility groups and, with the three
groups, 43 of the largest utility companies listed on the New York Stock
Exchange, including 23 electric power companies, 12 natural gas
distributors and 8 telephone companies.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and
inflation.
U.S. Three-Month Treasury Bill Average - the average return for all
treasury bills for the previous three month period.
Value Line -- composed of over 1,600 stocks in the Value Line Investment
Survey.
Wilshire Real Estate Securities Index - a market capitalization weighted
index of publicly traded real estate securities, including real estate
investment trusts, real estate operating companies and partnerships. The
index is used by he institutional investment community as a broad measure
of the performance of public real estate equity for asset allocation and
performance comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs)
but excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index..
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment
of dividends, except as otherwise stated.
B-3
