<PAGE>
As filed with the Securities & Exchange Commission
-----------------
Securities Act File No. 2-60792
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Investment Company Act File No. 811-2807
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
Registration Statement Under the Securities Act of 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 26 X
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Registration Statement Under the Investment Company Act of 1940 X
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Amendment No. 23 X
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THE ANALYTIC OPTIONED EQUITY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
700 South Flower Street, Suite 2400, Los Angeles, CA 90017
(Address of principal executive offices)
Registrant's Telephone Number: (213) 688-3015
NAME AND ADDRESS OF AGENT FOR SERVICE
COPIES TO:
HARINDRA DE SILVA MICHAEL GLAZER
Analytic Optioned Equity Fund, Inc. Paul, Hastings, Janofsky & Walker LLP
700 South Flower Street, Suite 2400 555 South Flower Street
Los Angeles, CA 90017 Los Angeles, CA 90071
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
- -----
on ________________ pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on ________________ pursuant to Rule 485 paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on ________________ pursuant to paragraph (a)(2) of Rule 485
- -----
This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
- -----
The Registrant has registered an indefinite number of shares of its common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The Registrant's Rule 24f-2 Notice for its most recent
fiscal year was filed on February 27, 1997.
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CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Location in Registration
N-1A Item No. Item Statement
- ------------ ---- -----------------------
1. Cover Page Cover Page - Prospectus
2. Synopsis Fund Expense Table; How
Performance is Calculated
3. Condensed Financial Financial Highlights
Information
4. General Description of The Fund; Investment
Registrant Objective and Policies;
Dividends, Distributions
and Taxes
5. Management of the Fund Management of the Fund
6. Capital Stock and Other Capital Stock
Securities
7. Purchase of Securities Being How to Purchase Shares;
Offered Shareholder Accounts; Net
Asset Value
8. Redemption or Repurchase How to Redeem Shares
9. Legal Proceedings Not Applicable
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
Location in Registration
N-1A Item No. Item Statement
- ------------ ---- -----------------------
10. Cover Page Cover Page - Statement of
Additional Information
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and Investment Objective and
Policies Policies; Investment
Restrictions and Other
Investment Policies;
Hedging Transactions in
Options, Futures and
Related Options
14. Management of Registrant Management of the Fund
15. Control Persons and Management of the Fund;
Principal Holders of Principal Shareholders
Securities
16. Investment Advisory and Custodian; Independent
Other Services Accountants; Legal Counsel
17. Broker Allocation Brokerage
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption, and Pricing and Redemption of
Pricing of Securities Being Fund Shares
Offered
20. Tax Status Tax Status; Tax Information
and Option Accounting
Principles
21. Underwriters Not Applicable
22. Calculation of Performance Calculation of Performance
Data Data and Other Performance
Comparisons and Statistics
23. Financial Statements Financial Statements
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
ii
<PAGE>
PART A
PROSPECTUS
The Defensive Equity Portfolio of Analytic Optioned Equity Fund, Inc.
700 South Flower Street, Suite 2400, Los Angeles, CA 90017 (800) 374-2633
The Defensive Equity Portfolio of Analytic Optioned Equity Fund, Inc.
(the "Fund") is a NO-LOAD, open-end, diversified management investment
company, or "mutual fund". As a no-load mutual fund, shares may be purchased
directly from and are redeemed by the Fund at net asset value without any
sale or redemption charges. The Fund's investment adviser is Analytic-TSA
Global Asset Management, Inc.
The Fund's investment objective is to obtain a greater long-term total
return and smaller fluctuations in quarterly total return from a diversified,
hedged common stock portfolio than would be realized from the same portfolio
unhedged. (See "Glossary" for definitions of "quarterly total return,"
"long-term total return" and "fluctuations in total return".)
The Fund will attempt to achieve this objective by investing primarily
in dividend paying common stocks on which options are traded on national
securities exchanges and in securities convertible into common stocks, by
selling covered call options and secured put options and by entering into
closing purchase transactions with respect to certain of such options. The
Fund may also hedge its securities by purchasing put and call options on its
portfolio securities, purchasing put and selling call options on the same
securities, and engaging in transactions in stock index and interest rate
futures, stock index options, and options on stock index and interest rate
futures.
SPECIAL CHARACTERISTICS. The Fund may hedge against changes in stock
prices by engaging in transactions involving stock index futures and their
related options, and may hedge against changes in interest rates by engaging
in transactions involving interest rate futures and their related options.
(See "Investment Objectives and Policies - Hedging Transactions"). The Fund
may also make short sales of securities "against the box" to receive interest
from the proceeds of such sale and/or to defer realizing of a gain or loss
thereon; and enter into "repurchase agreements" subject to certain
limitations (see "Other Investment Techniques").
There is no minimum on initial or subsequent purchases of Fund shares by
tax deferred retirement plans (including IRA, SEP-IRA and profit sharing and
money purchase plans) or Uniform Gifts to Minors Act accounts. For other
investors the minimum is $5,000 for an initial purchase and there is no
minimum for subsequent purchases.
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This prospectus contains concise information respecting the Fund which a
prospective investor should know before investing. Additional information
concerning the Fund and its investment adviser has been filed with the
Securities and Exchange Commission (the "Statement of Additional
Information"). The Statement of Additional Information is incorporated by
reference into this Prospectus and is available without charge to investors
by writing or telephoning the Fund at the address or the telephone number
shown above.
------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------------
Investors should read and retain this Prospectus
for further reference.
The date of this Prospectus and the related
Statement of Additional Information is May __, 1997
2
<PAGE>
THE FUND OFFERS INVESTORS THESE BENEFITS
PROFESSIONAL MANAGEMENT.
Founded in 1970, Analytic-TSA Global Asset Management, Inc. (the "Adviser")
provides continuous professional management to the Fund's portfolio. By
pooling their assets, shareholders can participate in investments that might
not otherwise be available to the individual shareholder.
NO-LOAD.
There is never any sales charge, redemption fee, or 12b-1 promotional fees
when you buy or redeem shares in the Fund. All of your money goes to work
immediately to achieve your investment objectives.
LIQUIDITY.
Although the Fund is designed for long-term investment, you may redeem all or
part of your Fund shares at net asset value, on any business day, without
charge. Your investment is liquid.
CONVENIENCE.
Shareholders are relieved of the administrative burden associated with the
direct ownership of individual securities because the Fund handles all record
keeping, collecting dividends and interest, and safekeeping of securities.
QUARTERLY REPORTS.
The Fund lets you know where you stand in easy-to-read, comprehensive
quarterly reports.
SYSTEMATIC WITHDRAWAL PLANS.
Without cost, a shareholder may elect to receive systematic withdrawal checks
on a monthly or quarterly basis.
EXCHANGE PRIVILEGES
Should your investment goals change, shares may be exchanged for shares of
any portfolio of the Analytic Series Fund, a registered investment company
for which the Adviser serves as investment adviser.
RETIREMENT PLANS.
Shares of the Fund can be purchased in connection with the following tax-
deferred prototype retirement plans:
IRAs (including transfers and "rollovers" from existing retirement plans for
individuals and their spouses); SEP-IRA and profit sharing and money-purchase
plans for corporations, partnerships and self-employed individuals to benefit
themselves and their employees.
3
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FUND EXPENSE TABLE
The following tables illustrate the expenses and fees that a shareholder of the
Fund will incur. The expenses set forth in the tables are based on the Fund's
1996 fiscal year.
Shareholder Transaction Expenses
--------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses
------------------------------
(as a percentage of average net assets)
Investment Advisory Fees 0.75%
12b-1 Fees None
Other Expenses (1) 0.59%
Total Fund Operating Expenses (1) 1.34%
(1) The Adviser has entered into agreements whereby a portion of the
commissions earned by a broker-dealer on portfolio transactions placed
with such broker-dealer is reimbursed to the Fund by payment of all or a
portion of the Fund's expenses, including its custodian fees. With the
expense reduction from such arrangements, other expenses would have been
0.48% and total operating expenses would have been 1.23% of the total
average net assets.
EXAMPLE
1 year 3 years 5 years 10 years
------ ------- ------- --------
You would pay the
following expenses
on a $1,000
investment,
assuming (1) 5%
annual return and $14 $42 $73 $161
(2) redemption at
the end of each
time period:
The purpose of the above information is to help an investor in the Fund to
understand the various costs and expenses he will bear directly or indirectly.
The example is not a representation of past or future expenses and actual
expenses may be greater or less than those shown.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial statements in the table below for each of the ten years in
the period ended December 31, 1996 has been audited by Deloitte & Touche LLP,
independent auditors. Such financial statements and the report of Deloitte &
Touche LLP thereon are incorporated by reference in the Statement of
Additional Information.
Copies of the Fund's 1996 Annual Report to Shareholders may be obtained,
at no charge, by writing or telephoning the Fund at the address or telephone
number appearing on the cover page of this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1996 1995 1994 1993
------ ------ ------ -----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.26 $11.12 $11.96 $11.97
------ ------ ------ -----
Income from investment operations
----------------------------------
Net investment income 0.20 0.24 0.31 0.33
Net realized or unrealized gains
(losses) on investment and options 1.87 2.14 (0.02) 0.48
------ ------ ------ -----
Total from investment operations 2.07 2.38 0.29 0.81
------ ------ ------ -----
Less distributions
-------------------
From net investment income 0.20 0.24 0.31 0.33
From net realized gains 0.75 0.00 0.82 0.49
------ ------ ------ -----
Total distributions 0.95 0.24 1.13 0.82
------ ------ ------ -----
Net asset value, end of period $14.38 $13.26 $11.12 $11.96
------ ------ ------ -----
------ ------ ------ -----
Total return 15.66% 21.52% 2.47% 6.73%
- ------------ ------ ------ ------ -----
Ratios/supplemental data
- ------------------------
Net assets, end of period (000) $52,484 $42,648 $48,254 $76,948
Ratio of expenses to average net assets 1.34%(1) 1.38%(1) 1.10% 1.07%
Ratio of net investment income to
average net assets 1.43% 1.87% 3.45% 2.51%
Portfolio turnover rate 43.17% 32.37% 48.71% 35.19%
Average commission rate (2) $0.0446 $0.0442 -- --
</TABLE>
(1)Gross of expenses paid indirectly through broker arrangements. With the
expense reduction from brokerage arrangements, the ratio of expenses to
average net assets would have been 1.23% and 1.22% for the years ended
December 31, 1996 and 1995, respectively.
(2)The formula for calculating the average commission rate is total commissions
paid divided by total shares purchased and sold. This rate includes
commissions paid on option contracts where each contract is 100 shares.
5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.29 $11.92 $13.00 $12.06 $11.38 $13.70
------ ------ ------ ------ ------ ------
Income from investment operations
- ---------------------------------
Net investment income 0.27 0.40 0.46 0.50 0.39 0.38
Net realized or unrealized gains
(losses) on investments and options 0.48 1.17 (0.27) 1.61 1.35 0.24
------ ------ ------ ------ ------ ------
Total from investment operations 0.75 1.57 0.19 2.11 1.74 0.62
------ ------ ------ ------ ------ ------
Less distributions
- ------------------
From net investment income 0.29 0.40 0.48 0.51 0.40 0.46
From net realized gains 0.78 0.80 0.79 0.66 0.66 2.48
------ ------ ------ ------ ----- ------
Total distributions 1.07 1.20 1.27 1.17 1.06 2.94
------ ------ ------ ------ ------ ------
Net asset value, end of period $11.97 $12.29 $11.92 $13.00 $12.06 $11.38
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total return 6.17% 13.29% 1.54% 17.74% 15.60% 4.28%
- ------------ ------ ----- ------ ----- ----- ------
Ratios/supplemental data
- ------------------------
Net assets, end of period (000) $91,561 $100,548 $106,220 $106,474 $102,239 $74,840
Ratio of expenses to average net assets 1.02% 1.10 1.11% 1.09% 1.13% 1.17%
Ratio of net investment income to
average net assets 2.33% 3.05% 3.68% 3.74% 3.44% 2.68%
Portfolio turnover rate 81.73% 75.83% 72.20% 61.20% 66.11% 83.53%
Average commission rate (2) -- -- -- -- -- --
</TABLE>
6
<PAGE>
HOW PERFORMANCE IS CALCULATED
From time to time the Fund may report its "total return" in
prospectuses, the Fund's annual reports, shareholder communications, and
advertising.
Total return for a performance period is calculated by assuming a
hypothetical initial investment ("p") in the Fund at the beginning of the
period. Then, assuming reinvestment of all distributions into new Fund
shares, a redeemable value at the end of the performance period ("ERV") is
calculated based on actual Fund performance. The percentage change between
the ending value and initial investment is the "cumulated total return". The
"average annual total compound return" (growth rate) expresses the total
return as an annual rate, which, if compounded annually over the period ("n"
is the number of years), would increase or decrease the initial investment to
the ending value. (Formula for calculating average annual total compound
return: (ERV/p)1/n -1)). See the "Glossary" for further discussion and
examples of total return and fluctuations in total return.
THE FUND
The Fund is a California corporation incorporated in 1977 and registered
with the Securities and Exchange Commission under the Investment Company Act
of 1940, as amended, as an open end, diversified, management investment
company. The Fund offers for sale its common stock, no par value, on a
no-load basis, which means that such shares may be purchased directly from
and redeemed by the Fund at net asset value without any sales or redemption
charge (See "Purchase of Fund Shares" for minimum investment limitations).
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain a greater long-term total
return and smaller fluctuations in quarterly total return from a diversified,
hedged common stock portfolio than would be realized from the same portfolio
unhedged. This investment objective may not be changed without shareholder
approval in accordance with applicable requirements of the Investment Company
Act of 1940.
The Fund seeks to achieve its investment objective by investing
primarily in dividend paying common stocks on which options are traded on
national securities exchanges and in securities convertible into common
stocks, by selling covered call options and secured put options and by
entering into closing purchase transactions with respect to certain of such
options. The Fund may also hedge its portfolio securities by purchasing put
and call options on its portfolio securities, purchasing put and selling call
options on the same securities, and engaging in transactions in stock index
and interest rate futures, stock index options, and options on stock index
and interest rate futures. The Fund's strategy is to create a well
diversified and significantly hedged portfolio using combined stock and
option and fixed income and option positions. Typically, the Fund remains
diversified across all industries represented in the Standard & Poor's 500
Index with similar industry weightings.
Total return will be obtained from the following sources:
(1) premiums from expired options.
(2) net profits, if any, from closing purchase or closing sale
transactions.
(3) dividends received on the securities in the Fund's portfolio.
(4) net realized capital gains, if any.
(5) net changes in unrealized capital appreciation, if any.
(6) interest income from money market instruments, U.S. Government
Securities, convertible securities, and short sales.
In seeking a greater long-term total return, the Fund will equally
emphasize current return and long-term capital gains. (See "Dividends,
Distributions and Taxes--Tax Considerations in Portfolio Transactions").
Since opportunities to realize net gains from covered option writing programs
and yields on stocks, money market instruments, U.S. Government securities,
convertible debt securities, and short sales vary from time to time because
of general economic and market conditions and many other factors, it is
anticipated that the Fund's total
7
<PAGE>
return will fluctuate and therefore there can be no assurance that the Fund
will be able to achieve its investment objective.
Except as described below, at least 80% of the Fund's total assets
(taken at current value), excluding cash, cash equivalents and U.S.
Government securities, will be invested in dividend paying common stocks
which have been approved by one or more exchanges as underlying securities
for listed call or put options, or securities which are convertible into such
common stocks without the payment of further consideration. The Fund may
invest its cash reserves in securities of the U.S. Government and its
agencies or the following cash equivalents: deposits in domestic banks,
bankers' acceptances, certificates of deposit, commercial paper, or
securities of registered investment companies. Commercial paper investments
will be limited to investment grade issues, rated A-1 or A-2 by Standard &
Poor's Corporation, or Prime 1 or Prime 2 by Moody's Investors Service, Inc.
Investments in registered investment companies are limited by certain
additional restrictions (see "Investments in Securities of Other Investment
Companies".) The Fund may also enter into short-term repurchase agreements
with respect to the foregoing securities, the sellers of which, usually
banks, agree to repurchase the securities subject to the agreement at the
Fund's cost plus interest within a specified time, usually, one day.
In periods of unusual market conditions and for defensive purposes the
Fund may retain all or part of its assets in cash or cash reserves of the
type described above.
COVERED OPTION WRITING. Covered call options and secured put options will be
written on the Fund's portfolio in order (i) to achieve, through the receipt
of premiums, a higher long-term total return then would be received from the
same portfolio unhedged and (ii) to reduce the fluctuation in this total
return. The writing of such options tends to reduce fluctuations in total
return because, in any short period of time, the gains or losses on the sale
of options will tend to offset the losses or gains, respectively, on the
underlying securities. Covered option writing involves risks -- see "Risks of
Option Writing" below.
COVERED CALL OPTIONS. A call option gives the purchaser of the option
the right to buy, and the writer has the obligation to sell, the underlying
securities at the exercise price during the option period. The Fund, as the
writer of the option, receives the premium from the purchaser of the call
option. The writer, during the time he is obligated under the option, may be
assigned an exercise notice by the broker-dealer through whom the call was
sold, requiring him to deliver the underlying security against payment of the
exercise price. The obligation is terminated only upon expiration of the
option or at such earlier time as the writer effects a closing purchase
transaction. Once a writer has been assigned an exercise notice, he will
thereafter be unable to effect a closing purchase transaction in that option.
So long as the Fund is obligated as the writer of a call option, it will (i)
own the underlying securities subject to the option, or (ii) have the right
to acquire the underlying securities through immediate conversion or exchange
of convertible preferred stocks or convertible debt securities owned by the
Fund, or (iii) hold on a security-for-security basis a call on the same
security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written (or, if greater
than the exercise price of the call written the difference will be maintained
in U.S. Government securities in a segregated account with the Custodian or
broker).
To secure this obligation to deliver the underlying security, a covered
call option writer is required to deposit in escrow the underlying security
or other assets in accordance with the rules of the Clearing Corporation and
the exchange on which the covered call option is traded. To fulfill this
obligation, at the time an option is written, the Fund, in compliance with
its custodian agreement, directs the custodian of its investment securities,
or a securities depository acting for the custodian, to act as the Fund's
escrow agent by issuing an escrow receipt to the Clearing Corporation
respecting the option's underlying securities. The Clearing Corporation will
release the securities from this escrow either upon the exercise of the
option, its expiration without being exercised or when the Fund enters into a
closing purchase transaction. Until such release the Fund cannot sell the
underlying securities.
So long as his obligation as a writer continues, the covered call option
writer gives up the opportunity to profit from a price increase in the
underlying security above the sum of the exercise price plus the premium
received in exchange for increasing his return if the underlying security
does not advance to or beyond the sum of the exercise price plus the premium.
Thus, in some periods the Fund will receive less total return and in other
8
<PAGE>
periods greater total return from its call options than it would have
received from its underlying securities unoptioned. The Fund expects to
increase its long-term total return by writing options which, in its opinion,
have sufficiently attractive premiums to produce greater total return over
the long-term.
SECURED PUT OPTIONS. The purchaser of a secured put option has the
right to sell, and the writer has the obligation to buy, the underlying
security at the exercise price during the option period. As a secured put
writer, the Fund will invest an amount equal to not less than the exercise
price of the put option in money market instruments, or it will hold on a
security-for-security basis a put on the same security as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written (or, if less than the exercise price of the
put written, the difference will be maintained in U.S. Government securities
in a segregated account with the Custodian or broker). These assets are then
escrowed in a manner similar to that applicable to securities underlying
covered call options. Thereafter, should the option be exercised, the Fund
will have a money market investment available equal to the exercise price of
the option to honor its obligation as a writer. The obligation of a secured
put option writer is terminated either upon the exercise of the option, its
expiration without being exercised, or by effecting a closing purchase
transaction.
The risk characteristics and potential rewards of writing a secured put
option are essentially similar to those of covered call option writing. The
writer's gain on a put option is limited to interest earned on its money
market investment plus the premium received, while the risk is not less than
the exercise price of the option less the current market price of the
underlying stock when the put is exercised, offset by the premium received
and interest earned. The Fund will only write secured put options in
circumstances where it has made an investment decision that it desires to
acquire the security underlying the option at the exercise price specified in
the option.
The Fund may engage in spreads in which it is both the purchaser and the
covered writer of the same type of option (puts or calls) on the same
underlying security with the options having different exercise prices and/or
expiration dates.
The Fund will write options from time to time on such portion of its
portfolio as management determines is appropriate in seeking to attain the
Fund's objective. The Fund will write options when management believes that a
liquid secondary market will exist on a national securities exchange for
options of the same series so that the Fund can effect a closing purchase
transaction if it desires to close out its position. Consistent with the
investment policies of the Fund, a closing purchase transaction will
ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying security from being called, or to permit the sale of
the underlying security. Effecting a closing purchase transaction will permit
the Fund to write another option on the underlying security with either a
different exercise price or expiration date or both.
The premium the Fund receives for writing an option will reflect, among
other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the option period, supply and demand
and interest rates. The exercise price of an option may be below, equal to
or above the current market value of the underlying security at the time the
option is written. Options written by the Fund will normally have expiration
dates between one and nine months from the date written. From time to time,
for tax and other reasons, the Fund may purchase an underlying security for
delivery in accordance with an exercise notice assigned to it, rather than
delivering such security from its portfolio. Since the time required to
obtain physical delivery of underlying common stocks upon conversion or
exchange of convertible or exchangeable securities with respect to which the
Fund has written options may exceed the time within which it must make
delivery in accordance with an exercise notice of a call option assigned to
it, the Fund may purchase or borrow the underlying common stocks to make
delivery. By so doing, the Fund will not bear any market risk, since it will
have the absolute right to receive from the issuer of the underlying common
stock an equal number of shares to replace the borrowed stock, but the Fund
may incur additional transaction costs or interest expense in connection with
any such purchase or borrowing.
