<PAGE>
As filed with the Securities and Exchange Commission on April 22, 1998
Securities Act File No. 2-60792
Investment Company Act of 1940 File No. 811-2807
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
POST-EFFECTIVE AMENDMENT NO. 29 [X]
and
REGISTRATION STATEMENT UNDER THE [_]
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 26
----------------------
THE ANALYTIC OPTIONED EQUITY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
700 South Flower Street, Suite 2400, Los Angeles, CA 90017
(Address of Principal Executive Offices)
Registrant's Telephone Number (213) 688-3015
HARINDRA DE SILVA
Analytic Optioned Equity Fund, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
(Name and Address of Agent for Service)
----------------------
COPY TO:
MICHAEL GLAZER
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90017
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[X] Immediately upon filing pursuant to Paragraph (b)
[_] on (date) pursuant to Paragraph (b)
[_] 60 days after filing pursuant to Paragraph (a)(1)
[_] on (date) pursuant to Paragraph (a)(1)
[_] 75 days after filing pursuant to Paragraph (a)(2)
[_] on (date) pursuant to Paragraph (a)(2) of Rule 485.
Registrant has registered an indefinite number of shares of its common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The registrant's Rule 24f-2 Notice for its most recent
fiscal year was filed on March 20, 1998.
<PAGE>
PROSPECTUS
APRIL 22, 1998
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
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Benefits to Investors...................................................... 3
Fund Expense Table......................................................... 4
Financial Highlights....................................................... 5
How Performance is Calculated.............................................. 6
The Fund................................................................... 7
Investment Objective and Policies.......................................... 7
Covered Option Writing................................................... 8
Risks of Option Writing.................................................. 11
Hedging Transactions..................................................... 12
Risk Factors in Hedging Transactions..................................... 16
Other Investment Techniques.............................................. 17
Portfolio Turnover....................................................... 20
Further Information...................................................... 20
Management of the Fund..................................................... 20
How to Purchase Shares..................................................... 24
How to Redeem Shares....................................................... 26
How to Exchange Shares..................................................... 29
Shareholder Accounts....................................................... 31
Tax Sheltered Retirement Plans............................................. 31
Withdrawal Plan............................................................ 32
Dividends, Distributions and Taxes......................................... 32
Distributions............................................................ 32
Taxation of Shareholders................................................. 33
Tax Considerations in Portfolio Transactions............................. 33
Capital Stock.............................................................. 34
General Information........................................................ 34
Glossary of Investment Terms and Stock and Debt Option Terms............... 34
Appendix................................................................... 39
</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.
THE DATE OF THIS PROSPECTUS AND THE RELATED
STATEMENT OF ADDITIONAL INFORMATION IS APRIL 22, 1998
<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 sales 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
<PAGE>
THE FUND OFFERS INVESTORS THESE BENEFITS
PROFESSIONAL MANAGEMENT.
Founded in 1970, Analytic.TSA Global Asset Management, Inc. (the "Adviser")
provides continuous professional management to the Fund's portfolio. By
pooling their assets, shareholders can participate in investments that
might not otherwise be available to the individual shareholder.
NO-LOAD.
There is never any sales charge, redemption fee, or 12b-1 promotional fees
when you buy or redeem shares in the Fund. All of your money goes to work
immediately to achieve your investment objectives.
LIQUIDITY.
Although the Fund is designed for long-term investment, you may redeem all
or part of your Fund shares at net asset value, on any business day,
without charge. Your investment is liquid.
CONVENIENCE.
Shareholders are relieved of the administrative burden associated with the
direct ownership of individual securities because the Fund handles all
record keeping, collecting dividends and interest, and safekeeping of
securities.
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. If the shareholders of
The Analytic Series Fund approve a proposal to merge into PBHG Advisor
Funds, Inc. at a shareholder meeting currently scheduled to be held on May
28, 1998, this exchange privilege will terminate.
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 0.10% as measured
by standard deviation as compared to a risk level of 0.15% 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 Annual Report
to Shareholders for the period ended December 31, 1997. The Fund also has
low credit risk and low interest rate risk.
