<PAGE>
PROSPECTUS
OCTOBER 20, 1997
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND, INC.
(800)374-2633
A NO-LOAD, OPEN-END FUND WITH NO SALES CHARGE OR REDEMPTION FEE.
TABLE OF CONTENTS
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Benefits to Investors.......................... 3
Fund Expense Table............................. 4
Financial Highlights........................... 5
How Performance is Calculated.................. 7
The Fund....................................... 7
Investment Objective and Policies.............. 7
Covered Option Writing....................... 9
Risks of Option Writing...................... 12
Hedging Transactions......................... 13
Risk Factors in Hedging Transactions......... 17
Other Investment Techniques.................. 18
Portfolio Turnover........................... 21
Further Information.......................... 22
Management of the Fund......................... 22
How to Purchase Shares......................... 25
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How to Redeem Shares........................... 28
How to Exchange Shares......................... 31
Shareholder Accounts........................... 32
Tax Sheltered Retirement Plans................. 33
Withdrawal Plan................................ 33
Dividends, Distributions and Taxes............. 34
Distributions................................ 34
Taxation of Shareholders..................... 34
Tax Considerations in Portfolio
Transactions............................... 36
Capital Stock.................................. 37
General Information............................ 37
Glossary of Investment Terms and Stock and Debt
Option Terms.................................. 38
Appendix....................................... 43
</TABLE>
This prospectus contains concise information regarding 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 telephoning the Fund
at (800) 374-2633.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
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.
<PAGE>
THE DATE OF THIS PROSPECTUS AND THE RELATED
STATEMENT OF ADDITIONAL INFORMATION IS OCTOBER 20, 1997
<PAGE>
The Defensive Equity Portfolio of Analytic Optioned Equity Fund, Inc. (the
"Fund") is a NO-LOAD, open-end, diversified investment management 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 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.
2
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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.
RISK CHARACTERISTICS.
The securities in the Fund's portfolio are subject to various risks, including
equity risk, interest rate risk, and credit risk. The historical equity risk
of the Fund is moderate with a risk level of 0.56 as measured by standard
deviation as compared to a risk level of 1.00 for the Standard & Poor's 500
stocks. A chart comparing the Fund's equity risk to that of the Standard &
Poor's 500 stocks is contained in the Fund's Semi-Annual Report to
Shareholders for the period ended June 30, 1997. The Fund also has a low
credit risk and a low interest rate risk.
3
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FUND EXPENSE TABLE
The following tables illustrate the expenses and fees that a shareholder of
the Fund will incur. However, transaction fees may be charged if a
broker-dealer or other financial intermediary deals with the Fund on your
behalf (See "How to Purchase Shares"). The "other" expenses set forth below
are estimates for the fiscal year ended December 31, 1997 and are annualized
based on the Fund's operations during the semi-annual period ended June 30,
1997.
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SHAREHOLDER TRANSACTION EXPENSES
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Sales Load Imposed on Purchases........................................................................... None
Sales Load Imposed on Reinvested Dividends................................................................ None
Deferred Sales Load....................................................................................... None
Redemption Fees........................................................................................... None
Exchange Fee.............................................................................................. None
</TABLE>
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ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
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Investment Advisory Fees.................................................................................. 0.75%
12b-1 Fees................................................................................................ None
Other Expenses............................................................................................ 0.57%
---------
Total Fund Operating Expenses............................................................................. 1.32%
---------
</TABLE>
EXAMPLE
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period: $ 13 $ 42 $ 72 $ 159
</TABLE>
The purpose of the above information is to help an investor in the Fund to
understand the various fees and expenses an investor 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
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FINANCIAL HIGHLIGHTS
The annual financial statements presented in the table below for each of the
ten years in the period ended December 31, 1996 have been audited by Deloitte &
Touche LLP, independent auditors. Such annual financial statements and the
report of Deloitte & Touche LLP thereon are incorporated by reference in the
Statement of Additional Information. Also presented in the table below are
unaudited semi-annual financial statements for the six-month period ended June
30, 1997.