RISKS OF OPTION WRITING. In return for the premium received, a covered call
writer during the term of the option is subject to the risk of losing the
potential for capital appreciation above the exercise price of the underlying
security. Likewise, a secured put writer retains the risk of loss should the
value of the underlying security decline below the exercise price, less the
premium received and interest earned. In both cases the writer has no control
9
<PAGE>
over the time when he has to fulfill his obligation as a writer of the
option. Once an option writer has received an exercise notice he cannot
effect a closing purchase transaction.
If a call expires unexercised, the covered writer realizes a gain in the
amount of the premium received, although there may have been a decline
(unrealized loss) in the market value of the underlying security during the
option period which may exceed such gain. If the covered writer has to sell
the underlying security because of the exercise of a call option, the writer
will realize a gain or loss from the sale of the underlying security with the
proceeds being increased by the amount of the premium. If a put expires
unexercised, the secured put writer realizes income from the amount of the
premium plus the interest income on the money market investment. If the
secured put writer has to buy the underlying security because of the exercise
of the put option, the secured put writer incurs a loss to the extent that
the current market value of the underlying security is less than the exercise
price of the put option. However, this may be offset in whole or in part by
the premium received and any interest income earned on the money market
investment.
HEDGING TRANSACTIONS. To hedge its portfolio, the Fund may enter into
securities transactions intended to reduce investment risk by taking an
investment position which will move in the opposite direction from the
position being hedged. To the extent the hedge works as intended, a loss or
gain on one position will tend to be offset by a gain or loss on the other.
Any losses incurred in and the costs of hedging transactions will reduce the
Fund's return. Hedging transactions involve risks - see "Risk Factors in
Hedging Transactions" below. The Fund's hedging strategies are fundamental
policies which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. (See "Investment
Restrictions and Other Investment Policies" in the Statement of Additional
Information.) See the Appendix for a more complete description of the
instruments discussed below and see the Statement of Additional Information
for more discussion of the various options, futures contracts and portfolio
hedging strategies that may be used by the Fund.
The extent to which the Fund may engage in the hedging techniques and
strategies described below, including spread transactions, covered call
options and "forward conversion" transactions, may be limited by the Internal
Revenue Code's requirements for qualification as a regulated investment
company. See "Option Accounting Principles" and "Tax Status" in the Statement
of Additional Information.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES. The Fund may
purchase put options in connection with its hedging activities and will
generally do so at or about the same time it purchases the underlying
security. By buying a put, the Fund has a right to sell the security at the
exercise price, thus limiting its risk of loss through a decline in the
market value of the security until the put expires. The amount of any
appreciation in the value of the underlying security will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs.
The Fund may purchase call options on securities which it intends to
purchase in order to limit the risk of a substantial increase in the market
price of such security. The Fund may also purchase call options on securities
held in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit
or loss from such a sale will depend on whether the amount received is more
or less than the premium paid for the call option plus the related
transaction costs.
PUT AND CALL OPTIONS ON THE SAME SECURITIES. The Fund may buy puts and
sell calls on the same portfolio security in "forward conversion"
transactions. In a forward conversion, the Fund will purchase a security and
write call options and purchase put options on the security. By purchasing
puts, the Fund protects the underlying security from depreciation in value.
The Fund will not exercise a put it has purchased while a call option on the
same security is outstanding. By selling calls on the same security, the Fund
receives premiums which may offset part or all of the cost of purchasing the
puts while foregoing the opportunity for appreciation in the value of the
underlying security. The use of options in connection with forward
conversions is intended to hedge against fluctuations in the market value of
the underlying security. Although it is generally intended in forward
conversion transactions that the exercise price of put and call options would
be identical, situations might occur in which some option positions are
acquired with different exercise prices. Therefore, the Fund's return may
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depend in part on movements in the price of the underlying security because
of the different exercise prices of the call and put options. Such price
movements may also affect the total return if the conversion is terminated
prior to the expiration date of the options. In such event, the Fund's
return may be greater or less than it would otherwise have been if it had
hedged the security only by purchasing put options.
OTHER HEDGING TOOLS. The Fund may engage in the following hedging
transactions which are described more fully in the Appendix: Stock index
futures and related options, stock index options, and financial futures and
related options.
STOCK INDEX FUTURES. The Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease
in market value of its equity securities that might otherwise result. When
the Fund is not fully invested in stocks and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of common
stocks that it intends to purchase. As such purchases are made, an equivalent
amount of stock index futures contracts will be terminated by offsetting
sales. In most of these transactions, the Fund will purchase such securities
upon termination of the long futures position whether the long position
results from the purchase of a stock index futures contract or the purchase
of a call option on a stock index futures contract, but under unusual market
conditions, a long futures position may be terminated without the
corresponding purchase of equity securities.
FINANCIAL FUTURES. The Fund may purchase and sell financial futures on
U.S. Government securities, including GNMA certificates (see the Appendix),
in order to hedge its U.S. Government securities and those portfolios
securities which may be sensitive to changes in interest rates. Such hedging
is similar to the Fund's hedging its equity securities through the use of
stock index futures.
STOCK INDEX OPTIONS. The Fund may purchase and sell exchange listed
call and put options on stock indexes to hedge against risks of market-wide
price movements. The need to hedge against such risks will depend on the
extent of diversification of the Fund's common stock and the sensitivity of
its stock investments to factors influencing the stock market as a whole.
Purchasing a put or selling a call option on a stock index is analogous to
the sale of a stock index futures contract. Purchasing a call or selling a
put option on a stock index is analogous to the purchase of a stock index
futures contract.
OPTIONS ON STOCK INDEX FUTURES. The Fund may purchase and sell exchange
listed call and put options on stock index futures to hedge against risks of
market-wide price movements. The need to hedge against such risks will
depend on the extent of diversification of the Fund's common stock and the
sensitivity of its stock investments to factors influencing the stock market
as a whole. Purchasing a put or selling a call option on a stock index
futures contract is analogous to the sale of a stock index futures contract.
Purchasing a call or selling a put option on a stock index futures contract
is analogous to the purchase of a stock index futures contract.
OPTIONS ON FINANCIAL FUTURES. The Fund may purchase and sell exchange
listed call and put options on financial futures to hedge against risks of
interest rate movements. The need to hedge against such risks will depend on
the extent of diversification of the Fund's common stock and the sensitivity
of its stock investments to interest rates. Purchasing a put or selling a
call option on a financial future is analogous to the sale of a stock index
futures contract. Purchasing a call or selling a put option on a financial
future is analogous to the purchase of a stock index future.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. The Fund will not engage in transactions in futures
contracts or related options for speculation but only as a hedge against
changes resulting from market conditions in the values of its securities or
securities which it intends to purchase. The Fund will not enter into any
stock index or financial futures contract or related option if, immediately
thereafter, more than one-third of the Fund's net assets would be represented
by futures contracts or related options. In addition, the Fund may not
purchase or sell futures contracts or purchase or sell related options if,
immediately thereafter, the sum of the amount of margin deposits on its
existing futures and related options positions and premiums paid for related
options would exceed 5% of the market value of the Fund's total assets. In
instances involving the purchase of futures contracts or related call
options, money market instruments equal to
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the market value of the futures contract or related option will be deposited
in a segregated account with the Custodian or broker to collateralize such
long positions and thereby insure that the use of such futures contracts or
related options is unleveraged.
The Fund's sale of futures contracts and purchase of put options on
futures contracts will be solely to protect its investments against declines
in value. The Fund expects that in the normal course it will purchase
securities upon termination of long futures contracts and long call options
on futures contracts most of the time, but under unusual market conditions it
may terminate any of such positions without a corresponding purchase of
securities.
RISK FACTORS IN HEDGING TRANSACTIONS. The Fund's ability to hedge
effectively all or a portion of its securities through transactions in
options on stock indexes, stock index futures, financial futures and related
options depends on the degree to which price movements in the underlying
index or underlying debt securities correlate with price movements in the
relevant portion of the Fund's securities. Inasmuch as such securities will
not duplicate the components of any index or such underlying debt securities,
the correlation will not be perfect. Consequently, the Fund bears the risk
that the prices of the securities being hedged will not move in the same
amount as the hedging instrument. It is also possible that there may be a
negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both such securities and the hedging instrument.
In addition, there is the risk that the anticipated spread between the
prices may be distorted due to differences in the nature of the markets, such
as speculators in the futures market. However, the risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.
Positions in stock index options, stock index futures and financial
futures and related options may be closed out only on an Exchange which
provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option or futures
contract or related option at any specific time. Thus, it may not be
possible to close such an option or futures position. The inability to close
options on futures positions also could have an adverse impact on the Fund's
ability to effectively hedge its securities. The Fund will enter into an
option or futures position only if there appears to be a liquid secondary
market for such options or futures and does not intend to take delivery of
the instruments underlying financial futures contracts it holds.
The Commodities Futures Trading Commission and the various exchanges
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures contract. Trading limits are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
An Exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions.
Management does not believe that these trading and positions limits will have
adverse impact on the Fund's strategies for hedging its securities.
OTHER INVESTMENT TECHNIQUES. The Fund may also engage in the following
transactions: lending of securities; short sales against the box; synthetic
put options; investment in securities of other investment companies; and
repurchase agreements.
LENDING OF SECURITIES. The Fund may lend those securities not subject to
written options or held in a segregated account with its Custodian to
broker-dealers pursuant to agreements requiring that the loans be
continuously secured by cash, or securities of the U.S. Government or its
agencies, or any combination of cash and such securities, as collateral
equal to at least the market value at all times of the securities lent. (See
"Investment Restrictions and Other Investment Policies" in the Statement of
Additional Information.) Such loans will not be made if as a result the
aggregate of all outstanding securities loans will exceed 30% of the value of
the Fund's total assets taken at current value. The Fund will continue to
receive interest on the securities lent and simultaneously earn interest on
the investment of the cash collateral in U.S. Government securities. However,
the Fund will normally pay lending fees to such broker-dealers from the
interest earned on invested collateral. Such loans will comply with
applicable regulatory requirements. There may be risks of delay in receiving
additional
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collateral, or risks of delay in recovery should the borrower of the
securities fail financially. However, loans will be made only to borrowers
deemed by management to be of good standing, and when in the judgment of
management the consideration which can be earned currently from such
securities loans justifies the attendant risk.
SHORT SALES AGAINST THE BOX AND SYNTHETIC PUT OPTIONS. The Fund may
make short sales of common stocks, provided that at all times that a short
position is open the Fund owns at least an equal amount of preferred stocks
or debt securities convertible or exchangeable into an equal number of shares
of the common stocks sold short (known as short sales "against the box")
without payment of further 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). A short sale of securities which is
hedged by a corresponding long position in a call option on the same security
is known as a "synthetic put" position because it has the same investment
characteristics as owning a protective put option on the same underlying
security.
Management intends to make short sales "against the box" for the purpose
of receiving a portion of the interest earned by the executing broker from
the proceeds of such sale and/or to defer realization of gain or loss for
Federal income tax purposes. The proceeds of such a sale are held by the
broker until the settlement date when the Fund delivers the convertible
security to close out its short position. Although prior to such delivery the
Fund will have to pay an amount equal to any dividends paid on the common
stocks sold short, the Fund will receive the dividends from the preferred
stocks or interest from the securities convertible into the stocks sold
short, plus a portion of the interest earned from the proceeds of the short
sale. The Fund will not make short sales of any optioned securities. The Fund
will segregate in a special account with its Custodian or broker convertible
preferred stocks or convertible debt securities in connection with such short
sales "against the box". The extent to which the Fund may make such short
sales may be limited by the Code's requirements for qualification as a
regulated investment company and the Fund's intention to qualify as such.
(See "Option Accounting Principles" and "Tax Status" in the Statement of
Additional Information.)
Synthetic put positions are sometimes advantageous for the Fund to enter
instead of purchasing an actual put option. For example, the Fund may engage
in spreads in which it is both the purchaser and the covered writer of the
same type of option (puts or calls) on the same underlying security with the
options having different exercise prices and/or expiration dates. When the
Fund enters into such a spread involving two put options, it is sometimes
advantageous to enter a synthetic put position instead of purchasing the put
option which is the long side of the spread. This can occur because there is
smaller investor interest in the put options as compared to the corresponding
calls and consequently the put options are offered for sale at a higher price
than the price that could be obtained by entering the synthetic put position.
INVESTMENTS IN SECURITIES OF OTHER INVESTMENT COMPANIES. Investments in
the securities of other investment companies are intended to (i) provide an
investment vehicle for the Fund's cash reserves that the Fund does not want
to commit to riskier investments, (ii) facilitate investment strategies in
which high-grade collateral is required, or (iii) facilitate investment
strategies by acquiring investments in portfolios of securities more
diversified or with specialized characteristics that could not be efficiently
acquired directly. Accordingly, the Fund may invest up to 35% of its total
assets in such securities. However, the Fund is restricted to purchasing
securities only to the extent that is permitted under the Investment Company
Act of 1940. The 1940 Act generally permits the Fund to purchase or
otherwise acquire securities issued by another investment company so long as,
immediately after such acquisition, the Fund and all affiliated persons of
the Fund do not own in the aggregate more than 3% of the total outstanding
voting stock of the acquired investment company. The 1940 Act also permits
the purchase of securities of other investment companies in connection with a
merger, reorganization, consolidation or similar transaction.
Such transactions may in some cases raise the Fund's transaction costs
relative to a direct investment in the same securities, but in some cases the
Fund may benefit from being able to acquire a diversified investment in one
purchase that could not be made economically in a direct fashion. As other
investment companies pay management fees to their investment advisers,
shareholders will bear a proportionate share of such fees as well
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<PAGE>
as the management fees paid by the Fund. In addition, the 1940 Act provides
that no investment company in which the Fund invests is obligated to redeem
shares of such company owned by the Fund in an amount exceeding 1% of the
company's outstanding shares during any period of less than thirty days.
REPURCHASE AGREEMENTS. The Fund may purchase U.S. Government securities
and concurrently enter into so-called "repurchase agreements" with the
seller, which will agree to repurchase such securities at the Fund's cost
plus interest within a specified time (normally one day). While repurchase
agreements involve certain risks not associated with direct investments in
U.S. Government securities, the Fund will follow procedures designed to
minimize such risks. These procedures include effecting repurchase
transactions only with large, well-capitalized banks and certain reputable
broker-dealers. In addition, the Fund's repurchase agreements will provide
that the value of the collateral underlying the repurchase agreement will
always be at least equal to the repurchase price, including any accrued
interest earned on the repurchase agreement. In the event of a default or
bankruptcy by a seller, the Fund will seek to liquidate such collateral.
However, to liquidate such collateral could involve certain costs or delays
and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss. No more than 10% of the total market value of Fund assets at
the time of purchase will be invested in repurchase agreements which have a
maturity longer than 7 days.
PORTFOLIO TURNOVER. The Fund will not attempt to achieve, nor will it be
limited to, a predetermined rate of portfolio turnover. Turnover rate is the
lesser of purchases or sales of portfolio securities for a year (excluding
all securities and options with maturities of one year or less) divided by
the monthly average of the market value of such securities. The anticipated
turnover rate is not expected to be higher than 100%; however, a higher
turnover rate may occur if the Fund writes a substantial number of options
which are exercised. For the years ended December 31, 1996 and 1995, the
Fund's portfolio turnover rates were 43.17% and 32.37%, respectively.
Higher portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs. The Fund will pay brokerage
commissions on its securities transactions and in connection with the
purchase and sale of options as well as for selling a security on exercise of
a call option and buying a security on exercise of a put option.
FURTHER INFORMATION. The Fund's investment objective and policies are
subject to certain restrictions, including limitations on borrowing, short
sales of securities and investments in real estate companies or securities
secured by real estate, which restrictions may not be changed without
approval of the holders of a majority of the Fund's outstanding shares. In
addition, certain factors may restrict the ability of the Fund to write
options. These restrictions and factors are described in the Statement of
Additional Information.
MANAGEMENT OF THE FUND
The officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors.
INVESTMENT ADVISER. Analytic-TSA Global Asset Management, Inc. (the
"Adviser"), 700 South Flower Street, Suite 2400, Los Angeles, California
90017, is the investment adviser of the Fund. The Adviser is a wholly owned
subsidiary of United Asset Management Corporation, a holding company
described under "Management of the Fund" in the Statement of Additional
Information.
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
portfolios for fiduciaries and other long term investors. It is one of the
oldest and largest independent investment management firms in this
specialized area. In January 1996, the Adviser 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 yield curve strategies. The Adviser serves,
among others, pension and profit-sharing plans, endowments, foundations,
corporate investment portfolios, mutual savings banks, and insurance
companies, for which it manages in excess of $1,000,000,000. It is also the
investment adviser of The Analytic Series Fund, a registered investment
company which commenced operations in late 1992.
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Pursuant to an Investment Management Agreement with the Fund, the
Adviser, subject to the control and direction of the Fund's Officers and
Board of Directors, manages the portfolio of the Fund in accordance with its
stated investment objective and policies, makes investment decisions for the
Fund, and administers the operations of the Fund. Dennis M. Bein, Harindra
de Silva and Charles L. Dobson are the portfolio managers for the Fund. Mr.
Bein has been a member of the portfolio manager and research team for the
Adviser since August 1995. He concurrently serves as a senior associate for
Analysis Group, Inc. Dr. de Silva is the President of the Fund and serves as
a managing director of the Adviser, which he joined in May 1995. He
concurrently serves as a principal of Analysis Group, which he joined in
March 1986. Mr. Dobson is Executive Vice President and Secretary of the Fund
and The Analytic Series Fund and has been a portfolio manager of the Adviser
since 1978. They are subject to the supervision of the Adviser's investment
management committee.
MANAGEMENT AND SERVICE FEES. As compensation for furnishing investment
advisory, management, and other services, and costs and expenses assumed,
pursuant to the Investment Management Agreement the Fund pays the Adviser an
annual fee equal to 0.75% of the first $100,000,000 of average daily net
assets, 0.65% of the next $100,000,000 of average daily net assets, and 0.55%
of average daily net assets in excess of $200,000,000.
The Adviser also acts as the Fund's transfer agent, dividend disbursing
agent, and shareholder relations servicing agent for which the Fund pays a
fee based on the number of accounts and net assets. The Fund also pays the
Adviser a fee based on its net assets to calculate its daily share price and
maintain its general accounting records.
EXPENSES. In addition to the management and service fees, the Fund pays
all other costs and expenses of its operations including, among other things,
legal and audit fees, unaffiliated Directors' fees and expenses, registration
fees, custodian fees, and expenses of printing and mailing of proxies,
prospectuses, statements of additional information and reports to
shareholders. During 1996, the Fund's ratio of operating expenses (net of
expenses paid indirectly through broker-dealers) to average net assets was
1.23%.
BROKERAGE. Under the terms of the Investment Advisory Agreement, the
Adviser is authorized to employ broker-dealers to execute orders for the
purchase and sale of portfolio securities, including options and futures, who
in its best judgment can provide "best execution" (prompt and reliable
execution at reasonably competitive price). In determining the abilities of
the broker-dealer to provide best execution of a particular portfolio
transaction, the Adviser considers all relevant factors including the
execution capabilities required by the transaction or transactions; the
ability and willingness of the broker-dealer to facilitate each transaction
by participation therein for its own account; the importance to the Fund of
speed, efficiency, or confidentiality; the broker-dealer's apparent
familiarity with sources from or to whom particular securities might be
purchased or sold; the quality and continuity of service rendered by the
broker-dealer with regard to the Fund's other transactions; and any other
factors relevant to the selection of a broker-dealer for particular and
related portfolio transactions of the Fund. Subject to the foregoing
obligation to seek best execution, the Adviser may consider as factors in the
allocation of portfolio transactions to a broker-dealer the broker-dealer's
sale of Fund shares, agreement to pay operating expenses of the Fund, or the
provision of research services to the Adviser.
Money market securities are traded primarily in the over-the-counter
market. Where possible, the Fund will deal directly with the dealers who
make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually
are acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Money market securities are generally
traded on a net basis and do not normally involve either brokerage commission
or transfer taxes. The cost of executing portfolio transactions will
primarily consist of dealer spreads and underwriting commissions.
The Fund has entered into agreements whereby a portion of the
commissions earned by a broker-dealer on portfolio transactions placed with
such broker-dealer is reimbursed to the Fund by payment of Fund expenses.
Such payments aggregated $53,203 for the Fund's 1996 fiscal year.
NET ASSET VALUE. The net asset value of the Fund is computed once daily
at 4:30 P.M. Eastern Time after the close of trading of the New York Stock
Exchange and the various option exchanges, or such other time as is
determined by or under the direction of the Board of Directors, on each day
in which there is a sufficient
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<PAGE>
degree of trading in the Fund's portfolio securities that the current net
asset value of the Fund might be materially affected by changes in the value
of portfolio securities. The net asset value per share is calculated by
taking the total value of the Fund's assets, deducting total liabilities and
dividing the results by the number of shares outstanding. Securities traded
on the New York Stock Exchange are valued at their price at the close of
regular trading on the New York Stock Exchange. Options traded on one or
more exchanges are valued at their closing prices on whatever exchange the
last sale occurred. All other portfolio securities which are traded on a
national securities exchange are valued at their last sale. In all cases,
when there is no last sale on that day or if the last sale is
unrepresentative, the value is taken to be the mean between the last current
bid and asked prices. All other securities not so traded are valued at the
mean between the last current bid and asked prices if market quotations are
available. Other securities and assets are valued at fair value in
accordance with methods determined in good faith by or under the direction of
the Fund's Board of Directors.
Money market securities are valued at the most recent bid price or yield
equivalent as obtained from dealers that make markets in such securities.
Securities with a remaining maturity of 60 days or less are valued on an
amortized basis. This involves valuing a portfolio security at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the security.
HOW TO PURCHASE SHARES
Shares of the Fund are purchased directly from the Fund with no sales
charge or commission at net asset value next computed after an order and
payment are received by the Fund. Any order received after 1:00 P.M. Pacific
Time will be processed at the next day's closing net asset value.