3
<PAGE>
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, 1998 and are based on the Fund's
operations during the annual year ended December 31, 1997.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases........................................... None
Sales Load Imposed on Reinvested Dividends................................ None
Deferred Sales Load....................................................... None
Redemption Fees........................................................... None
Exchange Fee.............................................................. None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees.................................................. 0.75%
12b-1 Fees................................................................ None
Other Expenses............................................................ 0.55%
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Total Fund Operating Expenses............................................. 1.30%
=====
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
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 $41 $71 $157
</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
<PAGE>
FINANCIAL HIGHLIGHTS
The annual financial statements presented in the table below for each of the
ten years in the period ended December 31, 1997 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.
Copies of the Fund's 1997 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 14.38 $ 13.26 $ 11.12 $ 11.96 $ 11.97 $ 12.29
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... 0.13 0.20 0.24 0.31 0.33 0.27
Net realized or
unrealized gains
(losses) on investments
and options............ 2.61 1.87 2.14 (0.02) 0.48 0.48
------- ------- ------- ------- ------- -------
Total from investment
operations........... 2.74 2.07 2.38 0.29 0.81 0.75
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment
income(1).............. 0.13 0.20 0.24 0.31 0.33 0.29
From net realized
gains.................. 3.97 0.75 0.00 0.82 0.49 0.78
------- ------- ------- ------- ------- -------
Total distributions... 4.10 0.95 0.24 1.13 0.82 1.07
------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 13.02 $ 14.38 $ 13.26 $ 11.12 $ 11.96 $ 11.97
------- ------- ------- ------- ------- -------
TOTAL RETURN............ 19.11% 15.66% 21.52% 2.47% 6.73% 6.17%
------- ------- ------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period ($000).......... $46,286 $52,484 $42,648 $48,254 $76,948 $91,561
Ratio of expenses to
average net assets
Before expense reim-
bursement............. 1.30% 1.34% 1.38% 1.10% 1.07% 1.02%
After expense reim-
bursement............. -- 1.23% 1.22% -- -- --
Ratio of net investment
income to average net
assets................. 0.75% 1.43% 1.87% 3.45% 2.51% 2.33%
Portfolio turnover
rate................... 75.41% 43.17% 32.37% 48.71% 36.19% 81.73%
Average commission
rate(2)................ $0.0591 $0.0446 $0.0442 -- -- --
</TABLE>
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(1) For the year ended December 31, 1997, the distributions in excess of net
investment income amounted to $0.002.
(2) For fiscal years beginning on or after September 1, 1995, a portfolio is
required to disclose the average commission rate per share it paid for
portfolio trades on which commissions were charged. The formula for
calculating the average commission rate is total commissions paid divided
by total shares purchased and sold. This rate includes commissions paid on
option contracts where each contract is 100 shares.
5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1991 1990 1989 1988
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year....... $ 11.92 $ 13.00 $ 12.06 $ 11.38
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................... 0.40 0.46 0.50 0.39
Net realized or unrealized gains (losses)
on investments and options.............. 1.17 (0.27) 1.61 1.35
-------- -------- -------- --------
Total from investment operations....... 1.57 0.19 2.11 1.74
-------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income............... 0.40 0.48 0.51 0.40
From net realized gains.................. 0.80 0.79 0.66 0.66
-------- -------- -------- --------
Total distributions.................... 1.20 1.27 1.17 1.06
-------- -------- -------- --------
Net asset value, end of year............. $ 12.29 $ 11.92 $ 13.00 $ 12.06
-------- -------- -------- --------
TOTAL RETURN............................. 13.29% 1.54% 17.74% 15.60%
-------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)......... $100,548 $106,220 $106,474 $102,239
Ratio of expenses to average net assets.. 1.10% 1.11% 1.09% 1.13%
Ratio of net investment income to average
net assets.............................. 3.05% 3.68% 3.74% 3.44%
Portfolio turnover rate.................. 75.83% 72.20% 61.20% 66.11%
</TABLE>
HOW PERFORMANCE IS From time to time the Fund may report its "to-
CALCULATED tal return" in prospectuses, the Fund's annual
reports, shareholder communications, and adver-
tising.