Copies of the Fund's 1996 Annual Report to Shareholders and 1997 Semi-Annual
Report to Shareholders may be obtained, at no charge, by telephoning the Fund at
the telephone number appearing on the cover page of this Prospectus.
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SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1997 -------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
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Net asset value, beginning of period.............. $ 14.38 $ 13.26 $ 11.12 $ 11.96 $ 11.97 $ 12.29
------------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................... 0.07 0.20 0.24 0.31 0.33 0.27
Net realized or unrealized gains
(losses) on investments and options........... 1.58 1.87 2.14 (0.02) 0.48 0.48
------------- ------- ------- ------- ------- -------
Total from investment operations.............. 1.65 2.07 2.38 0.29 0.81 0.75
------------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income...................... 0.06 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........................... 0.06 0.95 0.24 1.13 0.82 1.07
------------- ------- ------- ------- ------- -------
Net asset value, end of period.................... $ 15.97 $ 14.38 $ 13.26 $ 11.12 $ 11.96 $ 11.97
------------- ------- ------- ------- ------- -------
------------- ------- ------- ------- ------- -------
TOTAL RETURN...................................... 11.50% 15.66% 21.52% 2.47% 6.73% 6.17%
------------- ------- ------- ------- ------- -------
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RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000).................. $52,086 $52,484 $42,648 $48,254 $76,948 $91,561
Ratio of expenses to average net assets........... 1.32%* 1.34%(1) 1.38%(1) 1.10% 1.07% 1.02%
Ratio of net investment income to average net
assets........................................... 0.87%* 1.43% 1.87% 3.45% 2.51% 2.33%
Portfolio turnover rate........................... 12.41% 43.17% 32.37% 48.71% 36.19% 81.73%
Average commission rate(2)........................ $0.0421 $0.0446 $0.0442 -- -- --
</TABLE>
* Annualized
(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
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YEAR ENDED DECEMBER 31,
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1991 1990 1989 1988 1987
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Net asset value, beginning of period.................. $ 11.92 $ 13.00 $ 12.06 $ 11.38 $ 13.70
---------- ---------- ---------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... 0.40 0.46 0.50 0.39 0.38
Net realized or unrealized gains (losses) on
investments and options........................... 1.17 (0.27) 1.61 1.35 0.24
---------- ---------- ---------- ---------- ---------
Total from investment operations.................. 1.57 0.19 2.11 1.74 0.62
---------- ---------- ---------- ---------- ---------
LESS DISTRIBUTIONS:
From net investment income.......................... 0.40 0.48 0.51 0.40 0.46
From net realized gains............................. 0.80 0.79 0.66 0.66 2.48
---------- ---------- ---------- ---------- ---------
Total distributions............................... 1.20 1.27 1.17 1.06 2.94
---------- ---------- ---------- ---------- ---------
Net asset value, end of period........................ $ 12.29 $ 11.92 $ 13.00 $ 12.06 $ 11.38
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
TOTAL RETURN.......................................... 13.29% 1.54% 17.74% 15.60% 4.28%
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)...................... $ 100,548 $ 106,220 $ 106,474 $ 102,239 $ 74,840
Ratio of expenses to average net assets............... 1.10% 1.11% 1.09% 1.13% 1.17%
Ratio of net investment income to average net
assets............................................... 3.05% 3.68% 3.74% 3.44% 2.68%
Portfolio turnover rate............................... 75.83% 72.20% 61.20% 66.11% 83.53%
Average commission rate(2)............................ -- -- -- -- --
</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.
6
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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 (the "SEC") under the Investment Company Act
of 1940, as amended (the "1940 Act"), 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
"How to Purchase 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 1940 Act.
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
</TABLE>
7
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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 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,
</TABLE>
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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
</TABLE>
9
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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 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
</TABLE>
10
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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.
</TABLE>
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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
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
</TABLE>
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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 "Tax Information and
Option Accounting Principles" 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
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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 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.