Broker-dealers who place orders for the purchase of Fund shares on behalf of
their customers may charge the customer for that service. There is no minimum
on initial or subsequent purchases of Fund shares by tax deferred retirement
plans (including IRA, SEP-IRA and profit sharing and money purchase plans) or
Uniform Gifts to Minors Act accounts. For other investors the minimum is
$5,000 for an initial purchase and there is no minimum for subsequent
purchases.
The Fund reserves the right to reject any purchase order or to suspend
or modify the continuous offering of its shares.
PURCHASE BY MAIL. The simplest way to make initial and subsequent
purchases of Fund shares is to mail to the Fund a completed and signed
application to purchase shares with a check payable to the Fund. Overnight
mail service is suggested. Shares will be purchased at the next determined
net asset value per share after an order and payment are received by the Fund.
PURCHASE BY WIRE. Initial and subsequent purchases may be made by
wiring Federal Funds addressed:
The Union Bank of California, N.A.
ABA #122000496
For San Francisco Trust Account #001-094166
Analytic Optioned Equity Fund #2110-5992
for account of (your name)
Before wiring funds you must telephone Shareholder Services at (800)
374-2633 with the bank name, date and amount being wired to insure proper
investment. FOR INITIAL PURCHASES ONLY: No purchases will be processed
until a completed and signed application is received.
PURCHASE BY EXCHANGE. You may open an account or purchase additional
shares by making an exchange from an existing account in The Analytic Series
Fund. You may not open an account by exchange unless you have completed an
account application. For further information concerning exchanges, see
"Exchanging Shares" discussed below.
All shares (including reinvested dividends and capital gain distributions)
are issued or redeemed in full and fractional shares rounded to the third
decimal place, at net asset value, with no fees or charges. No share
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certificates will be issued except for investors whose regulators require
them to hold certificates. Instead, an account will be established for each
shareholder and all shares purchased will be held in book entry form by the
Fund. Any transaction respecting an account, including reinvestment of
dividends and distributions, will be confirmed in writing to the shareholder
showing the details of the transaction. (See "Shareholder Accounts.")
HOW TO REDEEM SHARES
TELEPHONE REDEMPTION PRIVILEGE: Provided the shareholder has previously
established the telephone redemption privilege (by completing the telephone
redemption portion of his application to purchase shares or by subsequent
written instructions with signature(s) guaranteed) a shareholder may redeem
all or part of his shares by calling the Fund. No request for redemption
will be accepted by telephone or wire except where redemption proceeds are to
be remitted to a predesignated bank account. The redemption proceeds will be
wired to the bank designated in the instructions. Any changes to the
telephone redemption instructions must be in writing with signature(s)
guaranteed. Telephone redemption privileges are not permitted for Analytic
prototype retirement plans.
The Fund's transfer agent will employ procedures designed to provide
reasonable assurance that instructions communicated by telephone are genuine
and, if it does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. The procedures employed by the
transfer agent include requiring the following information at the time of the
telephone call:
1. Account number;
2. Registration of account; and
3. Social Security Number or Tax I.D.
NOTE: Neither the Fund nor the transfer agent is responsible for
unauthorized telephone redemptions by a person reasonably believed to be a
shareholder unless the transfer agent has received written notice canceling
the telephone redemption authorization. The Fund may change or discontinue
the telephone redemption privilege without notice. For your protection, the
Fund and its agents reserve the right to record all calls.
The Fund reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Telephone redemptions may be difficult to
implement during periods of drastic economic or market changes, which may
result in an unusually high volume of telephone calls. If a shareholder is
unable to reach the Fund by telephone, shares may be redeemed in writing as
described below.
REDEMPTIONS BY WRITTEN INSTRUCTIONS: A shareholder may also redeem all
or part of his shares by written request to the Fund. The written request
must be endorsed by the registered owner(s) exactly as the account is
registered, including any special capacity of the registered owner(s). Where
the owner or owners have not arranged with the Fund for redemption proceeds
to be remitted to a predesignated bank account, the Fund requires that the
signature(s) be guaranteed. Fiduciaries, corporations and other entities may
also be required to furnish supporting documents.
REDEEMING BY EXCHANGE: Shares may be redeemed by making an exchange
into any portfolio of The Analytic Series Fund. For more information, see
"How to Exchange Shares" discussed below.
SIGNATURE GUARANTEES. To protect the shareholder's account and the Fund
from fraud, signature guarantees are required for certain redemptions. The
purpose of signature guarantees is to verify the identity of the party who
has authorized the redemption. A guarantor must be a commercial bank or trust
company which is a member of the Federal Deposit Insurance Corporation, a
member firm of a national securities exchange or another eligible guarantor
institution. Notaries public are not acceptable guarantors. Signature
guarantees are required for:
1. any redemption request for an account where the owner(s) have not
arranged with the Fund for redemption proceeds to be remitted to a
predesignated bank account;
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2. transfers or exchanges between accounts which are not identically
registered;
3. the addition of or change in the wiring instructions for the financial
institution designated to receive redemption proceeds directly into a
shareholder's account; and
4. procedures involving disputed or deceased shareholder accounts.
GENERAL. Shares are redeemed without charge at the net asset value next
computed after instructions and required documents are received in proper
form. Any instructions received after 1:00 P.M. Pacific Time will be
processed at the next day's closing net asset value. Payment will be made as
promptly as possible but in no event later than 3 business days from the day
the redemption request is received. Any letter of instruction must be signed
exactly as the account is registered, including any special capacity of the
registered owner. Under the Interest and Dividend Tax Compliance Act of 1983,
the Fund may be required to withhold at a rate of 31% from dividends and
capital gain distributions to shareholders and upon payment of redemptions to
shareholders, if they have not complied with the provisions of the Act
relating to the furnishing of taxpayer identification numbers and reporting
of dividends.
A request for a distribution from an IRA, SEP-IRA or other tax deferred
retirement account for which the Fund acts as sponsor may be delayed until
the Fund has ascertained the withholding requirements applicable to the
distribution. Investors may send withholding instructions to the Fund on
Internal Revenue Service ("IRS") Form W-4P along with the distribution
request. The form is available from the IRS or by calling the Fund. If an
investor does not want tax withholding from distributions, the investor may
state in the distribution request (instead of using Form W-4P) that no
withholding is desired and that the investor understands that there may be a
liability for income tax on the distribution, including penalties for failure
to pay estimated taxes.
In the event that the Fund is requested to redeem shares for which it
has not received good payment (e.g., cash or cashier's check on a U.S. bank),
it may delay the mailing of a redemption check until such time as it has
determined that good payment has been collected for the purchase of such
shares. In addition, the Fund reserves the right to defer honoring
redemption requests where the shares to be redeemed have been purchased by
check within 15 days prior to the date the redemption request is received
unless the Fund has been advised that the check used for investment has been
cleared for payment by the shareholder's bank. With the exception of
retirement plan accounts, the Fund may close out any investor's account
whenever, due to redemptions, the value of the account falls below the
minimum account balance of $1,000 and the investor fails to purchase
sufficient shares to bring the value of the account up to $1,000 or more
within 90 days after written notice to do so is sent by the Fund. Thus, for
example, an investor who opens an account with an initial investment of
$5,000, does not add to it, and then redeems a portion of it, may be asked to
increase his balance to $1,000 or have it involuntarily redeemed.
HOW TO EXCHANGE SHARES
Should your investment goals change, you may exchange your shares for
shares of any portfolio in The Analytic Series Fund. Exchanges are processed
at the net asset value per share next computed after receipt of instructions
in proper form.
EXCHANGING SHARES BY TELEPHONE: Provided that Telephone Exchange
Privileges have been established (by completing the "Telephone Exchange
Privileges" portion of the Account Registration or by subsequent written
instructions with signature(s) guaranteed), a shareholder may exchange all or
part of his shares by calling Shareholder Services at (800) 374-2633.
The Fund's transfer agent will employ procedures designed to provide
reasonable assurance that instructions communicated by telephone are genuine
and, if it does not do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. The procedures employed by the
transfer agent include requiring the following information at the time of the
telephone call:
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1. Account number;
2. Registration of account; and
3. Social Security Number or Tax I.D.
NOTE: Neither the Fund nor the transfer agent is responsible for
unauthorized telephone exchanges by a person reasonably believed to be a
shareholder unless the transfer agent has received written notice canceling the
telephone exchange authorization. The Fund may change or discontinue the
telephone exchange privilege without notice. For your protection, the Fund and
its agents reserve the right to record all calls.
The Fund reserves the right to refuse a telephone exchange if it
believes it is advisable to do so. Telephone exchanges may be difficult to
implement during periods of drastic economic or market changes, which may
result in an unusually high volume of telephone calls. If a shareholder is
unable to reach Shareholder Services by telephone, shares may be exchanged in
writing as described below.
A shareholder may exchange all or part of his shares by written request
to Shareholder Services. The written request must be endorsed by the
owner(s) exactly as the account is registered, including any special capacity
of the registered owner(s). The Fund requires that the signature(s) be
guaranteed.
IMPORTANT EXCHANGE INFORMATION. Before you make an exchange you should
consider the following:
1. Please read the prospectus of The Analytic Series Fund before making an
exchange.
2. An exchange is treated as a redemption and a purchase and any gain or
loss on the transaction is taxable.
3. Recently purchased shares may not be exchanged until payment for the
purchase has been collected. The Fund reserves the right to defer
honoring exchange requests where shares to be exchanged have been
purchased by check within 15 days prior to the date of the exchange
request, unless the Fund has been advised that such check has been
cleared for payment by the shareholder's bank.
4. Exchanges are accepted only if the registrations of the accounts are
identical.
5. The redemption and purchase price of shares redeemed by exchange is the
net asset value per share of the respective funds next computed after the
Fund receives instructions in proper form.
6. No exchange can be made unless the shares to be purchased have been
registered in the state of the purchaser.
EXCHANGE PRIVILEGE LIMITATIONS. The Fund's exchange privilege is not
intended to afford shareholders a way to speculate on short-term market
movements. Accordingly, in order to prevent excessive use of the Exchange
Privilege that may potentially disrupt the management of the Fund and increase
transaction costs, the Fund may establish a policy of limiting excessive
exchange activity.
SHAREHOLDER ACCOUNTS
When an investor makes his initial purchase of shares an account will be
opened for him on the books of the Fund, and he will receive a confirmation
of the opening of his account. Thereafter, whenever a transaction takes place
in the account, such as a purchase, redemption, transfer, change of address,
reinvestment of income or capital gain distributions, or withdrawal of share
certificates, a confirmation will be sent to the shareholder giving
complete details of that transaction. In addition, shareholders will receive
quarterly statements giving complete details of all transactions during the
quarter.
A shareholder may make additional investments in his account by sending
a check, money order or wire funds made payable to the Fund. Income
distributions (including dividends and distributions of net short-term
capital gains) and net long-term capital gains distributions, if any, will be
reinvested in full and fractional shares rounded to the third decimal place,
at the net asset value per share determined on the payment date.
Shareholders wishing to receive fixed payments on a monthly or quarterly
basis in amounts of $100 or more may do so by writing to the Fund or noting
the appropriate box on the application form. (See "Withdrawal Plan".)
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TAX SHELTERED RETIREMENT PLANS
Shares of the Fund may be purchased in connection with certain prototype
tax sheltered retirement plans, (IRA, SEP-IRA and profit sharing and
money-purchase plans) for corporations, partnerships and self-employed
individuals to benefit themselves and their employees. Investors with
existing plans who wish to invest their plan assets in the Fund without
adopting a prototype may do so by completing the Application to Purchase
Shares which accompanies this Prospectus.
The Adviser, at no cost to the Fund or any of the Fund's shareholders,
pays all fees for prototype retirement plans offered by the Fund (including
IRA accounts) for the life of the plan's account with the Fund. These fees
can be substantial and include all trustee and custodian, set-up, activity,
and annual maintenance fees. Complete information and simplified forms to
establish new accounts, or to transfer assets from existing accounts, are
available on request.
WITHDRAWAL PLAN
Any shareholder may establish a withdrawal plan under which he receives
a monthly or quarterly check in a predetermined amount of not less than $100.
All income dividends and any realized gain distributions attributable to the
account will be reinvested at net asset value on the payment dates, as with
other shareholder accounts, and shares of the Fund as specified on the
Application will be redeemed from the account in order to make the required
withdrawal payments. The shareholder may vary the amount or frequency of
withdrawal payments, temporarily discontinue them or terminate them by
notifying the Fund in writing. There is no charge for this service; however,
the Fund reserves the right to amend or discontinue such plans on thirty
days' notice.
Withdrawal payments should not be considered dividends, yield, or income
on an investment, since portions of each payment may consist of a return of
capital. Depending upon the size and frequency of payments and fluctuations
in value of the Fund's shares redeemed, redemptions for the purpose of making
withdrawal plan disbursements may reduce or even exhaust a shareholder
account.
DIVIDENDS, DISTRIBUTIONS AND TAXES
TAX STATUS OF THE FUND. The Fund intends to qualify as a "regulated
investment company" under the Internal Revenue Code. As a regulated
investment company, it will not be liable for federal income taxes on
amounts paid by it as dividends and distributions. The Fund did so qualify
during its last fiscal year, and intends to qualify in current and future
years. However, the Code contains a number of complex tests relating to
qualification which the Fund might not meet in any particular year. For
example, if the Fund derives 30% or more of its gross income from the sale or
other disposition of securities held for less than 3 months, it may fail to
qualify (see, also, "Tax Information and Option Accounting Principles" in the
Statement of Additional Information). If it did not so qualify, it would be
treated for tax purposes as an ordinary corporation and receive no tax
deduction for payments made to shareholders.
DISTRIBUTIONS. The Fund intends to distribute its investment company taxable
income, exclusive of capital gains, on a quarterly basis. Any net short-term
capital gains will be distributed at least annually and may be distributed
more frequently at the discretion of the Fund's Board of Directors.
Distributions of net capital gains (net long-term capital gains less net
short-term capital losses) if any, will be made annually. Income
distributions (including dividends and distributions of net short-term
capital gains) and net long-term capital gains distributions, if any, will be
reinvested in full and fractional shares rounded to the third decimal place,
at the net asset value per share determined on the payment date.
TAXATION OF SHAREHOLDERS. The following is only a brief discussion of
Federal income taxation in effect on the date of this prospectus, and does
not discuss the status of dividends and distributions from the Fund under
state and local tax laws. All applicable tax laws and regulations are subject
to change by legislative and administrative action. Each shareholder of the
Fund is advised to consult his own tax adviser with respect to applicable
Federal, state and local tax laws.
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The maximum marginal tax rate for individuals is currently 28% on net
capital gains distributions and 39.60% on ordinary income distributions. The
reduction of certain deductions and phase-out of exemptions may increase the
individuals marginal tax rate to more than 39.60%. For corporations, net
capital gains distributions are subject to maximum marginal tax rate of 35%
and ordinary income distributions are subject to the maximum marginal rate is
39%.
Distributions paid from the Fund's dividend and interest income and from
any net realized short-term capital gains are taxable to shareholders as
ordinary income under Federal income tax law, whether received in cash or in
additional shares. Net capital gains distributions are taxable to
shareholders as long-term capital gains, whether received in cash or
additional shares, regardless of how long such shareholders have held their
shares. However, any loss (to the extent of the distribution of net capital
gain received by a shareholder) will be treated as long-term capital loss
upon the redemption of shares of the Fund held for twelve months or less.
The sale of shares of the Fund is a taxable event and may result in a
capital gain or loss. A capital gain or loss may be realized from any
ordinary redemption of shares or exchange of shares.
All or a part of the Fund's dividends will be eligible for the 70%
deduction for dividends received by corporations. Special provisions are
contained in the Internal Revenue Code as to the eligibility, for the
deduction, of payments made by mutual funds to corporate shareholders. Net
capital gains distributions are not eligible for the deduction. The Fund
will report to its shareholders income dividends and capital gains
distributed during the calendar year and will designate that portion which
qualifies for the 70% corporate dividends received deduction. This
determination will be based on the ratio between aggregate dividends received
by the Fund on domestic corporate stock held for at least 46 days (91 days
for certain preferred stock) and the Fund's gross income. Gross income will
include dividends, interest and the excess of net short-term capital gains
(which includes premium from expired options and gains from closing purchase
transactions) over net long-term capital losses. Each year the Fund will mail
you information on the tax status of dividends and distributions.
Pursuant to the Interest and Dividend Tax Compliance Act of 1983,
shareholders may be subject to backup withholding of federal income tax at a
31% rate on dividends and other payments made to shareholders if they have
not provided the Fund with their correct social security number or other
taxpayer identification number, or have not made the certifications required
by the Internal Revenue Service.
The foregoing is only a brief discussion of Federal income taxation in
effect on the date of this Prospectus, and does not discuss the status of
dividends and distributions from the Fund under state and local tax laws. All
applicable tax laws and regulations are subject to change by legislative and
administrative action. Each shareholder of the Fund is advised to consult his
own tax adviser with respect to applicable Federal, state and local tax laws.
Any net capital gain distribution paid by the Fund has the effect of
reducing the net asset value per share on the reinvestment date by the amount
of the distribution. Therefore, a capital gain distribution paid shortly
after a purchase of shares by an investor would represent, in substance, a
partial return of capital to the shareholder (to the extent it is paid on the
shares so purchased), even though it would be subject to income taxes as
discussed above. Accordingly, prior to purchasing shares of the Fund, an
investor should carefully consider the impact of dividends or capital gains
distributions which are expected to be or have been announced.
TAX CONSIDERATIONS IN PORTFOLIO TRANSACTIONS. As a covered call and secured
put option writer, the Fund has great flexibility in determining the taxable
nature of its investment results, and it is this flexibility which the Fund
will utilize to attempt to achieve an equal emphasis on current income and
long-term capital gains earned on the Fund's investment portfolio. There
can be no assurance, however, that such equal emphasis can be achieved over
any particular period of time. Moreover, optioning securities in the Fund's
investment portfolio may have the effect of reducing capital appreciation
earned on such securities below that which could have been earned had no
options been written on such securities.
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Further, since shareholders of the Fund who are taxable may receive
distributions which are taxed to them as ordinary income in years when the
total return of the Fund is less than its dividend and interest return,
during such years the Fund will attempt, consistent with its investment
objective, to minimize its shareholders' ordinary taxable income by
offsetting, to the extent possible, any net short-term capital gains that may
have been realized from expired options and profitable closing purchase
transactions by selling underlying stocks with unrealized capital losses.
Otherwise, in such years the Fund's shareholders might have both a negative
total return and current taxable income, thus being subject to the payment of
income taxes in a year in which their real wealth may have declined. Of
course, there can be no assurance that the Fund will have sufficient
unrealized losses on its underlying common stocks to be able to offset these
net short-term capital gains.
CAPITAL STOCK
The Fund has an authorized capital of 100,000,000 shares of common stock
with no par value. All shares are of the same class with equal rights and
privileges. Except with respect to the election of directors where
cumulative voting may apply, each share is entitled to one vote and to
participate equally in dividends and distributions declared by the Fund.
Cumulative voting means that each shareholder is entitled to as many votes as
shall equal the number of his shares of common stock multiplied by the number
of directors to be elected, and such shareholder may cast all such votes for
a single director or divide them among two or more directors as he sees fit.
The shares are fully paid and nonassessable and have no pre-emptive,
conversion or exchange rights. The shares are transferable without
restriction. The Fund does not normally hold annual meetings of shareholders
except when required by the Investment Company Act of 1940.
GENERAL INFORMATION
Shareholder inquiries should be made in writing to Analytic-TSA Global
Asset Management, Inc., 700 South Flower Street, Suite 2400, Los Angeles,
California 90017, Attention: Shareholder Services; or by telephone
(800)374-2633.
Each shareholder will receive annual and semi-annual financial
statements, including a list of portfolio securities and outstanding call and
put options. The annual financial statements of the Fund will be audited by
certified public accountants.
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GLOSSARY OF INVESTMENT TERMS AND STOCK AND DEBT OPTION TERMS
INVESTMENT TERMS
QUARTERLY TOTAL RETURNS. The percentage change over a quarter in the
value of a shareholder's investment, assuming immediate reinvestment of all
distributions in additional Fund shares and no adjustment for the
shareholder's income tax consequences. This change derives from: dividends,
interest, realized capital gains or losses, changes in unrealized capital
appreciation or depreciation, premiums received from expired options and
gains or losses on closing purchase transactions, all less expenses. For
example, assume a shareholder's investment in the Fund has a value of $100 at
the start of a three-month period. If the value of his investment, after
immediate reinvestment of all income and capital gains distributions, is $101
at the end of such period, the total return for the period would be +1%. If
the value at the end of such period is $99 (again after reinvestment of all
income and capital gains distributions), the total return for the period
would be -1%.
LONG TERM TOTAL RETURNS. The percentage change in the value of a
shareholder's initial investment after a full market cycle (usually 3 or more
years), expressed as a constant annual compound rate of total return,
assuming the reinvestment of all subsequent income and capital gain
distributions in additional Fund shares. For example, suppose a
shareholder's initial investment is $100 (one share whose net asset value is
$100) and that all subsequent income and capital gain distributions are
reinvested in additional Fund shares on the distribution date. If after three
years the initial one share has become 1.2 shares and the net asset value per
share is $104.98, then the initial $100 investment is worth $125.98 (1.2 x
$104.98) and has grown at 8% per annum compounded. Compounded means that at
the end of each compounding interval, in this example one year, the total
return is computed and reinvested in additional fund shares at the end of
each compounding interval. Thus, at the end of the first year the initial
$100 investment is worth $108, and at the end of the second year it is worth
$116.64, and at the end of the third year it is worth $125.98. Similarly, if
after three years the net asset value per share is $64.89 then the initial
$100 investment is worth $77.87 (1.2 x $64.89) and has had a negative return
of 8% per annum compounded. Also if after three years the net asset value per
share is $83.33 then the initial $100 investment is worth $100 (1.2 x $83.33)
and has had a net return of zero per cent per annum. As these examples show,
the basic components on total return, income and the change in value of the
portfolio securities will vary and there can be no assurance that the Fund's
total return will be positive or that it will accrue at a constant rate.
FLUCTUATIONS IN TOTAL RETURN. Fluctuations in the Fund's total return
will be measured by the standard deviation of the Fund's quarterly total
returns. The standard deviation of returns measures the extent to which the
individual returns deviate from their arithmetic average. The standard
deviation is used extensively as a measure of dispersion (risk) and provides
a good historical measure of the variability of returns from an investment
portfolio. For example, the following table shows the 108 quarterly total
returns (assuming reinvestment of all dividends at the end of each calendar
quarter with no transaction costs) for a Standard & Poor's 500 Stock Index
over the twenty-seven year period ended December 31, 1996. The arithmetic
average of these quarterly returns is 3.22% and their standard deviation is
8.11%. In 32 of these 108 quarters the total return was negative.
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PERCENT QUARTERLY TOTAL RETURN, S & P 500 STOCK INDEX, 1970-1996
Year Qtr % Return Year Qtr % Return Year Qtr % Return
- ---- --- -------- ---- --- -------- ---- --- --------
1970 1 -1.77 1971 1 9.69 1972 1 5.75
2 -18.03 2 0.16 2 .67
3 16.92 3 -0.58 3 3.92
4 10.41 4 4.64 4 7.56
1973 1 -4.89 1974 1 -2.82 1975 1 22.95
2 -5.77 2 -7.56 2 15.36
3 4.81 3 -25.16 3 -10.95
4 -9.18 4 9.37 4 8.65
1976 1 14.98 1977 1 -7.45 1978 1 -4.94
2 2.47 2 3.31 2 8.51
3 1.91 3 -2.83 3 8.67
4 3.22 4 -0.11 4 -4.93
1979 1 7.10 1980 1 -4.12 1981 1 1.38
2 2.73 2 13.49 2 -2.30
3 7.65 3 11.22 3 -10.23
4 0.14 4 9.49 4 6.93
1982 1 -7.31 1983 1 10.12 1984 1 -2.40
2 -0.56 2 11.10 2 -2.57
3 11.52 3 -0.13 3 9.70
4 18.25 4 0.40 4 1.89
1985 1 9.19 1986 1 14.11 1987 1 21.36
2 7.34 2 5.89 2 5.02
3 -4.10 3 -6.97 3 6.60
4 17.21 4 5.58 4 -22.53
1988 1 5.70 1989 1 8.83 1990 1 -3.00
2 6.67 2 7.09 2 6.28
3 0.33 3 10.71 3 -13.75
4 3.08 4 2.07 4 8.96
1991 1 14.53 1992 1 -2.53 1993 1 4.37
2 -0.22 2 1.90 2 .49
3 5.35 3 3.16 3 2.58
4 8.38 4 5.04 4 2.32
1994 1 -3.79 1995 1 9.74 1996 1 5.37
2 0.42 2 9.55 2 4.49
3 4.89 3 3.59 3 3.09
4 -0.02 4 10.49 4 8.35
The arithmetic average of these quarterly returns is 3.22% and their standard
deviation is 8.11%. In 32 of the 108 quarters, the total return was negative.
Source: Standard & Poor's.
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STOCK AND DEBT OPTION TERMS
OPTION. An option is either a call or put option issued by the Options
Clearing Corporation (the "Clearing Corporation") on a stock or debt security
and traded on one or more Exchanges, as defined below, or subject to
regulatory approval is traded over-the-counter. Currently options are traded
on common stocks, stock indexes, stock index futures; on U.S. Treasury bonds,
notes, and bills; and on GNMA securities. Such options give a holder the
right to sell (in the case of a put option) or to buy (in the case of a call
option) the number of shares or other units of the underlying security
covered by the option at a fixed or determinable exercise price. The rights
represented by an option may be exercised by the proper filing of an exercise
notice prior to the fixed expiration time of the option.
CLASS OF OPTIONS. Options covering the same underlying security.
CLEARING CORPORATION. The Option Clearing Corporation.
CLOSING PURCHASE TRANSACTION. A transaction in which an investor who is
obligated as a writer (seller) of an option terminates his obligation as a
writer by purchasing on an exchange, in a closing purchase transaction, an
option of the same series as the option previously written. Such a
transaction has the effect of canceling the option writer's position as a
writer and does not result in the ownership of a new option.
CLOSING SALE TRANSACTION. A transaction in which an investor who is the
holder of an outstanding option liquidates his position as a holder by
selling an option of the same series as the option previously purchased.
Such sale does not result in the investor assuming the obligations of a
writer.
COVERED CALL OPTION WRITER. A writer of a call option who, so long as
he remains obligated as a writer, owns the underlying security or a security
which is immediately convertible into the underlying security or who holds on
a security-for-security basis on all on the same security as the call written
where the exercise price of the call held is equal to or less than the
exercise price of the call written or, if greater than the exercise price of
the call written, the difference is maintained by the writer in U.S.
Government securities in a segregated account with the writer's broker or
custodian.
COVERED PUT OPTION WRITER. A writer of a put option who, so long as he
remains obligated as a writer, has deposited U.S. Government securities with
a value equal to or greater than the exercise price with a securities
depository and has pledged them to the Options Clearing Corporation for the
account of the broker-dealer carrying the writer's position or who holds on a
security-for-security basis a put on the same security as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or if less than the exercise price of the
put written, the difference is maintained by the writer in U.S. Government
securities in a segregated account with the writer's broker or custodian.
EXCHANGE. A national securities exchange on which options are traded:
currently the Chicago Board Options Exchange ("CBOE"), American Stock
Exchange ("AMEX"), Pacific Stock Exchange ("PSE"), Philadelphia Stock
Exchange ("PHLX") and New York Stock Exchange ("NYSE").
EXERCISE PRICE. The price per unit at which the holder of a call option
may purchase (and the holder of a put option may sell) the underlying
security upon exercise of the option, sometimes referred to as the striking
price.
EXPIRATION DATE. The latest date when an option may be exercised.
NASDAQ OPTIONS. Standardized options on unlisted securities which are
displayed on the National Association of Securities Dealers Automated
Quotations System.
OPTION PERIOD. The time during which an option may be exercised,
generally from the date the option is written through its expiration date.
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PREMIUM. The price of an option agreed upon between the buyer and
writer (seller) for their agents in a transaction on an Exchange.
PUT OPTION. Any option issued by the Clearing Corporation and traded on
one or more of the Exchanges referred to above which gives the holder the
right to sell to the Clearing Corporation the underlying security at the
stated exercise price by filing an exercise notice prior to the expiration
date.
SECURED PUT OPTION WRITER. A writer of a put option who has an
underlying money market investment in an amount not less than the exercise
price of the option, so long as he remains obligated as writer of the put
option.
SERIES OF OPTIONS. Options covering the same underlying security and
having the same exercise prices and expiration dates.
STANDARD & POOR'S 500 STOCK INDEX. An unmanaged index composed of 400
industrial stocks, 40 financial stocks, 40 utilities stocks, and 20
transportation stocks. Comparisons of performance assume reinvestment of
dividends.
UNDERLYING SECURITIES. The securities subject to purchase upon the
exercise of a call option or subject to sale upon the exercise of a put
option.
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APPENDIX
DESCRIPTION OF U.S. GOVERNMENT SECURITIES.
U.S. Government securities include (1) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of issuance: U.S.
Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Treasury (such as Government National Mortgage Association (GNMA)
Certificates), (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Treasury, (c) discretionary authority
of the U.S. Government to purchase certain obligations of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality.
Agencies and instrumentalities include: Federal Land Banks, Farmers Home
Administration, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks, and Federal National Mortgage Association.
GNMA Certificates are mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans - issued by lenders
such as mortgage bankers, commercial banks and savings and loan associations
- - are either insured by the Federal Housing Administration or guaranteed by
the Veterans Administration. A "pool" or group of such mortgages is
assembled and, after being approved by GNMA, is offered to investors through
securities dealers. Once approved by GNMA, the timely payment of interest
and principal on each mortgage is guaranteed by the full faith and credit of
the U.S. Government.
GNMA Certificates differ from bonds in that principal is paid back
monthly by the borrower over the term of the loan rather than returned in a
lump sum at maturity. GNMA Certificates are called "pass-through" securities
because both interest and principal payments (including prepayments) are
passed through to the holder of the Certificate.
DESCRIPTION OF VARIOUS OPTIONS, FUTURES CONTRACTS, AND RELATED OPTIONS.
OPTIONS ON STOCK INDEXES. Options on stock indexes are similar to
options on stock except that the delivery requirements are different.
Instead of giving the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive a
cash "exercise settlement amount" equal to (i) the amount by which the fixed
exercise price of the options exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of the underlying index on the
date of exercise, multiplied by (ii) a fixed "index multiplier". Receipt of
this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of
cash received will be equal to such difference between the closing price of
the index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss to the Fund
on transactions in stock index options will depend on price movements in the
stock market generally (or in a particular industry or segment of the
market) rather than price movements of individual securities.
As with stock options, the Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market value of the stocks
included in the index. Some stock index options are based on a broad market
index such as the S & P 500, the S & P 100, or the N.Y.S.E. Composite Index.
Indexes are also based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the following exchanges among others: The
Chicago Board Options Exchange, New York Stock Exchange and American Stock
Exchange.
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STOCK INDEX FUTURES. A stock index futures contract is a bilateral
agreement pursuant to which the Fund will agree to receive or deliver at
settlement an amount of cash equal to a dollar amount multiplied by the
difference between the value of a stock index at the close of the last
trading day of the contract and the price at which the futures contract is
originally struck. Stock index futures have similar characteristics to
other futures contracts such as the financial futures discussed below, except
that settlement is through delivery of cash rather than the underlying
instruments. The Fund will be required to deposit with its Custodian or
broker an amount of cash, cash equivalents, money market instruments or U.S.
Treasury bills equal to approximately 5% of the contract amount as initial
margin. Daily variation margin payments to and from the Fund must be made
during the life of the futures contract in order to reflect increases or
decreases in the contract's value. At any time prior to expiration of the
stock index futures contract, the Fund may elect to close the position by
taking an opposite position. A final determination of variation margin is
then made, and additional cash is required to be paid or released by the
Fund, which will realize a gain or loss. In addition, the Fund will pay a
commission on each contract, including offsetting transactions. Stock index
futures are currently traded on the following exchanges among others:
Chicago Mercantile Exchange, New York Financial Exchange and Kansas City
Board of Trade.
OPTIONS ON STOCK INDEX FUTURES. Put and call options are traded on
stock index futures and they have characteristics and terminology similar to
other exchange traded options discussed above. See "Stock Index Futures"
above for a description of the instruments underlying these options.
FINANCIAL FUTURES CONTRACTS. A financial futures contract sale
creates an obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specified future time
for a specified price. A financial futures contract purchase creates an
obligation by the Fund, as purchaser, to take delivery of the specific type
of financial instrument at a specified future time at a specified price. The
specific securities delivered or taken, respectively, on the settlement date,
are not determined until at or near that date. The determination is in
accordance with the rules of the exchange on which the futures contract sale
or purchase was made. The Fund does not intend to take delivery of the
instruments underlying futures contracts it holds.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and same delivery date. If the
price in the sale exceeds the price in the offsetting purchase, the Fund is
paid the difference and thus realizes a gain. If the offsetting purchase
price exceeds the sale price, the Fund pays the difference and realizes a
loss. Similarly, the closing out of a futures contract purchase is effected
by the Fund entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of the security, in that no price or premium is paid or received.
Instead, cash, cash equivalents, money market instruments, or U.S. Treasury
bills equal to approximately 1 1/2% of the contract amount must be deposited
by the Fund with its Custodian or broker. This amount is known as initial
margin. Subsequent payments to and from the broker, called variation margin,
are made on a daily basis as the price of the underlying security fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as "mark-to-market". At any time prior to
expiration of the futures contract, the Fund may elect to close the position
by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker,
and the Fund realizes a loss or gain. In addition, the Fund will pay a
commission on each contract, including offsetting transactions.
Currently, financial futures contracts can be purchased or sold on U.S.
Treasury bills, U.S. Treasury bonds, U.S. Treasury notes with maturities
between 2 and 10 years, on GNMA Certificates, and on three-month domestic
bank certificates of deposit. While Treasury bonds, Treasury bills and
Treasury notes are backed by the full faith and credit of the U.S. Government
and GNMA Certificates are guaranteed by a U.S. Government agency, the futures
contracts in U.S. Government securities are not obligations of the U.S.
Treasury.
28
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Financial futures contracts are traded in an auction environment on the
floors of several exchanges - principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Fund will
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership
which is also responsible for handling daily accounting of deposits or
withdrawals of margin.
OPTIONS ON FINANCIAL FUTURES. Put and call options are traded on
financial futures contracts, and they have characteristics and terminology
similar to other exchange traded options. See "Financial Futures Contracts"
above for a description of the instruments underlying these options.
29
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INVESTMENT ADVISER
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
CUSTODIAN
The Union Bank of California, N.A.
Mutual Fund Services
475 Sansome Street, 11th Floor
San Francisco, California 94111
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, CA 90017
________________________
No dealer, salesman or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Fund or the Adviser. This Prospectus does not
constitute any offer to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
30
<PAGE>
PROSPECTUS
May 9, 1997
THE DEFENSIVE EQUITY PORTFOLIO
of Analytic Optioned Equity Fund, Inc.
A No-Load, Open-End Fund
With No Sales Charge or Redemption Fee.
Table of Contents
Benefits to Investors 3
Fund Expense Table 4
Financial Highlights 5
How Performance is Calculated 7
The Fund 7
Investment Objectives and Policies 7
Covered Option Writing 8
Risks of Option Writing 9
Hedging Transactions 10
Risk Factors in Hedging Transactions 12
Other Investment Techniques 12
Portfolio Turnover 14
Further Information 14
Management of the Fund 14
How to Purchase Shares 16
How to Redeem Shares 17
How to Exchange Shares 18
Shareholder Accounts 19
Tax Sheltered Retirement Plans 20
Withdrawal Plan 20
Dividends, Distributions and Taxes 20
Distributions 20
Taxation of Shareholders 20
Tax Considerations in Portfolio Transactions 21
Capital Stock 22
General Information 22
Glossary of Investment Terms and Stock and Debt 23
Option Terms
31
<PAGE>
PART B
ANALYTIC OPTIONED EQUITY FUND, INC.
700 South Flower Street, Suite 2400, Los Angeles, CA 90017
(800) 374-2633
May __, 1997
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus but should
be read in conjunction with the Prospectus for Analytic Optioned Equity Fund,
Inc. (the "Fund") dated May __, 1997. A copy of the Prospectus may be
obtained by writing or telephoning the Fund at the address or telephone
number shown above.
TABLE OF CONTENTS
Page
----
Investment Objective and Policies 2
Covered Option Writing 2
Factors Which May Adversely Affect
Transactions in Options 3
Position Limitations 3
Investment Restrictions and Other Investment
Policies 4
Hedging Transactions in Options, Futures and
Related Options 6
Stock Index Options 6
Stock Index Futures 6
Options on Stock Index Futures 6
Financial Futures and Related Options 7
Management of the Fund 7
Investment Advisory and Other Services 8
Brokerage 10
Tax Information and Option Accounting Principles 11
Calculation of Performance Data and Other
Performance Comparisons and Statistics 13
Principal Shareholders 16
Pricing and Redemption of Fund Shares 16
Custodian 17
Transfer, Dividend Disbursing and Shareholder
Servicing Agent 17
Independent Auditors 17
Legal Counsel 17
Financial Statements 17
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INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve this objective. The following information
supplements the discussion in the Prospectus.
COVERED OPTION WRITING. In return for the premium received, a covered
call option writer during the term of the option is subject to the risk of
losing the potential for capital appreciation above the exercise price.
Likewise, a secured put option writer retains the risk of loss should the
value of the underlying security decline below the exercise price. In both
cases the writer has no control over the time when he has to fulfill his
obligation as a writer of the option. Once an option writer has received an
exercise notice he cannot effect a closing purchase transaction.
If a call option expires unexercised, the covered option writer realizes
a gain in the amount of the premium received although there may have been a
decline (unrealized loss) in the market value of the underlying security
during the option period which may exceed such gain. If the covered option
writer has to sell the underlying security because of the exercise of a call
option, the writer will realize a gain or loss from the sale of the
underlying security with the proceeds being increased by the amount of the
premium. If a put option expires unexercised, the secured put option writer
realizes income from the amount of the premium plus the interest income of
the money market investment. If the secured put writer has to buy the
underlying security because of the exercise of the put option, the secured
put writer incurs an unrealized loss to the extent that the current market
value of the underlying security is less than the exercise price of the put
option. However, this may be offset in whole or in part by the premium
received and any interest income earned on the money market investment.
A call option gives the purchaser of the option the right to buy, and
the writer the obligation to sell, the underlying security at the exercise
price during the option period. A put option gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying security at the
exercise price during the option period. So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates upon
expiration of the option, or such earlier time at which the writer effects a
closing purchase transaction by purchasing an option of the same series as he
previously sold. Once a writer has been assigned an exercise notice in
respect of an option, he is thereafter not allowed to effect a closing
purchase transaction. To secure his obligation to deliver the underlying
security in the case of a call option, or to pay for the underlying security
in the case of a put option, a covered writer is required to deposit in
escrow the underlying security or other assets in accordance with the rules
of the Options Clearing Corporation (the "Clearing Corporation") and of the
Exchanges.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater long term
total return and smaller fluctuations in quarterly return than would be
realized on the securities alone. The covered call option writer has, in
return for the premium, given up the opportunity for profit from a price
increase in the underlying security above the exercise price so long as his
obligation as a writer continues, but has retained the risk of loss should
the price of the security decline. Conversely, the put option writer has, in
the form of the premium, gained a profit as long as the price of the
underlying security remains above the exercise price, but has assumed an
obligation to purchase the underlying security from the buyer of the put
option at the exercise price, even though the security may fall below the
exercise price, at any time during the option period. The option writer has
no control over when he may be required to sell his securities in the case of
a call option, or to purchase securities in the case of a put option, since
he may be assigned an exercise notice at any time prior to the termination of
his obligation as a writer. If an option expires unexercised, the writer
realizes a gain in the amount of the premium. Such a gain, of course, may, in
the case of a covered call option, be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security. If a put option is exercised, the writer must fulfill his
obligation to purchase the underlying security at the exercise price, which
will usually
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exceed the then market value of the underlying security. Options written by
the Fund will normally have expiration dates not more than nine months from
the date written. The exercise price of the options may be below, equal to,
or above the current market prices of the underlying securities at the times
the options are written.
FACTORS WHICH MAY ADVERSELY AFFECT TRANSACTIONS IN OPTIONS. An option
position may be closed out only on an Exchange which provides a secondary
market for an option of the same series. Although the Fund will generally
purchase or write only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
Exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an Exchange may exist. In such event,
it might not be possible to effect closing transactions in particular
options. If as a covered call option writer the Fund is unable to effect a
closing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise. Likewise, a secured put writer could not
sell the money market instrument and use the proceeds for other investments,
such as an investment in common stocks, while he was obligated as a put
writer.
Reasons for the absence of a liquid secondary market on an Exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or the Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market thereon would
cease to exist, although outstanding options on that Exchange which have been
issued by the Clearing Corporation as a result of trades on that Exchange
would continue to be exercisable in accordance with their terms.
There can be no assurance that higher than anticipated trading activity
or order flow or other unforeseen events might not, at times, render certain
of the facilities of the Clearing Corporation and the Exchanges inadequate.
Such events have in the past resulted, and may again result, in the
institution by an Exchange of special procedures, such as trading rotations,
restrictions on certain types of orders, or trading halts or suspensions,
with respect to one or more options, or may otherwise interfere with the
timely execution of customers' orders.
In the event that NASDAQ options are traded, it is anticipated that many
of the factors which may adversely affect transactions in Exchange listed
options may also adversely affect NASDAQ options.
The size of the premiums which the Fund may receive may be adversely
affected as new or existing institutions, including other investment
companies, engage in or increase their option writing activities.
POSITION LIMITATIONS. Each of the Exchanges has established limitations
governing the maximum number of calls and puts in each class (whether or not
covered) which may be written by a single investor, or group of investors
acting in concert, (regardless of whether the options are written on the same
or different Exchanges or are held or written in one or more accounts or
through one or more brokers). It is possible that the Fund and clients
advised by the Adviser may constitute such a group. An Exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose certain other sanctions. At the date of this Prospectus, the only such
limits which may affect the operations of the Fund are those which limit the
writing of call options on the same underlying security by an investor or
such group to 4,500 options (450,000 shares), 7,500 options (750,000 shares),
10,500 options (1,050,000 shares) 20,000 options (2,000,000 shares) or 25,000
options (2,500,000 shares) in each class regardless of expiration date.
Whether the applicable limit is 4,500, 7500, 10,500, 20,000 or 25,000 options
is determined by the most recent six-month trading volume of the underlying
security.
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Every six months each Exchange reviews the status of underlying
securities to determine which limit should apply. These position limits may
limit the number of options which the Fund can write on a particular security.
INVESTMENT RESTRICTIONS AND OTHER INVESTMENT POLICIES
The following restrictions are fundamental policies for the protection
of the Fund's shareholders and cannot be changed without the approval of the
holders representing a majority of the Fund's outstanding voting securities,
which for purposes of such approval shall be the lesser of (i) 67% or more of
the shares present at a meeting of shareholders if the holders of more than
50% of the outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding voting
securities of the Fund. The Fund may not:
(1) Purchase securities of any issuer (other than U.S. Government
obligations) if, as a result, more than 5% of the value of the Fund's assets
would be invested in securities of that issuer, nor may it concentrate its
investments in any single industry except that it may invest up to 25% of its
net asset value in a single industry.
(2) Purchase more than 10% of the voting securities or more than 10% of
any class of securities of any issuer. (For this purpose, all outstanding
debt securities of an issuer are considered as one class, and all preferred
stocks of an issuer are considered as one class.)