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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 portfolio 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.
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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 the market value of
the futures contract or related option will be deposited
in a segregated account with the Custodian or broker to
collateralize
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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 The Fund's ability to hedge effectively all or a portion
TRANSACTIONS 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
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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 an
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 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.
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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 Internal Revenue
Code's (the "Code") requirements for qualification as a
regulated investment company and the Fund's intention to
qualify as such. (See "Tax Information and Option
Accounting Principles" 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
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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 1940 Act. 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 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
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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.
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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.
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 and makes investment
decisions for 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
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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,
Inc., 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 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.
DISTRIBUTOR UAM Fund Distributors, Inc., (the "Distributor") a
wholly-owned subsidiary of United Asset Management
Corporation, is the distributor of the Fund's shares.
Its principal office is located at 211 Congress Street,
Boston, Massachusetts 02110. Under a Distribution
Agreement with the Fund (the "Distribution Agreement"),
the Distributor, as agent of the Fund, has agreed to use
its best efforts as sole distributor of Fund shares. The
Distributor does not receive any fee or other
compensation under the Distribution Agreement. The
Distribution Agreement provides that the Fund will bear
costs of registration of its shares with the SEC and
various states as well as the printing of its
prospectuses, its Statement of Additional Information
and its reports to shareholders.
ADMINISTRATIVE SERVICES UAM Fund Services, Inc. ("UAM Fund Services"), a wholly-
owned subsidiary of United Asset Management Corporation,
performs and oversees all administrative, fund
accounting, dividend disbursing and transfer agent
services to the Fund pursuant to a Fund Administration
Agreement with the Fund (the "Administration
Agreement"). For its services, UAM Fund Services
receives a fee based on net assets. UAM Fund Services'
principal office is located at 211 Congress Street,
Boston, Massachusetts 02110. UAM Fund Services has
subcontracted some of these services to Chase Global
Funds Services Company, an affiliate of The Chase
Manhattan Bank. Chase
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Global Funds Services Company is located at 73 Tremont
Street, Boston, Massachusetts 02108.
Chase Global Funds Services Company is the Fund's sub-
dividend disbursing agent, sub-transfer agent and sub-
shareholder servicing agent. The shareholder servicing
phone number is (800) 374-2633. All other administrative
and accounting functions are performed by UAM Fund
Services.
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 the semi-annual period ended June 30, 1997, the
Fund's ratio of operating expenses to average net assets
was 1.32% on an annualized basis.
BROKERAGE Under the terms of the Investment Management 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 a 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
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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.
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 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
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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.
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.
Shares of the Fund may be purchased by customers of
broker-dealers or other financial intermediaries
("Service Agents") which have established a shareholder
servicing relationship with the Fund on behalf of their
customers. Service Agents may impose additional or
different conditions on purchases or redemptions of Fund
shares and may charge transaction or other account fees.
Each Service Agent is responsible for transmitting to
its customers a schedule of any such fees and
information regarding additional or different purchase
or redemption conditions. Shareholders who are customers
of Service Agents should consult their Service Agent for
information regarding these fees and conditions. Amounts
paid to Service Agents may include transaction fees
and/or service fees paid by the Fund from the Fund
assets attributable to the Service Agent, which would
not be imposed if shares of the Fund were purchased
directly from the Fund or its distributor. Service
Agents may provide shareholder services to their
customers that are not available to a shareholder
dealing directly with the Fund.
Service Agents may enter confirmed purchase orders on
behalf of their customers. If shares of the Fund are
purchased in this manner, the Service Agent must receive
your investment order before the close of trading on the
New York Stock Exchange, and transmit it to the Fund's
Sub-Transfer Agent, Chase Global Funds Services Company,
prior to the close of their business day to receive that
day's share price. Proper payment for the order must be
received by the Sub-Transfer Agent no later than the
time when the Fund is priced on the following business
day. Service Agents are responsible to their customers
and the Fund for timely transmission of all subscription
and redemption requests, investment information,
documentation and money.
The Fund reserves the right to reject any purchase order
or to suspend or modify the continuous offering of its
shares.
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PURCHASE BY MAIL Initial purchases of Fund shares may be made by mailing
a completed and signed application, together with a
check payable to the Fund, to:
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The Analytic Optioned Street Address
Equity Fund, Inc. (overnight mail)
P.O. Box 2798 73 Tremont Street
Boston, MA 02208 Boston, MA 02108
(800) 374-2633
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Subsequent purchases of Fund shares may be made by
mailing to the above address the account stub which
accompanies any Fund confirmation statement along with a
check payable to the Fund or by mailing to the above
address a check payable to the Fund. If you chose to
mail a check without the account stub, please make sure
that your check includes your account number, account
name and the Fund's name.
PURCHASE BY WIRE Initial and subsequent purchases may be made by wiring
Federal Funds addressed:
The Chase Manhattan Bank
ABA #021000021
The Analytic Optioned Equity Fund, Inc. -- (DEFENSIVE
EQUITY PORTFOLIO)
CREDIT DDA 9102791614
Account Registration: (YOUR NAME)
Account #: (YOUR ACCOUNT NUMBER)
Before wiring funds you must telephone the Fund's
sub-transfer agent 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
certificates will be issued
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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's
sub-transfer agent at (800) 374-2633. 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 sub-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 sub-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 sub-transfer agent is
responsible for unauthorized telephone redemptions by a
person reasonably believed to be a shareholder unless
the sub-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.
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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's sub-transfer agent by telephone, shares may be
redeemed in writing as described below.
REDEMPTIONS BY WRITTEN A shareholder may also redeem all or part of his shares
INSTRUCTIONS by written request to the Fund's sub-transfer agent at
the address set forth above under "Purchase by Mail."
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;
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.
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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 4:00 P.M. Eastern 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
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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 the Fund's sub-transfer agent at
(800) 374-2633. The Fund's sub-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
sub-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 sub-transfer agent is
responsible for unauthorized telephone exchanges by a
person reasonably believed to be a shareholder unless
the sub-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 the Fund's
sub-transfer agent by telephone, shares may be exchanged
in writing as described below.
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A shareholder may exchange all or part of his shares by
written request to the Fund's sub-transfer agent at the
address set forth above under "Purchase by Mail." 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,
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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 (at the address set
forth above under "Purchase by Mail") or noting the
appropriate box on the application form. (See
"Withdrawal Plan".)
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
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discontinue them or terminate them by notifying the Fund
in writing at the address set forth above under
"Purchase by Mail." 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. 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
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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.
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 the 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
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.
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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 As a covered call and secured put option writer, the
TRANSACTIONS 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.
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
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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 1940 Act.
GENERAL INFORMATION The Fund's Custodian is The Chase Manhattan Bank.
Shareholder inquiries should be made by telephone at
(800) 374-2633 or in writing to the following address:
Analytic Funds Street Address
P.O. Box 2798 (overnight mail)
Boston, MA 02208 73 Tremont Street
(800) 374-2633 Boston, MA 02108
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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 independent certified public accountants.