(3) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). (The deposit or payment by the Fund of initial or
variation margin in connection with futures contracts or related options is
not considered the purchase of a security on margin.)
(4) Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may write covered call options with respect to all of its
portfolio 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, as described under "Investment
Objective and Policies".
(5) 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
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.
(6) Invest in real estate although the Fund may invest in marketable
securities which are secured by real estate and securities of companies which
invest in or deal in real estate. The Fund will not invest more than 10% of
the value of its total assets in securities which are not readily marketable,
including real estate interests.
(7) Invest more than 5% of the value of its total assets 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.
B-4
<PAGE>
(8) 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.
(9) Make loans, except through the making of time or demand deposits
with banks, and subject to paragraphs 6 and 16, the purchase of bonds,
debentures, commercial paper and other short term obligations, and except
through repurchase agreements (provided however, that the Fund will not
invest more than 10% of its total net assets in repurchase agreements of more
than seven days duration).
(10) Borrow money in excess of 10% of the Fund's total assets at current
value and then only as a temporary measure for extraordinary or emergency
purposes and not for leverage.
(11) Pledge more than 10% of the Fund's total assets at current value.
Neither the deposit or escrow of underlying securities, convertible preferred
stocks or convertible debt securities, or U.S. Government securities, in
connection with the writing of call options, nor the deposit of U.S.
Government securities in escrow in connection with the writing of put
options, nor the segregation in a segregated account with the Custodian of
securities in connection with short sales "against the box," nor the deposit
of cash, cash equivalents, or money market instruments in a segregated
account with the Custodian and/or a broker in connection with futures
contracts or related options, is deemed to be a pledge.
(12) Underwrite securities of others except to the extent the Fund may
be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities.
(13) Purchase securities of other investment companies, except as
permitted under the Investment Company Act of 1940.
(14) Invest for the purpose of exercising control or management of
another company.
(15) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in the common stock of
companies which invest in or sponsor such programs.
(16) Invest in securities restricted as to disposition under the Federal
securities laws.
(17) Participate on a joint or a joint and several basis in any trading
account in securities.
(18) Buy or sell commodities or commodity contracts except that the Fund
may engage in interest rate futures contracts, stock index futures contracts
and related options, as described under "Hedging Transactions in Options,
Futures and Related Options".
If a percentage restriction is adhered to at the time of an investment,
a later increase or decrease in percentage beyond the specified limit
resulting from a change in values of net assets will not be considered a
violation of these restrictions.
In addition to the policies described above, the Fund has adopted the
following investment policies which are not deemed to be fundamental, which
may be changed without shareholder approval, and are not otherwise described
in the Fund's Prospectus:
It is contrary to the Fund's present policies to:
- 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;
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- 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;
- Lend its unencumbered portfolio securities against collateral if the Fund's
aggregate lending will exceed 30% of its total net assets;
- Borrow securities, except as a temporary measure, to enable the Fund to
meet, in a timely manner, obligations to deliver such securities upon the
exercise of a call option written by it in connection with a convertible
security. If, due to market fluctuations or other reasons, the value of the
Fund's assets fall below 300% of its borrowings, the Fund will reduce its
borrowings to the required level within three days thereafter (not
including Sundays and holidays) which reduction may result in the Fund's
being required to sell securities at a time when it may otherwise be
disadvantageous to do so.
HEDGING TRANSACTIONS IN OPTIONS, FUTURES AND RELATED OPTIONS
The Fund does not intend to enter into transactions in stock index
options, stock index futures and related options or financial futures and
related options except in connection with hedging its portfolio. The Fund
will invest in stock index options, futures and options on futures only if,
in the judgment of management, there is a sufficient degree of correlation
between movements in the value of such instrument and movements in the value
of the relevant portion of the Fund's investments for such hedge to be
effective. There can be no assurance that such judgment will be accurate or
that hedging transactions will be successful. As noted in the Prospectus, the
Fund may purchase options to hedge its portfolio securities or securities
which it intends to purchase, but as set forth above its option writing
strategies are intended to obtain a greater long term total return with
smaller fluctuations in quarterly total return than would be realized on the
securities alone.
STOCK INDEX OPTIONS. The Fund may purchase exchange listed call and put
options on stock indexes for the purpose of hedging its portfolio. As stated
in the Prospectus, the effectiveness of this hedging technique will depend
upon the extent to which price movements in the portion of the Fund's
portfolio being hedged correlate with price movements of the stock index
selected. Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock, whether the
Fund will realize a gain or loss from purchases of options on an index
depends upon movements in the level of stock prices in the stock market
generally or in an industry or market segment rather than movements in the
price of a particular stock.
STOCK INDEX FUTURES. The Fund may sell stock index futures contracts in
anticipation of or during a market decline in an endeavor to offset the
decrease in market value of portfolio securities that would otherwise result
from a market decline. When the Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures in order to gain rapid market exposure that may in part or
entirely offset increases in the cost of the securities that it intends to
purchase. No purchase of stock index futures will be made, however, unless
the Fund intends to purchase securities in approximately the amount of the
market value of the stocks represented by the index futures purchased and it
has identified the cash or cash equivalents needed to make such a purchase.
An amount of cash and cash equivalents equal to the market value of the
futures contracts will be deposited in a segregated account with the Fund's
Custodian to collateralize its position in stock index futures.
OPTIONS ON STOCK INDEX FUTURES. The Fund may sell options on stock index
futures only to terminate an existing position. Put options on stock index
futures sometimes may be purchased in lieu of the sale of a stock index
future for the purpose of hedging a portion of the securities portfolio of
the Fund. The purchase of a call option on a stock index futures contract is
intended to serve as a temporary substitute for the purchase of individual
securities which may subsequently be purchased in an orderly fashion.
However, if such options are exercised and futures contracts are purchased to
hedge against a possible increase in the price of a security before the Fund
is able to purchase such security in an orderly
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fashion and the security declines instead, the Fund may then decide not to
purchase the security because of concerns of possible further declines or for
other reasons. Thus, the Fund will realize a loss on the futures contract
that is not offset by a reduction in the price of securities purchased. When
it purchases a call on stock index futures, the Fund will set aside the
amount of additional cash or cash equivalents necessary to meet its
obligations on the underlying index futures contract.
FINANCIAL FUTURES AND RELATED OPTIONS. The Fund may purchase and sell
financial futures on U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury
notes, and GNMA mortgage-backed certificates, or sell call options or
purchase put options on such futures, in order to hedge U.S. Government and
other portfolio securities and convertible preferred stocks, whose prices are
or may be sensitive to changing interest rates. Certain convertible preferred
stocks tend to trade more like fixed-income securities than other equity
securities. However, the values of convertible preferred stocks are also
affected by changes in the prices of the securities into which they are
convertible; thus, at times, there may not be a close correlation between
such convertible preferred stocks and financial futures or related options.
The effectiveness of these hedging strategies will depend upon the
correlation between interest rates and changes in the value of the Fund's
securities. In addition, due to temporary price distortions in the market,
even a correct forecast of general interest trends by management may still
not result in an effective use of these instruments as a hedge.
MANAGEMENT OF THE FUND
The officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Directors. The following is a list of
directors and officers of the Fund and their principal occupations during the
past five years. The mailing address of the directors and officers of the
Fund is 700 South Flower Street, Suite 2400, Los Angeles, CA 90017. (*
indicates a director who is an interested person of the Fund, as defined
under the Investment Company Act of 1940.)
MICHAEL F. KOEHN*. Chairman of the Board of Directors.
Member of the Board of Directors, President and Chief Executive Officer of
the Adviser, Trustee of The Analytic Series Fund and President of Analysis
Group, Inc., a consulting firm providing economic and financial consulting
services. He earned a Ph.D. in Finance at the Wharton School, University of
Pennsylvania.
MICHAEL D. BUTLER. Director.
Trustee of The Analytic Series Fund. Professor emeritus of Social Sciences,
former Dean of Undergraduate Studies at the University of California at Irvine
and former member of the Society of Fellows, Harvard University.
ROBERTSON WHITTEMORE. Director.
Trustee of The Analytic Series Fund and Partner, Encore of La Jolla, retail
clothing store. Former real estate broker, attorney, President of La Jolla Town
Council; trustee of Combined Arts and Education Council of San Diego, and
Executive Director of the San Diego Community Foundation. He earned his B.A.
from Yale University, and his J.D. and M.B.A. from University of California at
Berkeley.
HARINDRA DE SILVA. President.
Managing Director of the Adviser and President of The Analytic Series Fund, and
Principal of Analysis Group, Inc. He holds a B.S. from the University of
Manchester at Manchester England, a M.B.A. from Simon School at Rochester New
York and a Ph.D. in Finance from the University of California at Irvine.
CHARLES L. DOBSON. Executive Vice President and Secretary.
Director, Secretary and Portfolio Manager of the Adviser and Executive Vice
President and Secretary of The Analytic Series Fund. He holds a B.A. in
Economics and M.S. in Administration from the University of California, Irvine.
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GREGORY M. MC MURRAN. Treasurer.
Chief Investment Officer of the Adviser and Treasurer of The Analytic Series
Fund. He holds a B.A. in Economics from the University of California, Irvine
and a M.A. Economics from California State University at Fullerton.
MARIE NASTASI ARLT. Senior Vice President.
Chief Operating Officer of the Adviser and Senior Vice President of The Analytic
Series Fund and Vice President of Analytic-TSA Investors, Inc. She holds a B.A.
from California State University, Fullerton. She concurrently serves as
Formerly she served as Managing Director and Executive Vice President of TSA
Capital Management.
ANGELO A. CALVELLO. Senior Vice President.
Director of Business Development of the Adviser and Senior Vice President of The
Analytic Series Fund. He earned a B.A., M.A. and Ph.D in Philosophy from DePaul
University at Chicago, Illinois. Formerly, he served as Executive Vice
President at Credit Agricole Futures and Vice President of The Chicago
Mercantile Exchange.
Officers and directors of the Fund who are affiliates of the Adviser receive no
fee or salary from the Fund. Each director who is not an affiliate of the
Adviser receives an annual fee of $2,000 plus $1,000 per meeting attended and
reimbursement for expenses. For the fiscal year ended December 31, 1996, total
compensation received by the directors who are not affiliates of the Adviser is
as follows:
Total
Pension/ Compensation
Aggregate Retirement From Analytic
Compensation Benefits Estimated Optioned
from Accrued as Annual Equity Fund
Analytic Part of Benefits and The
Optioned Fund from Analytic
Name Equity Fund Expenses Retirement Series Fund
- ----------------- ------------ ----------- ---------- -----------
Michael D. Butler $5,000 None None $10,000
Robertson Whittemore $5,060 None None $10,120
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER: Analytic-TSA Global Asset Management, Inc. (the
"Adviser") is the investment adviser of the Fund pursuant to an Investment
Management Agreement between the Fund and the Adviser, dated August 12, 1993
(the "Management Agreement"). The Management Agreement was last approved by
the Board of Directors, including the unanimous vote of the Fund's Directors
who are not parties to the agreement or "interested persons" of the Fund, on
April 2, 1997, at a meeting called for the purpose of voting on such approval.
The Adviser is a wholly owned subsidiary of United Asset Management
Corporation ("UAMC"). UAMC was organized in 1980 by its President and
principal stockholder, Norton H. Reamer, for the purpose of acquiring firms
engaged in the institutional investment management business.
The officers and directors of the Adviser are:
Roger G. Clarke Chairman of the Board
Michael F. Koehn Member of the Board, President and Chief
Executive Officer
Gregory M. McMurran Chief Investment Officer
Robert Bannon Managing Director
Harindra de Silva Managing Director
Charles L. Dobson Secretary, Director and Portfolio Manager
Marie Nastasi Arlt Chief Operating Officer
Angelo A. Calvello Director - Business Development
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THE INVESTMENT MANAGEMENT AGREEMENT: Pursuant to an Investment
Management Agreement with the Fund, the Adviser, subject to the control and
direction of the Fund's Officers and Board of Directors, manages the Fund in
accordance with its stated investment objective and policies, and makes
investment decisions for the Fund. Pursuant to separate agreements, the
Adviser also acts as the Fund's transfer agent, dividend disbursing agent,
and shareholder relations servicing agent, and provides accounting and daily
pricing services to the Fund. At its expense, the Adviser provides the
office space and all necessary office facilities, equipment, and personnel
for providing these services to the Fund.
As compensation for furnishing investment advisory, management and
other services, and expenses assumed, pursuant to the Investment Management
Agreement, the fund pays the Adviser an annual fee equal to 0.75% of the
first $100,000,000 of the Fund's average daily net assets, 0.65% of the next
$100,000,000 of average daily net assets, and 0.55% of average net assets in
excess of $200,000,000. For the fiscal years ended December 31, 1994, 1995
and 1996, the Fund paid advisory fees of $497,600, $346,095, and $363,576,
respectively, pursuant to the current Investment Management Agreement and the
former Investment Advisory Agreement.
The Adviser has agreed that if in any fiscal year the expenses borne by
the Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of such Fund are registered or
qualified for sale to the public, it will reimburse the Fund for any excess
to the extent required by such regulations. Unless otherwise required by law
such reimbursement would be accrued and paid on the same basis that the
advisory fees are accrued and paid by the Fund. To the Fund's knowledge, the
only state expense limitation in effect on the date of this Statement of
Additional information is that of California, which requires the Adviser to
reimburse the Fund for advisory fees to the extent that certain expenses
exceed 2-1/2% of average annual net assets up to $30,000,000, 2% of the next
$70 million of average net assets, and 1-1/2% of average net assets in excess
of $100,000,000.
Under the Management Agreement, any liability of the Adviser to the Fund
and its shareholders is limited to situations involving its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
and obligations under the Management Agreement.
The Management Agreement continues from year to year so long as it is
approved annually by a majority of the Board of Directors or of the
outstanding voting securities of the Fund, and by a majority of the Directors
who are not "interested persons" of any party to the Agreement (as defined in
the Investment Company Act of 1940).
The Management Agreement may not be assigned by the Adviser and will
terminate automatically upon assignment. It may be terminated without
penalty upon 60-days' written notice by either party or by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act). The Management Agreement may be amended by a vote of a majority of the
Directors of the Fund, including a majority of the disinterested directors,
cast in person at a meeting called for that purpose, subject to approval by
the vote of a majority of the Fund's outstanding voting securities. "A
majority of the Fund's outstanding voting securities" as used herein, is
defined in the first paragraph of "Investment Restrictions and Other
Investment Policies."
Personnel of the Adviser may invest in securities for their own accounts
pursuant to a Code of Ethics that sets forth all employees' fiduciary
responsibilities regarding the Fund, established procedures for personal
investing, and restricts certain transactions. For example, the Code
restricts the timing of personal investing in relation to trades by the Fund,
prohibits participating by employees in initial public offerings, and
requires approval of private placement purchases and service on boards of
directors of publicly held companies.
ACCOUNTING AND TRANSFER AGENCY AGREEMENTS: Pursuant to a Fund
Accounting Agreement with the Fund, the Adviser maintains certain books and
records for the Fund, provides pricing information
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with respect to portfolio investments, calculates daily net asset value per
share for the Fund, and performs certain other accounting services. As
compensation for such services, the Adviser receives an annual fee equal to
0.05% of the Fund's average daily net assets, plus reimbursement of
reasonable out-of-pocket expenses.
Pursuant to a Transfer Agency Agreement with the Fund, the Adviser
provides transfer agency services for the Fund, including processing of
purchase and redemption orders and confirmations, maintenance of shareholder
account information, and preparation and filing of reports to the Internal
Revenue Service, Securities and Exchange Commission and state securities
authorities. As compensation for such services, the Adviser receives an
annual base fee equal to 0.16% of the Fund's average daily net assets up to
$100 million, 0.14% of average daily net assets in excess of $100 million up
to $200 million, and 0.12% of average daily net assets in excess of $200
million. The Adviser also receives a fee of $1.50 per shareholder account
per month, plus reimbursement of reasonable out-of-pocket expenses.
Each such Agreement is terminable by either party upon 60 days notice.
Under each such Agreement, any liability of the Adviser to the Fund and its
shareholders is limited to situations involving its own willful misfeasance,
bad faith, gross negligence or reckless disregard of its duties and
obligations under the Agreement.
BROKERAGE
Under the terms of the Advisory Agreement, the Adviser is authorized to
employ brokers and dealers to execute orders for the purchase and sale of the
Fund's portfolio securities, including the writing of option contracts, who,
in its best judgment , can provide "best execution" (prompt and reliable
execution at a reasonable competitive price). During the fiscal the years
ended December 31, 1994, 1995, and 1996, aggregate commissions paid by the
Fund amounted to $251,936, $159,118 and $149,614, respectively. During the
fiscal year ended December 31, 1996, none of the Fund's commissions were
allocated to brokers who also provided research services to the Adviser.
In determining the abilities of the broker-dealer to provide best
execution of a particular portfolio transaction, the Adviser considers all
relevant factors including the execution capabilities required by the
transaction or transactions; the ability and willingness of the broker-dealer
to facilitate each transaction by participation therein for its own account;
the importance to the Fund of speed, efficiency, or confidentiality; the
broker-dealer's apparent familiarity with sources from or to whom particular
securities might be purchased or sold; and the quality and continuity of
service rendered by the broker-dealer with regard to the Fund's other
transactions; and any other factors relevant to the selection of a
broker-dealer for particular and related portfolio transactions of the Fund.
Subject to the foregoing obligation to seek best execution, the Adviser may
consider as factors in the allocation of portfolio transactions to a
broker-dealer the broker-dealer's sale of Fund shares, agreement to pay
operating expenses of the Fund, or the provision of research services to the
Adviser. Research services furnished by brokers through which the Fund
affects portfolio transactions may be used by the adviser in servicing all of
its accounts. Similarly, research services furnished by brokers through which
the adviser's other accounts affect portfolio transactions may be used in
servicing the Fund.
If the Fund effects a closing purchase transaction with respect to an
option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option, except where the Fund
utilizes a clearing agent with respect to certain put and call options.
Likewise, if an option written by the Fund is exercised, normally the sale or
purchase of the underlying securities will be executed by the same
broker-dealer or clearing agent who executed the sale of the option. During
the year ended December 31, 1996, such clearing agents received commissions
of $9,579.
The Fund may purchase or sell listed securities in the over-the-counter
market ("the third market"). Where transactions are executed in the third
market, the Fund generally will deal with the
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<PAGE>
primary market makers; however, if it is to the advantage of the Fund, the
services of other brokers may be utilized.
The Adviser currently manages separate accounts and other mutual funds
aggregating in excess of $1,000,000,000 which employ investment strategies
similar to those used by the Fund. At times, investment decisions may be made
to purchase or sell the same investment security for the Fund and one or more
of the other clients advised by the Adviser. When two or more of such clients
are simultaneously engaged in the purchase or sale of the same security or
option, the transactions will be allocated as to amount and price in a manner
considered equitable to each and so that each receives, to the extent
practicable, the average price or premium for such transaction. There may be
circumstances in which such simultaneous transactions would be
disadvantageous to the Fund with respect to price and availability of
securities. In other cases, however, it is believed that transactions would
be advantageous to the Fund.
TAX INFORMATION AND OPTION ACCOUNTING PRINCIPLES
As of the date of this Prospectus, the Fund is qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended, and the Fund intends to continue to qualify under said Subchapter
M. As a result of such qualification the Fund will not be subject to Federal
income taxes to the extent that it distributes not less than 98% of its
investment company taxable income and its capital gains net income.
Investment company taxable income includes net income from dividends,
interest and net short-term capital gain. Premiums from expired options
written by the Fund and net gains, if any, from closing purchase transactions
are treated as short-term capital gains for Federal income tax purposes. In
order to qualify under Subchapter M, the Fund, among other things must derive
less than 30% of its gross income from the sale or other disposition of
securities held less than three months; as a result the Fund may be
restricted in the writing of options which expire in less than three months
or in effecting closing purchase transactions in options written less than
three months before such transaction.
When the Fund writes an option, an amount equal to the premium received
is recorded by the Fund as an asset and an equivalent liability. The
liability is thereafter valued to reflect the current value of the option
which is either the last sale price, or, in the absence of a sale, the mean
between the last current bid and asking price. If the option is not exercised
and expires, or if the Fund effects a closing purchase transaction, the Fund
will realize a gain (or a loss in the case of a closing purchase transaction
where the cost exceeds the original premium received) and the liability
related to the option will be extinguished. Any such gain or loss is a
short-term capital gain or loss for Federal income tax purposes, except that
a short-term loss realized when the Fund closes certain in-the-money covered
call options involving portfolio equity securities will be converted to a
long-term capital loss if the hypothetical sale of the underlying security on
the date of such transaction would have given rise to a long-term capital
gain. If a call option which the Fund has written on any equity security is
exercised, the Fund realizes a capital gain or loss (long-term or short-term,
depending on the holding period of the underlying security) from the sale of
the underlying security and the proceeds from such sale are increased by the
premium originally received. If a put option which the Fund has written on an
equity security is exercised, the amount of the premium originally received
will reduce the cost of the security which the Fund purchases upon exercise
of the option.
In the case of put and call options on nonequity securities, the
principle of marking-to-market carries over to the Federal income tax
treatment of such options in that an option is treated as having been closed
on the last day of the Fund's taxable year, giving rise to a capital gain or
loss. Nonequity options include broad-based stock index options, debt
options, commodity options and currency options. Sixty percent of any net
gain or loss recognized on such deemed closings, as well as 60% of the gain
or loss with respect to such options on any actual closing transactions or
exercises will be treated as long-term
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<PAGE>
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. Also, 60% of the gain on the expiration of any such option on
its stipulated expiration date will be treated as long-term capital gain, and
the balance as short-term capital gain. However, if a put or call option the
Fund has written or holds relating to a nonequity security is part of a
"mixed straddle," as defined by the Internal Revenue Code (the "Code") (see
discussion of straddles below), the Fund may be able to make an election
under which these provisions will be inapplicable in whole or in part to such
option, and the rules applicable to options on equity securities described
above will apply. In any event, the provisions of Code Section 1092 described
below in Special Tax Rules Applicable to Straddles will be applicable to such
straddles.
THE PURCHASE OF CALLS AND PUTS ON DEBT AND EQUITY SECURITIES - IN
GENERAL -the premium paid by the Fund for the purchase of a call or put
option is included in the asset section of the Fund's "Statement of Assets
and Liabilities" as an investment and subsequently adjusted to the current
market value of the option. For example, if the current market value of the
option exceeds the premium paid, the excess would be unrealized appreciation.
The current market value of a purchased option is the last sale price on the
principal Exchange on which such option is traded or, in the absence of a
sale, the mean between the last bid and offering prices.
If the option on an equity security which the Fund has purchased expires
on the stipulated expiration date, the Fund realizes a short-term or
long-term loss for tax purposes in the amount of the cost of the option. If
the Fund enters into a closing sale transaction with respect to such an
option, it realizes a capital gain or loss, depending on whether the sales
proceeds from the closing sale transaction are greater or less than the cost
of the option. The gain or loss will be short-term or long-term, depending on
the Fund's holding period in the option. If the Fund exercises a put option
on an equity security, it will realize a gain or loss (long-term or
short-term, depending on the period for which the Fund has held the
underlying security prior to the time it purchased the put) from the sale of
the underlying security and the proceeds from such sale will be decreased by
the premium originally paid. However, since the purchase of a put option is
treated as a short sale for Federal income tax purposes, the holding period
of a hedged underlying security held for not more than one year will be
terminated by such a purchase and will start again only when the Fund enters
into a closing sale transaction with respect to such option or it expires. If
the Fund exercises a call option on an equity security, the premium paid for
the option will be added to the cost of the security purchased.
SPECIAL TAX RULES APPLICABLE TO "STRADDLES" - Section 1092 of the Code
may affect the taxation of options on debt or equity securities. Section 1092
defines a "straddle" as offsetting positions with respect to personal
property. A position in personal property is generally defined as any
interest, including an option, in personal property. A position in personal
property includes a debt security and certain options written thereon and
also includes a stock position and "deep-in-the-money" options (as defined in
the Code) written thereon.
Section 1092 generally provides that in the case of a straddle, any loss
from the disposition of a position in the straddle can only be deducted to
the extent that the loss exceeds the unrealized gains on all offsetting
straddle positions. For example, if the Fund owns a stock and has purchased a
put option with respect to such stock, any loss realized from a closing sale
transaction with respect to the option can only be recognized to the extent
that such loss exceeds any unrealized gain on the underlying stock. Section
1092 also provides that "wash sale" rules are applicable to transactions
where a position is sold at a loss and a new offsetting position is acquired
within a prescribed period and that "short sale" rules are applicable to
offsetting positions. These rules are applicable to the Fund's debt option
positions, "deep-in-the-money" stock option positions, options on convertible
securities and certain of the Fund's hedging transactions in options, stock
index options, stock index and financial futures contracts and related
options described under "Hedging Transactions in Options, Futures and Related
Options". In addition, Section 1092 will suspend or terminate the Fund
holding period in certain stocks with respect to which the Fund writes or
acquires options, including non-"deep-in-the-money" options which are
"qualified covered call options" and stock index options and subject stocks
to restrictions comparable to the "wash sale rules" of Code Section 1091.
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Moreover, a Portfolio will not be able to deduct currently part of the
interest and other expenses which are attributable to positions that are
governed by the straddle rules of Section 1092 of the Code. Losses which the
Fund realizes on certain transactions involving certain in-the-money covered
call options may be converted from short-term to long-term capital loss.
Management will manage the Fund to take into account Section 1092 and such
Regulations.
FUTURES CONTRACTS - Accounting for futures contracts will be in
accordance with generally accepted accounting principles. The amount of any
realized gain or loss on closing out of futures contracts will result in a
realized capital gain or loss for tax purposes. Futures contracts held by the
Fund at the end of each fiscal year will be required to be "marked-to-market"
for Federal income tax purposes. Sixty percent of any net gain or loss
recognized on such deemed sales or on any actual sales will be treated as
long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss. However, if a futures contract is part of
"mixed straddle," as defined by the Code, the Fund may be able to make an
election under which these provisions will be inapplicable in whole or in
part to such futures contracts,. In any event, the provisions of Section 1092
described above will be applicable to such straddles.
OPTIONS ON CERTAIN STOCK INDEXES AND ON FUTURES CONTRACTS - accounting
for options on futures contracts and on certain stock indexes will be in
accordance with generally accepted accounting principles. The amount of any
realized gain or loss on closing out such a position will result in a
realized capital gain or loss for tax purposes. Such options held by the Fund
at the end of each fiscal year will be required to be "marked-to-market" for
Federal income tax purposes. Sixty percent of any net gain or loss recognized
on such deemed sales or on any actual sales will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. However, if the option is part of a "mixed straddle," as
defined by the Code, the Trust may be able to make an election under which
these provisions will be inapplicable in whole or in part to such option. In
any event, the provisions of Section 1092 described above will be applicable
to such straddles. The above rules apply to options on stock indexes if there
is in effect a designation by the Commodities Futures Trading Commission (the
"CFTC") of a contract market based on such stock index or the Treasury
Department determines that such options meet the requirements of law for such
a designation. Options on "broad-based" stock indexes have generally been so
designated. Options on stock indexes for which the CFTC has not designated a
contract market and which the Treasury Department has not determined meet the
requirements of law for such designation, generally including options on
"narrow-based" stock indexes, will receive Federal income tax treatment
similar to that of stock options.
CALCULATION OF PERFORMANCE DATA AND OTHER
PERFORMANCE COMPARISONS AND STATISTICS
From time to time the Fund may report its "total return" in
prospectuses, the Fund's annual reports, shareholder communications, and
advertising.
Total return for a performance period is calculated by assuming a
hypothetical initial investment ("p") in the Fund at the beginning of the
period. Then, assuming reinvestment of all distributions into new Fund
shares, a redeemable value at the end of the performance period ("ERV") is
calculated based on actual Fund performance. The percentage change between
the ending value and initial investment is the "cumulative total return". The
"average annual total compound return" (growth rate) expresses the total
return as an annual rate, which, if compounded annually over the period ("n"
is the number of years), would increase or decrease the initial investment to
the ending value. (Formula for calculating average annual total compound
return: (ERV/p)1/n -1)). See the "Glossary" in the Prospectus for further
discussion and examples of total return and fluctuations in total return.
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For example, the Fund's total return for various periods has been as follows:
1 year 5 years 10 years
1/1/96 - 1/1/92 - 1/1/87 -
12/31/96 12/31/96 12/31/96
-------- -------- --------
Cumulative Total Return 15.69% 63.27% 166.56%
Average Annual Compound Total Return 15.69% 10.30% 10.30%
VOLATILITY. Occasionally statistics may be used to specify the Fund's
volatility or risk. Measures of volatility or risk are generally used to
compare the Fund's net asset value or performance relative to a market index.
One measure of volatility is beta. Beta is the volatility of the Fund
relative to the total market as represented by the Standard & Poor's 500
Stock Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the
market. Sometimes beta may be calculated relative to a different market
index. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or total
return around an average, over a specified period of time. The premise is
that greater volatility connotes greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS. One measure of performance that adjusts
for risk is alpha. Alpha is a measure of the difference between the Fund's
performance and a market index portfolio with the same beta.
For example, suppose the Fund's beta is approximately 0.5 over a
historical period. Then, a similar risk market index portfolio can be
constructed with a beta of 0.5 by creating an index with a weight of 50% in
the S & P 500 Index and 50% in U.S. Treasury Bills. The Fund's return is
then compared to the return of the market index.
Sales literature referring to the use of the Fund as a potential
investment for Individual Retirement Accounts (IRAs), Business Retirement
Plans, and other tax-advantaged retirement plans may quote a total return
based upon compounding of dividends on which is it presumed no federal income
tax applies.
Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to
shareholders only for the limited historical period used.
COMPARISONS. To help investors better evaluate how an investment in the
Fund might satisfy their investment objective, advertisements and other
materials regarding the Fund may discuss various measures of the Fund's
performance as reported by various financial publications. Materials may
also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. The following publications,
indices, and averages, among others, may be used:
a) The Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow
Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks. Comparisons of performance
assume reinvestment of dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities stocks, and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
c) The 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.
d) Wilshire 5000 Equity Index - represents the return on the market
value of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
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<PAGE>
e) Mixtures of indexes and U.S. Treasury Bills which approximate the
historical risk level of the Fund. In particular: mixtures of the S & P 500
Stock Index and U.S. Treasury Bills such as the 50%/50% mixture discussed
under "Other Performance Quotations."
f) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income
Fund Performance Analysis - measure total return and average current yield
for the mutual fund industry, and rank individual mutual fund performance
over specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
g) 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.
h) Financial publications: The Wall Street Journal and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
i) 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.
j) 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, Treasury bills, and
inflation.
k) Savings and Loan Historical Interest Rates - as published in the
U.S. Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First
Boston Corporation, The J.P. Morgan companies, Salomon Brothers, Merrill
Lynch, Lehman Brothers, Smith Barney Shearson and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the
prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and five financial institutions. The S & P 100
Stock Index is a smaller more flexible index for options trading.
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 Fund, that the averages are generally
unmanaged. In addition there can be no assurance that the Fund will continue
this performance as compared to such other averages.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table shows as of March 31, 1997, the beneficial ownership
of shares of the Fund's common stock by all officers and directors of the
Fund as a group and the record ownership of shares by each person known to
the Fund to be a record owner of more than 5% of its issued and outstanding
common stock (3,428,428 shares). Except for the shares held by officers and
directors, the Fund has no information regarding beneficial ownership of such
shares.
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS
- ---------------- ---------------- -------------------
Public School Retirement System of 407,008 11.87%
St. Louis
One Mercantile Center, Room 2607
St. Louis, MO 53101
Charles Schwab & Co., Inc. 262,383 7.65%
101 Montgomery Street
San Francisco, CA 94104
Wendell & Co. 254,488 7.42%
c/o Bank of New York
P.O. Box 1066, Wall Street Station
New York, NY 10286
All Officers and Directors of the 75,250 2.19%
Fund as a group
PRICING AND REDEMPTION OF FUND SHARES
The Fund's net asset value per share is calculated by taking the total
value of the Fund's assets, deducting total liabilities and dividing the
result by the number of shares outstanding. Portfolio securities which are
traded on a national securities exchange are valued at the last sale price or
if there is no recent sale, at the mean between the last current bid and
asked prices. All other securities not so traded are valued at the mean
between the last current bid and asked prices if market quotations are
available. Other securities and assets are valued at fair value in accordance
with methods determined in good faith by the Fund's Board of Directors.
The Fund may suspend the right of redemption or delay payment more than
three (3) business days: (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings); (b)
when trading on the New York Stock Exchange is restricted; (c) when an
emergency exists as determined by the Securities and Exchange Commission so
that disposal of the Fund's investments or determination of its net asset
value is not reasonably practicable; or (d) for such other periods as the
Securities and Exchange Commission by order may permit for protection of the
Fund's shareholders. The amount received by a shareholder upon redemption may
be more or less than he paid for his shares depending on the market value of
the Fund's portfolio securities at the time.
Shares of the Fund may be transferred upon delivery to the Fund of (1) a
letter of instructions, signed by each registered owner exactly as the shares
are registered, which clearly identifies the exact names in which the account
is presently registered, the account number, the number of shares to be
transferred, and the names, addresses and social security or tax
identification number of the account to which the shares are to be
transferred, (2) stock certificates, if any, which are the subject of the
transfer, and (3) an instrument of assignment ("stock power"), which should
specify the total number of shares to be transferred and on which the
signature(s) of the registered owner(s) have been guaranteed by a commercial
bank or trust company which is a member of the Federal Deposit Insurance
Corporation, or by a member firm of a national securities exchange.
Additional documents are required for transfers by corporations, executors,
administrators, trustees and guardians; if a shareholder is in doubt as to
what
B - 16
<PAGE>
documents are required, he should contact the Fund. The Fund is not bound to
record any transfer of the stock transfer books until the Fund has received
all required documents.
CUSTODIAN
The Fund's custodian is The Union Bank of California N.A., Mutual Fund
Services, 475 Sansome Street, 11th Floor, San Francisco, California 94111.
Pursuant to the terms of the Custodian Agreement the Fund will forward to the
Custodian the proceeds of each purchase of Fund shares. The Custodian will
hold such proceeds and make disbursements therefrom in accordance with the
terms of the Custodian Agreement. It will retain possession of the securities
purchased with such proceeds and maintain appropriate records with respect to
receipt and disbursements of money, receipt and release of securities, and
all other transactions of the Custodian with respect to the securities and
other assets of the Fund.
TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT
The Fund's Transfer, Dividend Disbursing and Shareholder Service Agent
is Analytic-TSA Global Asset Management, Inc. (see "Investment Advisory and
Other Services").
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 1000 Wilshire Boulevard, Los Angeles, CA
90017-2472 serves as independent auditors to the Fund. The services provided
by the firm include the audit of the financial statements of the Fund
included in the Statement of Additional Information and services related to
other filings made with the Securities and Exchange Commission.
LEGAL COUNSEL
The Fund's legal counsel is Paul, Hastings, Janofsky & Walker LLP, 555
South Flower Street, Los Angeles, California 90071.
FINANCIAL STATEMENTS
The financial statements in the Fund's 1996 Annual Report to Shareholders are
incorporated in this Statement of Additional Information by reference. Such
financial statements have been audited by the Fund's independent auditors,
Deloitte & Touche LLP, whose report thereon also appears in such Annual
Report and is incorporated herein by reference. Such financial statements
have been incorporated hereby in reliance upon such reports given upon their
authority as experts in accounting and auditing. Copies of the Fund's 1996
Annual Report to Shareholders may be obtained at no charge by writing or
telephoning the Fund at the address or number on the front page of this
Statement of Additional Information.
B-17
<PAGE>
PART C
OTHER INFORMATION
Item 24: FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
(1) The following information is included in Part A - Prospectus:
Financial Highlights
(2) The following information is included in Part B - Statement of
Additional Information:
Registrant's Statement of Assets and Liabilities including
Schedules of Portfolio Investments, Statement of Changes in
Net Assets, Statement of Operations, related notes, and
Independent Auditors' Report, are included as part of
Registrant's Annual Report to Shareholders for the period
ended December 31, 1996, are incorporated by reference in
Part B.
(b) Exhibits
1 Articles of Incorporation, as amended -- filed as Exhibit 1 to
Registrant's Form N-1A Registration Statement on April 26,
1990 and incorporated herein by reference.
2 Bylaws, as amended -- filed as Exhibit 2 to Registrant's Form
N-1A Registration Statement on April 26, 1990 and incorporated
herein by reference.
3 None.
4 Specimen of share certificate of Registrant -- filed as
Exhibit 4 to Registrant's Form N-1A Registration Statement on
April 26, 1990 and incorporated herein by reference.
5 Investment Advisory Agreement dated August 12, 1993 between
Registrant and Analytic Investment Management, Inc. -- filed
as Exhibit 5 to Post Effective Amendment No. 21 to
Registrant's Form N-1A Registration Statement on June 10,
1993 and incorporated herein by reference.
6 None
7 None.
8 Custodian Agreement between Registrant and The Bank of
California, National Association -- filed as Exhibit 9 to
Registrant's Form N-1A Registration Statement on April 26,
1990 and incorporated herein by reference.
9.1 Fund Accounting Agreement dated August 12, 1993 between
Registrant and Analytic Investment Management, Inc. -- filed
as Exhibit 9.1 to Post Effective Amendment No. 21 to
Registrant's Form N-1A Registration Statement on June 10, 1993
and incorporated herein by reference.
9.2 Transfer Agency Agreement dated August 12, 1993 between
Registrant and Analytic Investment Management, Inc. -- filed
as Exhibit 9.2 to Post Effective Amendment No. 21 to
Registrant's Form N-1A Registration Statement on June 10, 1993
and incorporated herein by reference.
10 Opinion and Consent of Counsel - included as part of
Registrant's Form 24f-2 Notice filed February 27, 1997 and
incorporated herein by reference.
11 Consent of Deloitte & Touche LLP.
12 None.
13 None.
14 Analytic Individual Retirement Account and Disclosure
Statement -- filed as Exhibit 14 to Post Effective Amendment
No. 17 to the Registrant's Form N-1A Registration Statement on
April 26, 1990 and incorporated herein by reference.
15 None.
C-1
<PAGE>
16 Schedule of Computation of Performance Quotations in
Registration Statement -- filed as Exhibit 16 to Post
Effective Amendment No. 22 to the Registrant's Form N-1A
Registration Statement on April 29, 1994 and incorporated
herein by reference.
17 None
18 None
19 Financial Statements -- filed pursuant to Rule 303 of Reg S-T.
27 Financial Data Schedule.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
By reason of its common Board of Trustees and investment adviser, The
Analytic Series Fund, a Delaware business trust which is registered as a
diversified, open-end management investment company under the 1940 Act, may be
deemed to be under common control with the Registrant.
Item 26: NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD HOLDERS AS OF
TITLE OF CLASS MARCH 31, 1997
-------------- ------------------------------
Common Stock, No Par Value 1,478
Item 27: INDEMNIFICATION
Article V of Registrant's Articles of Incorporation and Article VI of
Registrant's Bylaws provide for indemnification of Registrant's officers and
directors.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of Registrant pursuant to the foregoing provisions or otherwise, Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is therefore unforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the two years ended December 31, 1996, Analytic-TSA Global Asset
Management, Inc. has engaged only in the business of acting as investment
adviser to fiduciaries and other long-term investors. It also acts as adviser
to The Analytic Series Fund, an open-end, diversified registered investment
company. During such period, the other substantial business, professions,
vocations or employments of the directors and officers of Analytic-TSA Global
Asset Management, Inc have been as follows:
C-2
<PAGE>
NAME OFFICE OTHER EMPLOYMENT
- ---- ------ ----------------
Roger G. Clarke Chairman of the President of Analytic-TSA
Board of Directors Investors (wholly owned
subsidiary of Adviser) and
Director of Investment
Securities of the Church of
Jesus Christ of Latter Day
Saints, since January 1996.
Formerly, Managing Director,
President, Chief Executive
Officer and Chief Investment
Officer of TSA Capital
Management.
Michael F. Koehn Member of the Co-founder and President of
Board of Analysis Group, Inc.;
Directors, Director of Analytic Optioned
President and Equity Fund; Trustee of The
Chief Executive Analytic Series Fund.
Officer
Gregory M. McMurran Chief Investment Treasurer of Analytic
Officer Optioned Equity Fund and The
Analytic Series Fund.
Harindra de Silva Managing Director President of Analytic
Optioned Equity Fund and The
Analytic Series Fund.
President of AG Risk
Management and Principal of
Analysis Group
Robert J. Bannon Managing Director Portfolio Manager of
Analytic-TSA Investors
(wholly owned subsidiary of
Adviser) since March, 1996.
Formerly, Senior Vice
President and Senior
Investment Strategist of
TSA Capital Management
(4/95 to 1/96); Senior Bond
Strategist of I.D.E.A. (5/92
to 4/95)
Charles L. Dobson Secretary, Executive Vice President and
Director and Secretary of Analytic
Portfolio Manager Optioned Equity Fund and The
Analytic Series Fund.
Marie Nastasi Arlt Chief Operating Secretary, Treasurer,
Officer Principal and Vice President
of Analytic-TSA Investors
(wholly owned subsidiary of
Adviser) since January, 1996.
Executive Vice President,
Managing Director,
Principal, Treasurer and
Secretary of TSA Capital
Management.
Angelo A. Calvello Director -- Senior Vice President of
Business Development Analytic Optioned Equity Fund
and The Analytic Series Fund.
The business address of such persons is 700 South Flower Street, Suite 2400, Los
Angeles, CA 90017.
C-3
<PAGE>
Item 29. Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained at the offices of the Registrant and its
investment adviser, 700 South Flower Street, Suite 2400, Los Angeles, CA
90017.
Item 31. Not applicable.
Item 32. UNDERTAKINGS
The Fund hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
amendment to Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Irvine, and State of
California, on the 29th day of April, 1997.
ANALYTIC OPTIONED EQUITY FUND, INC.
(Registrant)
By /s/ MICHAEL F. KOEHN
------------------------------
Michael F. Koehn, Chairman
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ HARINDRA DE SILVA
- --------------------------
Harindra de Silva President April 29, 1997
/s/ GREGORY M. MCMURRAN
- --------------------------
Gregory M. McMurran Treasurer (Chief Financial Officer) April 29, 1997
/s/ MICHAEL F. KOEHN
- --------------------------
Michael F. Koehn Chairman of the Board of Directors April 29, 1997
/s/ MICHAEL D. BUTLER
- --------------------------
Michael D. Butler* Director April 29, 1997
/s/ ROBERTSON WHITTEMORE
- --------------------------
Robertson Whittemore* Director April 29, 1997
/s/ DEBORAH SHEFLIN
- --------------------------
*By Deborah Sheflin April 29, 1997
Attorney-in-fact
C-5
<PAGE>
EXHIBIT INDEX
EXHIBIT No. EXHIBIT DESCRIPTION PAGE
11 Consent of Deloitte & Touche LLP C-7
19 Financial Statements C-14
27 Financial Data Schedule C-8
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to (a) the use in this Post-Effective No. 25 to Registration
Statement No. 2-60792 on Form N-1A of our report dated February 10, 1997 on
the statement of assets and liabilities of The Analytic Optioned Equity Fund,
Inc., including the schedule of investments, as of December 31, 1996, and
the related statements of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended appearing in Part B, the Statement of Additional Information of such
Registration Statement, (b) the reference to us under the heading "Financial
Highlights" in the Prospectus, which are a part of such Registration
Statement, and (c) the reference to us under the headings "Independent
Auditors" and "Financial Statements" in the Statement of Additional
Information of such Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 29, 1997
<PAGE>
<TABLE>
<S> <C>
OFFICERS AND DIRECTORS
CHAIRMAN OF THE
BOARD OF DIRECTORS.... Michael F. Koehn
DIRECTOR.............. Michael D. Butler
DIRECTOR.............. Robertson Whittemore
PRESIDENT............. Alan L. Lewis
EXECUTIVE VICE
PRESIDENT AND
SECRETARY............. Charles L. Dobson
TREASURER............. Harindra de Silva
SENIOR VICE
PRESIDENT............. Deborah D. Boedicker
SENIOR VICE
PRESIDENT............. Marie Nastasi Arlt
VICE PRESIDENT........ Deborah C. Sheflin
</TABLE>
INVESTMENT ADVISOR
Analytic-TSA Global Asset Managment, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
TRANSFER AGENT, DIVIDEND DISBURSEMENT AGENT,
AND SHAREHOLDER RELATIONS SERVICING AGENT
Analytic-TSA Global Asset Managment, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
CUSTODIAN
The Union Bank of California, N.A.