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GLOSSARY OF INVESTMENT TERMS AND QUARTERLY TOTAL RETURNS:
STOCK AND DEBT OPTION TERMS The percentage change over a quarter in the value of a
INVESTMENT TERMS 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
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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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<TABLE>
<CAPTION>
PERCENT QUARTERLY TOTAL RETURN, S&P % %
500 STOCK INDEX, 1970-1996 YEAR QTR RETURN YEAR QTR RETURN YEAR QTR
--------- ----------- ---------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1970 1 (1.77) 1971 1 9.69 1972 1
2 (18.03) 2 0.16 2
3 16.92 3 (0.58) 3
4 10.41 4 4.64 4
1973 1 (4.89) 1974 1 (2.82) 1975 1
2 (5.77) 2 (7.56) 2
3 4.81 3 (25.16) 3
4 (9.18) 4 9.37 4
1976 1 14.98 1977 1 (7.45) 1978 1
2 2.47 2 3.31 2
3 1.91 3 (2.83) 3
4 3.22 4 (0.11) 4
1979 1 7.10 1980 1 (4.12) 1981 1
2 2.73 2 13.49 2
3 7.65 3 11.22 3
4 0.14 4 9.49 4
1982 1 (7.31) 1983 1 10.12 1984 1
2 (0.56) 2 11.10 2
3 11.52 3 (0.13) 3
4 18.25 4 0.40 4
1985 1 9.19 1986 1 14.11 1987 1
2 7.34 2 5.89 2
3 (4.10) 3 (6.97) 3
4 17.21 4 5.58 4
<CAPTION>
PERCENT QUARTERLY TOTAL RETURN, S&P %
500 STOCK INDEX, 1970-1996 RETURN
----------
<S> <C>
5.75
.67
3.92
7.56
22.95
15.36
(10.95)
8.65
(4.94)
8.51
8.67
(4.93)
1.38
(2.30)
(10.23)
6.93
(2.40)
(2.57)
9.70
1.89
21.36
5.02
6.60
(22.53)
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<CAPTION>
% %
YEAR QTR RETURN YEAR QTR RETURN YEAR QTR
--------- ----------- ---------- --------- ----------- ---------- --------- -----------
1988 1 5.70 1989 1 8.83 1990 1
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 6.67 2 7.09 2
3 0.33 3 10.71 3
4 3.08 4 2.07 4
1991 1 14.53 1992 1 (2.53) 1993 1
2 (0.22) 2 1.90 2
3 5.35 3 3.16 3
4 8.38 4 5.04 4
1994 1 (3.79) 1995 1 9.74 1996 1
2 0.42 2 9.55 2
3 4.89 3 3.59 3
4 (0.02) 4 10.49 4
<CAPTION>
%
RETURN
----------
(3.00)
<S> <C>
6.28
(13.75)
8.96
4.37
.49
2.58
2.32
5.37
4.49
3.09
8.35
</TABLE>
<TABLE>
<S> <C>
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.
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.
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40
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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.
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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.
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.
</TABLE>
42
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APPENDIX U.S. Government securities include (1) U.S. Treasury
DESCRIPTION OF U.S. GOVERNMENT obligations, which differ only in their interest rates,
SECURITIES. 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, OPTIONS ON STOCK INDEXES:
FUTURES CONTRACTS, AND RELATED Options on stock indexes are similar to options on stock
OPTIONS. 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
</TABLE>
43
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<S> <C>
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.
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
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
45
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<S> <C>
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.
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.
</TABLE>
46
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<S> <C>
OFFICERS AND DIRECTORS
CHAIRMAN OF THE
BOARD OF DIRECTORS... Michael F. Koehn
DIRECTOR............. Michael D. Butler
DIRECTOR............. Robertson Whittemore
PRESIDENT............ Harindra de Silva
EXECUTIVE VICE
PRESIDENT AND
SECRETARY............ Charles L. Dobson
TREASURER............ Gregory M. McMurran
SENIOR VICE
PRESIDENT............ Angelo A. Calvello
SENIOR VICE
PRESIDENT............ Marie Nastasi Arlt
</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
UAM Fund Services, Inc.
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208
CUSTODIAN
The Chase Manhattan Bank
1211 Avenue of the Americas
New York, NY 10036
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
The Analytic Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208
Phone: (800) 374-2633
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.
- ---------------------------------------------------------------------
- -------------------------------------------------------------------
ANALYTICFUNDS
THE DEFENSIVE
EQUITY PORTFOLIO
- ----------------------
OF ANALYTIC OPTIONED
EQUITY FUND
PROSPECTUS
OCTOBER 20, 1997
MEMBER OF
100% NO-LOAD-TM-
MUTUAL FUND COUNCIL
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