Mutual Fund Services
475 Sansome Street, 11th Floor
San Francisco, CA 94111
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90071
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
1000 Wilshire Blvd.
Los Angeles, CA 90017
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
Phone: (800) 374-2633
FAX: (213) 688-8856
[LOGO]
THE DEFENSIVE
EQUITY PORTFOLIO
OF
ANALYTIC OPTIONED EQUITY FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1996
MEMBER OF
100% NO-LOAD-TM-
MUTUAL FUND COUNCIL
C-14
<PAGE>
MEMBER OF
THE DEFENSIVE EQUITY PORTFOLIO 100% NO-LOAD-TM-
OF ANALYTIC OPTIONED EQUITY FUND, INC. MUTUAL FUND COUNCIL
- ----------------------
January 31, 1997
Dear Fellow Shareholders:
For the quarter ended December 31, 1996, your Fund's net asset value
increased 4.5% per share, while the S&P 500 increased 8.4%, both with dividends
reinvested. At quarter end, the Fund's share price was $14.38 and its dividend
was $0.06 per share, which was the 74th consecutive quarterly dividend paid by
the Fund. The Fund also declared and paid on December 31, 1996 a long-term
capital gain distribution of $0.74 per share.
The Fund's net total return (dividends plus appreciation) was 632.2%, after
all expenses including management fees, over the 18 1/2 years since inception on
July 1, 1978. Over the most recent 10 years, the net total return was 166.6%.
This 10 year return is equivalent to an annualized compound growth rate of
10.3%, well ahead of the 3.6% average annual rate of inflation (consumer price
index) over this period. Although the S&P 500 was also well ahead of inflation
(15.3%), the Fund's return was achieved with 43% less risk (volatility) as
measured by standard deviation.
The Fund's allocation at quarter end was 94% in large capitalization stocks,
and 6% in mid-capitalization stocks. Large capitalization is defined as
companies with over $5 billion total market value and mid-capitalization as
companies between $200 million and $5 billion total market value. The Fund
currently has less than 1% of its portfolio in small capitalization (under $200
million) issues.
For investors considering equity exposure with a lower level of risk than
the broad market, the Defensive Equity Portfolio of the Analytic Optioned Equity
Fund is an excellent alternative.
The Fund remains committed to its proven strategy of remaining virtually
fully invested in a well diversified portfolio of hedged, higher quality stocks.
The portfolio is well positioned to protect against market declines and to gain
substantially from market advances.
Should you have any questions regarding your Fund's investment strategy or
results, please do not hesitate to call us at 1-800-374-2633.
WE APPRECIATE YOUR BUSINESS AND THANK YOU FOR INVESTING WITH US.
[SIGNATURE] [SIGNATURE]
Alan L. Lewis Charles L. Dobson
President Executive Vice President & Portfolio
Manager
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
AVERAGE ANNUAL COMPOUND TOTAL RETURN
(GROWTH RATE)(1), PERIODS ENDED 12/31/96, PERCENT
<TABLE>
<S> <C>
One Year 15.7%
Five Years 10.3%
Ten Years 10.3%
</TABLE>
(1) The investment returns quoted in this letter represent past returns, net of
all fees and expenses. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
700 South Flower Street, Suite 2400, Los Angeles, California 90017 - Tel: (800)
374-2633 - Fax: (213) 688-8856
C-15
<PAGE>
INVESTMENT RESULTS
For calendar year 1996 your Fund appreciated 15.7% while the S&P 500
appreciated 22.9%. Your Fund's return is net of all fees and expenses. Normally
when the S&P 500 exceeds 20% we expect to capture at best two-thirds of that
appreciation. Calendar year 1996 was somewhat better as we captured 68% of the
appreciation. This somewhat higher return can be attributed in part to our
weighting (94% of the portfolio) in the large capitalization issues during the
year. Another factor was the relative stability of monthly returns. Only
September and November showed S&P 500 gains over 5%. In fact these two months
accounted for over 57% of the market return in 1996.
Relatively stable markets allow us to capture some stock appreciation and a
large part of the premium or money we received from selling options on stock we
have in the portfolio. When the stock market appreciates rapidly the gain on
stocks is limited by the options we sold. The Fund may also have to repurchase
the options we sold at a loss.
Although selling options limits our gain in rapidly rising markets such as
1995 and 1996, they do reduce losses in declining markets. For example when the
S&P 500 declined in July and December of 1996 by 4.4% and 1.98% respectively,
your Fund declined 2.6% and .7%.
Despite the rise in the market over the past ten years, your Fund remains
committed to its conservative investment philosophy. From inception your Fund's
returns have been relatively predictable, given the market returns. This makes
the Fund an integral part of ones overall asset allocation.
SHAREHOLDER SERVICES (800) 374-2633
COMPLETE INVESTMENT RECORD FROM INCEPTION 7/1/78 TO 12/31/96
(PERCENTAGE)
<TABLE>
<CAPTION>
THE DEFENSIVE
EQUITY PORTFOLIO
OF ANALYTIC OPTIONED
EQUITY FUND S&P 500 INDEX CPI (INFLATION)
--------------------- --------------- ---------------
<S> <C> <C> <C>
Cumulative Total Return............ 632.23 1,485.7 141.5
Average Annual Compound Total
Return........................... 11.4 16.1 4.9
Standard Deviation (Risk Level).... 9.0 14.5 1.1
Beta............................... 0.6 1.0 N/A
</TABLE>
C-16
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
TOTAL RETURN
Growth of $10,000 Investment 1/1/87 - 12/31/96
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AOEF S&P 500 CPI
<S> <C> <C> <C>
12/86 10 10 10
3/87 10.9197 12.1327 10.145
6/87 11.2989 12.7561 10.2718
9/87 11.7492 13.601 10.4017
12/87 10.4276 10.5231 10.441
3/88 10.9407 11.1412 10.5405
6/88 11.4975 11.8759 10.6762
9/88 11.7033 11.9218 10.839
12/88 12.0546 12.2919 10.9024
3/89 12.5644 13.1558 11.0652
6/89 13.1608 14.313 11.2281
9/89 14.0278 15.8374 11.3095
12/89 14.1925 16.1628 11.409
3/90 14.1379 15.6744 11.6443
6/90 14.4462 16.6603 11.7529
9/90 13.3794 14.3641 12.0062
12/90 14.4112 15.65 12.1057
3/91 15.3904 17.9285 12.2143
6/91 15.4026 17.8914 12.3048
9/91 15.9676 18.8545 12.4133
12/91 16.3266 20.431 12.4767
3/92 16.393 19.9096 12.6033
6/92 16.6872 20.3009 12.6848
9/92 16.8887 20.9304 12.7843
12/92 17.3346 21.9981 12.8386
3/93 17.9573 22.9406 12.9924
6/93 18.0884 23.0586 13.0648
9/93 18.3815 23.6484 13.1281
12/93 18.4996 24.1956 13.1914
3/94 18.1439 23.2726 13.3181
6/94 18.3773 23.3676 13.3905
9/94 19.0661 24.5182 13.5171
12/94 18.9558 24.5119 13.5443
3/95 20.132 26.8983 13.6981
6/95 21.2971 29.4507 13.7976
9/95 22.3137 31.7921 13.861
12/95 23.0407 33.6866 13.8881
3/96 24.0138 35.5177 14.0872
6/96 24.9206 37.1212 14.1776
9/96 25.4978 38.2569 14.2591
12/96 26.656 41.4594 14.6898
Average Annual Compound Total Return
1 Year 5 Years 10 Years
15.7% 10.3% 10.3%
Past performance is not predictive of future
performance.
</TABLE>
YEARLY RISK COMPARISON
1/1/87 - 12/31/96
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AOEF S&P 500
<S> <C> <C>
87 17.5791 36.6951
88 3.17386 5.6692
89 4.49586 7.38831
90 12.5315 20.5969
91 5.63219 12.3046
92 1.88552 6.48213
93 2.74096 3.08515
94 4.91682 7.15594
95 2.62219 3.4785
96 1.9678 4.48378
</TABLE>
C-17
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE--2.18% OF NET ASSETS
Boeing Co. 5,000 $ 531,875 5,000 Feb '97 $ 95 $ $ 65,625
McDonnell Douglas Corp. 4,000 256,000 4,000 Feb '97 55 39,000
Northrop Grumman Corp. 3,000 248,250 3,000 Feb '97 75 26,437
Raytheon Co. 5,000 240,625 5,000 Feb '97 55 2,812
----------- ----------
1,276,750 133,874
----------- ----------
AUTO RELATED--0.63%
Goodyear Tire & Rubber Co. 3,000 154,125 3,000 Apr '97 50 11,062
T R W, Inc. 4,000 198,000 4,000 Jan '97 47.50 9,500
----------- ----------
352,125 20,562
----------- ----------
AUTOS & TRUCKS--2.35%
Chrysler Corp. 17,000 561,000 10,000 Jan '97 32.50 13,750
7,000 Jan '97 37.50 219
Ford Motor Co. 6,000 191,250
General Motors Corp. 9,100 507,325 4,100 Mar '97 55 11,787
----------- ----------
1,259,575 25,756
----------- ----------
BANKS/SAVINGS & LOANS--6.67%
Banc One Corp. 5,500 236,500 5,500 Feb '97 37.50* 1,203
Bank of New York, Inc. 10,200 344,250 5,100 Apr '97 30 29,325
5,100 Apr '97 35 8,925
Bankamerica Corp. 5,500 548,625 5,500 Apr '97 90 72,187
Bankers Trust New York Corp. 300 25,875 300 Jan '97 80 1,725
Barnett Banks, Inc. 16,000 658,000 8,000 Jan '97 40 16,500
8,000 Apr '97 40 32,000
Citicorp 6,100 628,300 3,000 Jan '97 110 1,875
3,100 Apr '97 100 28,287
Fleet Norstar Financial Group 5,000 249,375 5,000 Apr '97 55 5,937
J.P. Morgan & Co. 4,000 390,500 4,000 Mar '97 95 25,000
Nationsbank Corp. 3,000 293,250 2,300 Feb '97 110 1,150
Republic New York Corp. 5,000 408,125 5,000 Mar '97 70 62,500
----------- ------- ----------
3,782,800 1,203 285,411
----------- ------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-18
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BREWERY/SPIRITS & TABACCO--0.82%
Anheuser-Busch Companies, Inc. 7,000 $ 280,000 7,000 Mar '97 $ 40 $ $ 14,437
Seagram Co., Ltd. 5,000 193,750 5,000 Feb '97 35 28,750
----------- ----------
473,750 43,187
----------- ----------
BROADCAST RADIO & TELEVISION--0.61%
Tele Communications** 10,000 130,625 10,000 Jan '97 12.50 15,625
Viacom, Inc., Class A** 5,800 200,100 5,800 Feb '97 40 2,175
Viacom, Inc., Class B** 226 7,882
----------- ----------
338,607 17,800
----------- ----------
BUILDING/PACKAGE MATERIALS--0.38%
Armstrong World Industries, Inc. 3,000 208,500 3,000 Mar '97 70 9,937
----------- ----------
208,500 9,937
----------- ----------
CHEMICALS--2.94%
Avery Dennison Corp. 4,000 141,500 4,000 Apr '97 32.50 16,500
Dow Chemical Co. 3,000 235,125 3,000 Mar '97 85 3,375
Du Pont (E. I.) De Nemours Co. 6,000 566,250 6,000 Apr '97 100 14,625
Grace (W R) & Co. 800 41,400
Hercules, Inc. 5,000 216,250 5,000 Mar '97 45 10,312
Monsanto Co. 5,000 194,375 5,000 Apr '97 45 4,062
Morton International 5,000 203,750 5,000 Mar '97 45 5,625
----------- ----------
1,598,650 54,499
----------- ----------
CLOSED-END FUNDS/HOLDING COMPANIES--0.05%
A.C. Nielsen, Corp.** 1,666 25,198
-----------
25,198
-----------
COMPUTER SERVICES/SOFTWARE--4.41%
Cisco Systems, Inc.** 11,500 731,687 6,000 Jan '97 60 28,500
5,500 Apr '97 70 22,000
First Data Corp. 10,000 365,000 10,000 Feb '97 40 8,750
Microsoft Corp.** 12,000 991,500 6,000 Jan '97 85 11,250
6,000 Apr '97 72.50 85,500
Oracle Systems** 9,600 400,800 5,000 Mar '97 50 5,000
4,600 Jun '97 50 11,500
----------- ----------
2,488,987 172,500
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-19
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPUTERS--2.81%
Compaq Computer Corp.** 7,500 $ 556,875 4,000 Jan '97 $ 90 $ $ 500
3,500 Apr '97 65 46,812
International Business Machines Corp. 5,900 890,900 3,000 Jan '97 160 3,937
2,900 Apr '97 140 52,925
Silicon Graphics, Inc.** 5,000 127,500 5,000 Feb '97 22.50* 2,812
----------- ------- ----------
1,575,275 2,812 104,174
----------- ------- ----------
COSMETICS & PERSONAL CARE--0.83%
Avon Products, Inc. 3,000 171,376 3,000 Jan '97 50 24,000
Gillette Co. 4,000 311,000 4,000 Mar '97 75 20,000
----------- ----------
482,376 44,000
----------- ----------
ELECTRIC/GAS/WATER UTILITIES--3.51%
American Electric Power Co. 5,000 205,625 5,000 Feb '97 45 625
Consolidated Edison of New York 3,300 96,525
Dominion Resources, Inc. 10,000 385,000
Duke Power Co. 5,000 231,250
F P L Group, Inc. 5,000 230,000
Pacific Gas & Electric Co. 8,000 168,000
Public Service Enterprise Group, Inc. 6,000 163,500
Southern Co. 16,000 362,000
----------- ----------
1,841,900 625
----------- ----------
ELECTRICAL EQUIPMENT--1.19%
Emerson Electric Co. 3,500 338,625 3,500 Mar '97 90 30,625
Honeywell, Inc. 5,000 328,750 5,000 May '97 70 12,500
----------- ----------
667,375 43,125
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-20
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ELECTRONICS--7.60%
General Electric Co. 16,200 $ 1,601,776 4,700 Jan '97 $ 95 $ $ 25,850
6,000 Mar '97 90 72,000
5,500 Jun '97 105 27,500
Hewlett-Packard Co. 13,000 653,250 5,000 Feb '97 45 33,750
8,000 May '97 55 24,000
Intel Corp. 10,000 1,309,376 5,000 Jan '97 130 33,750
5,000 Apr '97 130 68,750
Motorola, Inc. 9,000 552,376 4,500 Jan '97 80 281
4,500 Apr '97 55 38,813
Texas Instruments, Inc. 4,000 255,000 4,000 Jan '97 50 56,000
----------- ----------
4,371,778 380,694
----------- ----------
ENTERTAINMENT/ADVERTISING--1.14%
Mirage Resorts, Inc.** 7,000 151,375 7,000 Feb '97 25 2,625
TCI Satellite Entertainment Class A** 1,000 9,875
The Walt Disney Co. 7,000 487,375 3,500 Jan '97 60 33,687
3,500 Apr '97 70 14,437
----------- ----------
648,625 50,749
----------- ----------
ENVIRONMENTAL CONTROL--0.36%
WMX Technologies, Inc. 6,000 195,750 6,000 Feb '97 32.50 7,125
----------- ----------
195,750 7,125
----------- ----------
FINANCIAL SERVICES & BROKERS--2.54%
American Express Co. 3,300 186,450 3,300 Jan '97 50 22,275
Dean Witter Discover and, Co. 5,000 331,250 5,000 Apr '97 60 40,626
Federal National Mortgage Association 7,000 260,750 7,000 Jun '97 42.50 9,625
Merrill Lynch & Co. 6,000 489,000 6,000 Apr '97 70 80,250
Transamerica Corp. 3,000 237,000 3,000 Feb '97 75 16,125
----------- ----------
1,504,450 168,901
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-21
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FOOD PROCESSING & WHOLESALE--7.68%
Campbell Soup Co. 5,000 $ 401,250 5,000 Feb '97 $ 85 $ $ 7,187
Coca-Cola Co. 27,000 1,420,875 10,000 Jan '97 55 3,125
7,000 Feb '97 55 7,000
10,000 May '97 55 22,500
Conagra, Inc. 5,000 248,750 5,000 Mar '97 50 11,250
Earthgrains, Co. 140 7,315
Heinz (H.J.) Co. 1,500 53,625 1,500 Mar '97 30* 94
Kellogg Co. 5,000 328,125
Pepsico, Inc. 16,000 468,000 6,000 Jan '97 30 3,000
10,000 Apr '97 35 5,000
Philip Morris Companies, Inc. 9,000 1,013,626 6,500 Mar '97 95 123,500
2,500 Mar '97 120 9,375
Wrigley Wm. Jr. Co. 5,000 281,250 5,000 Mar '97 65 1,250
----------- ------- ----------
4,222,816 94 193,187
----------- ------- ----------
FOREST PRODUCTS & PAPER--1.69%
Georgia-Pacific Corp. 3,000 216,000 3,000 Jan '97 80 94
International Paper Co. 5,000 201,875 5,000 Apr '97 45 3,125
Kimberly Clark Corp. 5,000 476,250 5,000 Jan '97 100 2,656
----------- ----------
894,125 5,875
----------- ----------
HOME--CONSTRUCTION/TOOLS/FURNISHING--0.44%
Whirlpool Corp. 5,000 233,126 5,000 Mar '97 55 937
----------- ----------
233,126 937
----------- ----------
HOUSEHOLD PRODUCTS/WARES--1.79%
Clorox Co. 2,500 250,938 2,500 Jan '97 90 26,250
Procter & Gamble Co. 7,500 806,250 2,500 Jan '97 90 42,813
5,000 Apr '97 100 50,625
----------- ----------
1,057,188 119,688
----------- ----------
INSURANCE--3.13%
Allstate, Corp. 9,270 536,501 5,000 Jan '97 55 16,250
4,200 Apr '97 55 21,000
American International Group, Inc. 3,000 324,750 3,000 Feb '97 105 19,500
Cigna Corp. 3,500 478,187 3,500 Apr '97 130 39,156
Loews Corp. 4,000 377,000 4,000 Jun '97 95 25,000
Torchmark Corp. 900 45,450
----------- ----------
1,761,888 120,906
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-22
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
IRON & STEEL--0.38%
Corning, Inc. 5,000 $ 231,250 5,000 Feb '97 $ 40 $ $ 34,062
----------- ----------
231,250 34,062
----------- ----------
MACHINE CONSTRUCTION/DIVERSIFIED--0.84%
Caterpillar, Inc. 3,200 240,800
Deere & Co. 5,000 203,125 5,000 Mar '97 45 3,750
----------- ----------
443,925 3,750
----------- ----------
MEDICAL SUPPLIES & SERVICES--1.69%
Becton Dickinson & Co. 6,000 260,250 6,000 Mar '97 45 9,751
C.R. Bard, Inc. 5,000 140,000 4,000 Jan '97 35 250
Columbia HCA/Healthcare Corp. 7,500 305,625 7,500 Feb '97 40 16,875
Fresenius Medical Care** 877 24,666
Fresenius National Medical Care -
Preference shares** 800 104
United States Surgical Corp. 5,000 196,875 5,000 Apr '97 45 12,187
----------- ----------
927,520 39,063
----------- ----------
METALS & MINING--0.98%
Aluminum Co. of America 6,000 382,500 6,000 Jan '97 65 4,500
Barrick Gold, Corp. 5,000 143,750 5,000 Apr '97 30 7,812
----------- ----------
526,250 12,312
----------- ----------
MISCELLANEOUS SECURITIES--0.31%
Cognizant, Corp.** 5,000 165,000
-----------
165,000
-----------
MISCELLANEOUS MANUFACTURING--2.03%
Allied Signal Corp. 5,000 335,000 5,000 Mar '97 70 10,000
Eastman Kodak Co. 3,500 280,875 3,500 Jan '97 80 10,500
Imation, Corp.** 500 14,062
Minnesota Mining & Manufacturing Co. 5,000 414,375 5,000 Jan '97 70 70,000
Parker Hannifin Corp. 3,000 116,250 3,000 Feb '97 40 3,750
----------- ----------
1,160,562 94,250
----------- ----------
OFFICE/BUSINESS EQUIPMENT--0.49%
Xerox Corp. 5,000 263,125 5,000 Jan '97 53.375 5,313
----------- ----------
263,125 5,313
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-23
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OIL/GAS DOMESTIC--2.43%
Atlantic Richfield Co. 5,000 $ 662,500 5,000 Jan '97 $ 140 $ $ 313
Enron Corp. 5,000 215,625 5,000 Apr '97 45 8,125
Pennzoil Co. 2,000 113,000 1,000 Jan '97 50 6,750
Tenneco, Inc. 6,300 284,287 6,300 Feb '97 55 5,709
----------- ----------
1,275,412 20,897
----------- ----------
OIL/GAS INTERNATIONAL--6.35%
Amoco Corp. 4,500 362,250 4,500 Feb '97 80 12,375
Chevron Corp. 5,000 325,000
Exxon Corp. 12,500 1,225,000 6,500 Jan '97 90 63,375
6,000 Apr '97 90 60,000
Mobil Corp. 6,000 733,500 6,000 May '97 125 24,750
Royal Dutch Petroleum Co. 3,000 512,250 3,000 Jan '97 155 48,375
Texaco, Inc. 4,000 392,500 4,000 Apr '97 105 9,000
----------- ----------
3,550,500 217,875
----------- ----------
OIL EQUIPMENT/EXPLORATION & SERVICES--0.53%
Halliburton Co. 5,000 301,250 5,000 Apr '97 65 12,500
Schlumberger, Ltd. 3,000 Feb '97 100* 11,063
----------- ----------
301,250 23,563
----------- ----------
PHARMACEUTICALS & BIOTECHNOLOGY--8.97%
Allergan, Inc. 5,100 181,687 5,100 Jan '97 45 956
American Home Products Corp. 6,000 351,750 6,000 Apr '97 70 2,438
Amgen, Inc.** 5,000 271,875 5,000 Apr '97 70 1,875
Bristol Myers Squibb Co. 5,000 543,750 5,000 Mar '97 115 15,625
Eli Lilly & Co. 10,000 730,000 5,000 Jan '97 80 1,250
5,000 Apr '97 70 32,500
Johnson & Johnson 15,000 746,250 5,000 Jan '97 50 5,938
5,000 Jan '97 52.50 1,563
5,000 Apr '97 55 5,625
Merck & Co. 15,000 1,188,750 7,500 Jan '97 85 3,750
7,500 Apr '97 80 36,563
Molecular Biosystems, Inc.** 16 104
Mylan Laboratories 1,000 Jan '97 20 62
Pfizer, Inc. 6,000 497,250 6,000 Mar '97 90 13,500
Warner-Lambert Co. 5,000 375,000 5,000 Apr '97 65 56,875
----------- ------- ----------
4,886,416 62 178,458
----------- ------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-24
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PUBLISHING--0.58%
Donnelley R R & Sons 6,000 $ 188,250
Dun & Bradstreet 5,000 118,750 5,000 Feb '97 $ 65 $ $ 2,188
----------- ----------
307,000 2,188
----------- ----------
RAILROAD/TRUCKING/MISCELLANEOUS--0.88%
C. S. X. Corp. 2,000 84,500
Consolidated Rail Corp. 300 29,887 300 Jan '97 70 8,888
Newport News Shipbuilding** 1,260 18,900
Norfolk Southern 4,000 350,000 4,000 Mar '97 90 12,000
----------- ----------
483,287 20,888
----------- ----------
RESTAURANTS & LODGING--0.80%
Hilton Hotels Corp. 10,000 261,250 10,000 Jan '97 15* 312
McDonald's Corp. 3,500 158,375
----------- -------
419,625 312
----------- -------
RETAIL--GENERAL/DEPARTMENT--2.70%
Dayton-Hudson Corp. 9,000 353,250 4,500 Jan '97 35 19,969
4,500 Jan '97 33.375 27,000
Gap, Inc. 7,000 210,875 7,000 Jan '97 35 1,750
J.C. Penny Co. 5,500 268,125 5,500 Feb '97 55 344
Nordstrom, Inc. 5,000 177,187 5,000 Jan '97 45 625
Sears Roebuck & Co. 10,000 461,250 5,000 Jan '97 55 1,250
5,000 Apr '97 55 3,125
----------- ----------
1,470,687 54,063
----------- ----------
RETAIL--GROCERY/DRUG STORES--0.65%
Safeway, Inc.** 5,000 213,750 5,000 Mar '97 37.50 30,313
Winn-Dixie Stores, Inc. 5,000 158,125 5,000 Jan '97 35 313
----------- ----------
371,875 30,626
----------- ----------
SPECIALTY RETAIL/WHOLESALE--1.36%
Home Depot, Inc. 5,000 250,625 5,000 Jan '97 55 938
Alco Standard Corp. 2,500 129,062
NIKE, Inc. 6,000 358,500 6,000 Apr '97 62.50 21,750
----------- ----------
738,187 22,688
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-25
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND DECEMBER 31, 1996
PORTFOLIO OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
------------------------------------------------------
Investments Market Value
----------------------- --------------------
Number of Market Shares Expiration Exercise Options Options
COMMON STOCKS (CONTINUED) Shares Value Optioned Date Price Bought Sold
--------- ----------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
TELECOMMUNICATION UTILITIES--8.03%
American Telephone & Telegraph 19,500 $ 848,250 5,000 Jan '97 $ 60 $ $ 1,875
Ameritech Corp. 10,000 606,250 5,000 Apr '97 55 33,750
Bell Atlantic Corp. 5,000 323,750 5,000 Apr '97 65 16,875
Bellsouth Corp. 18,400 742,900 5,000 Jan '97 45 313
G T E Corp. 12,500 568,750 5,000 Jan '97 42.50 18,750
7,500 Jun '97 50 10,313
Hong Kong Telecom, Ltd. 2,000 32,500
M C I Communications 10,000 326,875 10,000 Jan '97 30 30,000
Nynex Corp. 8,500 409,062
SBC Communications, Inc. 9,000 465,750
U S West, Inc. 3,000 Jan '97 32.50 1,687
----------- ------- ----------
4,324,087 1,687 111,876
----------- ------- ----------
TELECOMMUNICATIONS & EQUIPMENT--1.48%
Lucent Technologies, Inc. 4,715 218,069
Northern Telecom, LTD. 10,000 618,750 5,000 Mar '97 55 41,250
5,000 Mar '97 65 16,250
----------- ----------
836,819 57,500
----------- ------- ----------
TOTALS $53,944,391 $6,170 $2,932,884
----------- ------- ----------
----------- ------- ----------
TOTAL COMMONS STOCKS
(Cost $41,917,190) 53,944,391
TOTAL OPTIONS PURCHASED
(Cost $37,396) 6,170
-----------
TOTAL INVESTMENTS--102.80%
(Cost $41,954,586) 53,950,561
TOTAL OPTIONS SOLD (5.59%)
(Premiums $1,929,290) (2,932,884)
CASH EQUIVALENTS--2.29%
SEI Cash Plus Trust-Prime Obligation, 5.61% 1,204,459
EXCESS OTHER ASSETS OVER LIABILITIES
(NET)--0.50% 261,668
-----------
NET ASSETS--100.00% $52,483,804
-----------
-----------
</TABLE>
**NON-INCOME PRODUCING SECURITY
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-26
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Securities portfolio at market value (identified cost $41,954,586)................................. $53,950,561
Cash equivalents (includes cash reserved for short puts options of $300,000)....................... 1,204,459
Receivable for investments sold.................................................................... 174,853
Dividends receivable............................................................................... 92,232
Interest receivable................................................................................ 9,458
-----------
Total assets..................................................................................... 55,431,563
-----------
LESS LIABILITIES:
Options outstanding at market value (premiums received $1,929,290)................................. 2,932,884
Accrued expenses................................................................................... 14,875
-----------
Total liabilities................................................................................ 2,947,759
-----------
NET ASSETS........................................................................................... $52,483,804
-----------
-----------
REPRESENTED BY:
Paid-in capital.................................................................................... $41,491,019
Undistributed net realized gains................................................................... 405
Net unrealized appreciation of investments......................................................... 10,992,380
-----------
$52,483,804
-----------
-----------
Net asset value, purchase and redemption price per outstanding share (100,000,000 shares of no par
capital shares authorized; 3,648,722 shares outstanding)......................................... $ 14.38
-----------
-----------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
<S> <C> <C>
OPERATIONS:
Net investment income............................................... $ 694,100 $ 862,933
Net realized gain (loss) on investments and options................. 2,783,447 (185,575)
Change in unrealized appreciation of investments and options........ 3,607,945 8,394,839
-------------------- --------------------
Increase in net assets from operations............................ 7,085,492 9,072,197
-------------------- --------------------
DISTRIBUTION TO SHAREHOLDERS:
From net investment income.......................................... (700,644) (847,716)
From net realized gains............................................. (2,598,524) 0
-------------------- --------------------
Decrease in net assets from distributions......................... (3,299,168) (847,716)
-------------------- --------------------
FUND SHARE TRANSACTIONS:
Proceeds from sales of 865,241 and 424,638 capital shares for 1996
and 1995, respectively............................................ 11,970,173 5,108,441
Proceeds from 192,456 and 64,633 capital shares issued upon
reinvestment of distributions for 1996 and 1995, respectively..... 2,761,283 805,478
Cost of 624,996 and 1,614,600 capital shares redeemed for 1996 and
1995, respectively................................................ (8,681,585) (19,744,905)
-------------------- --------------------
Increase (decrease) in net assets from fund share transactions...... 6,049,871 (13,830,986)
-------------------- --------------------
Net increase (decrease) in net assets............................... 9,836,195 (5,606,505)
Net assets, beginning of year..................................... 42,647,609 48,254,114
-------------------- --------------------
Net assets, end of year........................................... $ 52,483,804 $ 42,647,609
-------------------- --------------------
-------------------- --------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-27
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends........................................... $ 1,060,436
Interest............................................ 229,685
-----------
Total investment income........................... 1,290,121
-----------
EXPENSES:
Fees paid to Analytic-TSA Global Asset Management (the
adviser):
Investment advisory and management fees............. 363,576
Transfer agent and accounting fees.................. 129,424
Audit and tax fees.................................... 51,525
Registration fees, insurance and other expenses....... 25,678
Shareholder services, reports and notices............. 31,653
Custodian fees........................................ 27,757
Directors' fees and expenses.......................... 13,080
Legal fees............................................ 6,531
-----------
Total expenses.................................... 649,224
Expenses paid indirectly............................ (53,203)
-----------
Net expenses........................................ 596,021
-----------
Net investment income............................... 694,100
-----------
REALIZED & UNREALIZED GAINS (LOSSES) ON INVESTMENTS
AND OPTIONS:
Net realized gains (losses):
Proceeds from sales of investments.................. $21,033,832
Cost of investments sold............................ 17,088,003
-----------
Net realized gain on investments.................. 3,945,829
-----------
Premiums received on options closed................. 1,619,315
Cost of closing purchase transactions............... 4,328,086
-----------
Net realized loss on options closed................. (2,708,771)
Premiums received on options expired................ 1,546,389
-----------
Net realized loss on options...................... (1,162,382)
-----------
Total net realized gain........................... 2,783,447
Unrealized gains:
Change in unrealized appreciation of investments.... 3,802,123
Change in unrealized depreciation of options
outstanding....................................... (194,178)
-----------
Net change in unrealized appreciation............. 3,607,945
-----------
Net realized and unrealized gains on investments
and options..................................... 6,391,392
-----------
Net increase in net assets from operations...... $ 7,085,492
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-28
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Defensive Equity Portfolio of Analytic Optioned Equity Fund, Inc. (the Fund)
is registered under the Investment Company Act of 1940, as amended, as a
diversified, no-load, open-end management investment company.
The Fund's investment objective is to obtain a greater long-term total return
and smaller fluctuations in quarterly return from a diversified, hedged common
stock portfolio than would be realized from the same portfolio unhedged. The
Fund attempts to achieve this objective by investing primarily in dividend
paying common stocks on which options are traded on national securities
exchanges, in securities convertible into common stocks, and selling covered
call options and secured put options. The Fund may also hedge its securities by
purchasing put and call options on its portfolio securities, purchasing put and
selling call options on the same securities, and engaging in transactions in
stock index and interest rate futures, stock index options, and options on stock
index and interest rate futures.
The following is a summary of the Fund's significant accounting policies.
SECURITIES VALUATION--Common stocks and outstanding options (collectively
referred to as securities) are stated at market value. Securities traded on
securities exchanges are valued at the last sale price on the day of valuation
or, in the absence of a sale that day, at the mean between the last current bid
and asked prices.
INVESTMENT INCOME AND SECURITIES TRANSACTIONS--Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Interest income
on bonds is not reduced by amortization of premium paid but is increased by
amortization of any discount. Securities transactions are accounted for on the
trade date (the date the order to buy or sell is executed). Realized gains on
losses from securities transactions are reported on an identified cost basis for
both financial statement and Federal income tax purposes.
OPTION ACCOUNTING PRINCIPLES--Covered call options and secured put options are
written on the Fund's portfolio in order (i) to acheive, through the receipt of
premiums, a higher long-term total return than would be received from the same
portfolio unhedged and (ii) to reduce the fluctuation in this total return. When
the Fund writes a call or put option, an amount equal to the premium received by
the Fund is included in the Fund's Statement of Assets and Liabilities as an
asset and an equivalent liability. The amount of the liability will be
subsequently marked-to-market to reflect the current market value of the option
written. The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the last current bid and asked
prices.
When a call expires on its stipulated expiration date, or if the Fund enters
into a closing purchase transaction, the Fund will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received when the
call option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option will be
extinguished. When a call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security and the proceeds of the sale are
increased by the premium originally received.
C-29
<PAGE>
When the Fund writes a put option, cash equal to the exercise price is placed in
an interest bearing escrow account to secure the outstanding put option. When a
put option expires, or if the Fund enters into a closing purchase transaction,
the Fund will realize a gain or loss on the option transaction, the cash is
released from escrow and the liability related to such option is extinguished.
When a put option is exercised, the Fund uses the cash in escrow to purchase the
security, the cost of the security is reduced by the premium originally received
and no gain or loss is recognized.
FUND SHARE VALUATION--Fund shares are sold and redeemed on a continuing basis at
net asset value. Net asset value per share is determined daily as of the close
of trading of the New York Stock Exchange on each day the Exchange is open for
trading by dividing the total value of the Fund's investments and other assets,
less the sum of liabilities and the value of the outstanding options, by the
number of Fund shares outstanding.
FEDERAL INCOME TAXES--It is the Fund's intention to continue to comply with the
provisions of the Internal Revenue Code enabling it to qualify as a regulated
investment company and, in the manner provided therein, to distribute all of its
taxable income to its shareholders. Accordingly, no provision for income taxes
has been made
The cost of investments and options for Federal income tax purposes at December
31, 1996 was $41,954,586. Net unrealized appreciation of $10,992,380 was
comprised of aggregate gross unrealized appreciation of $13,270,772 less
aggregate gross depreciation of $2,278,392. During the year ended December 31,
1996, the Fund realized, on a federal tax basis and for financial reporting
purposes, net gains of $2,783,447.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents at December 31, 1996
consist of cash on deposit and money market funds valued at cost, which
approximates market value.
USE OF ESTIMATES--The financial statements have been prepared in conformity with
generally accepted accounting principles. The preparation of the accompanying
financial statements requires management to make estimate and assumptions that
effect the reported amount of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from these estimates.
2. DISTRIBUTIONS OF REALIZED GAINS
The Fund distributed net capital gains of $2,598,524 at December 31, 1996.
3. INVESTMENT ADVISORY AGREEMENT AND "AFFILIATED PERSONS"
Analytic-TSA Global Asset Management, Inc. (formerly Analytic Investment
Mangement, Inc.) is the investment adviser (the "Adviser") of the Fund. The
Adviser is a wholly owned subsidiary of United Asset Management Corporation, a
holding company that purchased all of the voting common stock of the Adviser on
May 9, 1985. The Adviser, subject to the control and direction of the Fund's
board of directors, manages and supervises the investment operations of the Fund
and the composition of it portfolio, including the writing of options and making
recommendations to the Fund's board of directors as to investment policies.
As compensation for furnishing investment advisory, management, and other
services, and costs and expenses assumed, pursuant to the Investment Management
Agreement, the Fund pays the Adviser an annual fee equal to 0.75% of the first
$100,000,000 of average daily net assets, 0.65% of the next $100,000,000 of
average daily net assets, and 0.55% of average daily net assets in excess of
$200,000,000. The Adviser also acts as the Fund's transfer agent, dividend
disbursing agent, and shareholder relations servicing agent for which the Fund
pays a fee based on the number of accounts and net assets. The Fund also pays
the Adviser a
C-30
<PAGE>
fee based on its net assets to calculate its daily share price and maintain its
general accounting records. In order to comply with the registration
requirements of certain states, the Adviser has agreed that, in any fiscal year,
if the expenses of the Fund (including the advisory fee but excluding interest,
taxes, brokerage commissions, backup withholding, litigation, indemnity and
extraordinary expenses) exceed the limits set by applicable regulations of state
securities commission, the Adviser will reduce its fee by the amount of such
excess. Any such reductions are subject to readjustment during the year.
Currently, the Fund believes that the most restrictive applicable expense
limitation of state securities commissions is 2.50% of the Funds $30,000,000 of
the average net assets, 2.0% of the next $70,000,000 of such average net assets,
and 1.50% of the average net assets in excess of $100,000,00. Additionally, the
Adviser has agreed to absorb all costs of marketing the shares of the Fund,
although the Adviser is not required to do so by the investment advisory
agreement. At December 31, 1996, six officers and a director of the Fund are
also officers and directors of the Adviser.
4. INVESTMENT ACTIVITY
For the year ended December 31, 1996, the cost basis of purchases and proceeds
of sales of investments aggregated $26,068,520 (reduced by $20,622 of premiums
for put options exercised), and $21,033,832 (including $656,641 of premiums for
call options exercised), respectively. Transactions in options contracts written
were as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
----------- -------------
<S> <C> <C>
Outstanding at beginning of year.................. 5,972 $ 1,554,350
Options written................................... 17,341 4,217,907
Options terminated in closing purchase
transactions.................................... (6,219) (1,619,315)
Options expired................................... (6,677) (1,546,389)
Options exercised................................. (2,835) (677,263)
----------- -------------
Outstanding at December 31, 1996.................. 7,582 $ 1,929,290
----------- -------------
----------- -------------
</TABLE>
As of December 31, 1996, portfolio securities valued at $46,587,912 were held in
escrow by the custodian in connection with covered call options written by the
Fund.
5. EXPENSES PAID INDIRECTLY
The Fund has entered into an agreement whereby certain operating expenses of the
Fund are paid indirectly by a broker, based upon a percentage of commissions
earned by the broker for execution of portfolio transactions. For the year ended
December 31, 1996, such expenses amounted to $53,203. Gross commission rates for
this broker are consistent with those of other brokers utilized by the Fund.
C-31
<PAGE>
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 13.26 $ 11.12 $ 11.96 $ 11.97 $ 12.29
--------- --------- --------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... 0.20 0.24 0.31 0.33 0.27
Net realized or unrealized gains (losses) on
investments and options....................... 1.87 2.14 (0.02) 0.48 0.48
--------- --------- --------- ------- -------
Total from investment operations.............. 2.07 2.38 0.29 0.81 0.75
--------- --------- --------- ------- -------
LESS DISTRIBUTIONS:
From net investment income...................... 0.20 0.24 0.31 0.33 0.29
From net realized gains......................... 0.75 0.00 0.82 0.49 0.78
--------- --------- --------- ------- -------
Total distributions............................. 0.95 0.24 1.13 0.82 1.07
--------- --------- --------- ------- -------
Net asset value, end of period.................... $ 14.38 $ 13.26 $ 11.12 $ 11.96 $ 11.97
--------- --------- --------- ------- -------
--------- --------- --------- ------- -------
TOTAL RETURN...................................... 15.66% 21.52% 2.47% 6.73% 6.17%
--------- --------- --------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000).................. $ 52,484 $ 42,648 $ 48,254 $76,948 $91,561
Ratio of expenses to average net assets........... 1.34%(1) 1.38%(1) 1.10% 1.07% 1.02%
Ratio of net investment income to average net
assets........................................... 1.43% 1.87% 3.45% 2.51% 2.33%
Portfolio turnover rate........................... 43.17% 32.37% 48.71% 36.19% 81.73%
Average commission rate(2)........................ 0.0446 0.0442
</TABLE>
(1) Gross of expenses paid indirectly through broker arrangements. With the
expense reduction from brokerage arrangements, the ratio of expenses to
average net assets would have been 1.23% and 1.22% for the years ended
December 31, 1996 and 1995, respectively.
(2) The formula for calculating the average commission rate is total commission
paid divided by the total shares purchased and sold. Each option contract is
100 shares.
C-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE ANALYTIC OPTIONED EQUITY FUND,
INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of Analytic Optioned Equity Fund, Inc. as
of December 31, 1996 and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned and
outstanding options at December 31, 1996 by correspondence with the custodian
and brokers. Where confirmations were not received, we performed alternative
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Analytic Optioned Equity Fund, Inc. as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
[SIG]
LOS ANGELES, CALIFORNIA
FEBRUARY 10, 1997
C-33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 41,954,586
<INVESTMENTS-AT-VALUE> 53,950,561
<RECEIVABLES> 276,543
<ASSETS-OTHER> 1,204,459
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 55,431,563
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,947,759
<TOTAL-LIABILITIES> 2,947,759
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,491,019
<SHARES-COMMON-STOCK> 3,648,722
<SHARES-COMMON-PRIOR> 3,216,021
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 405
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,992,380
<NET-ASSETS> 52,483,804
<DIVIDEND-INCOME> 1,060,436
<INTEREST-INCOME> 229,685
<OTHER-INCOME> 0
<EXPENSES-NET> (596,021)
<NET-INVESTMENT-INCOME> 694,100
<REALIZED-GAINS-CURRENT> 2,783,447
<APPREC-INCREASE-CURRENT> 3,607,945
<NET-CHANGE-FROM-OPS> 7,085,492
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (700,644)
<DISTRIBUTIONS-OF-GAINS> (2,598,524)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 865,241
<NUMBER-OF-SHARES-REDEEMED> 624,996
<SHARES-REINVESTED> 192,456
<NET-CHANGE-IN-ASSETS> 9,836,195
<ACCUMULATED-NII-PRIOR> 6,544
<ACCUMULATED-GAINS-PRIOR> (184,518)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 363,576
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 649,224
<AVERAGE-NET-ASSETS> 48,476,807
<PER-SHARE-NAV-BEGIN> 13.26
<PER-SHARE-NII> .2
<PER-SHARE-GAIN-APPREC> 1.87
<PER-SHARE-DIVIDEND> (.2)
<PER-SHARE-DISTRIBUTIONS> (.75)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.38
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