Total return for a performance period is calcu-
lated by assuming a hypothetical initial in-
vestment ("p") in the Fund at the beginning of
the period. Then, assuming reinvestment of all
distributions into new Fund shares, a redeem-
able value at the end of the performance period
("ERV") is calculated based on actual Fund per-
formance. The percentage change between the
ending value and initial investment is the "cu-
mulated total return". The "average annual to-
tal 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 re-
turn.
THE FUND The Fund is a California corporation incorpo-
rated in 1977 and registered with the Securi-
ties 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.
6
<PAGE>
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 limita-
tions).
INVESTMENT OBJECTIVE AND The Fund's investment objective is to obtain a
POLICIES 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 accor-
dance with applicable requirements of the 1940
Act.
The Fund seeks to achieve its investment objec-
tive 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 cov-
ered 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 portfo-
lio securities, purchasing put and selling call
options on the same securities, and engaging in
transactions in stock index and interest rate
futures, stock index options, and options on
stock index and interest rate futures. The
Fund's strategy is to create a well diversified
and significantly hedged portfolio using com-
bined stock and option and fixed income and op-
tion positions. Typically, the Fund remains di-
versified across all industries represented in
the Standard & Poor's 500 Index with similar
industry weightings.
Total return will be obtained from the follow-
ing 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 apprecia-
tion, if any.
(6) interest income from money market instru-
ments, 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 writ-
ing programs and yields on stocks, money market
7
<PAGE>
instruments, U.S. Government securities, con-
vertible 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. Gov-
ernment securities, will be invested in divi-
dend paying common stocks which have been ap-
proved by one or more exchanges as underlying
securities for listed call or put options, or
securities which are convertible into such com-
mon stocks without the payment of further con-
sideration. The Fund may invest its cash re-
serves in securities of the U.S. Government and
its agencies or the following cash equivalents:
deposits in domestic banks, bankers' accept-
ances, certificates of deposit, commercial pa-
per, 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 Serv-
ice, Inc. Investments in registered investment
companies are limited by certain additional re-
strictions (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 re-
purchase the securities subject to the agree-
ment 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 or-
der (i) to achieve, through the receipt of pre-
miums, 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 writ-
ing involves risks--see "Risks of Option Writ-
ing" below.
COVERED CALL OPTIONS:
A call option gives the purchaser of the option
the right to buy, and the writer has the obli-
gation to sell, the underlying securities at
the
8
<PAGE>
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 un-
der the option, may be assigned an exercise no-
tice by the broker-dealer through whom the call
was sold, requiring him to deliver the under-
lying 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 op-
tion, or (ii) have the right to acquire the un-
derlying securities through immediate conver-
sion or exchange of convertible preferred
stocks or convertible debt securities owned by
the Fund, or (iii) hold on a security-for-secu-
rity 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 dif-
ference will be maintained in U.S. Government
securities in a segregated account with the
Custodian or broker).
To secure this obligation to deliver the under-
lying 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 ex-
change 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 Cus-
todian of its investment securities, or a secu-
rities depository acting for the Custodian, to
act as the Fund's escrow agent by issuing an
escrow receipt to the Clearing Corporation re-
specting the option's underlying securities.
The Clearing Corporation will release the secu-
rities from this escrow either upon the exer-
cise of the option, its expiration without be-
ing exercised or when the Fund enters into a
closing purchase transaction. Until such re-
lease the Fund cannot sell the underlying secu-
rities.
So long as his obligation as a writer contin-
ues, 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 ex-
change for increasing his return if the under-
lying 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 securi-
ties unoptioned. The Fund expects to increase
its long-term
9
<PAGE>
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 obliga-
tion to buy, the underlying security at the ex-
ercise price during the option period. As a se-
cured put writer, the Fund will invest an
amount equal to not less than the exercise
price of the put option in money market instru-
ments, or it will hold on a security-for-secu-
rity 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 differ-
ence will be maintained in U.S. Government se-
curities in a segregated account with the Cus-
todian 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 avail-
able equal to the exercise price of the option
to honor its obligation as a writer. The obli-
gation of a secured put option writer is termi-
nated 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 writ-
ing. The writer's gain on a put option is lim-
ited to interest earned on its money market in-
vestment plus the premium received, while the
risk is not less than the exercise price of the
option less the current market price of the un-
derlying stock when the put is exercised, off-
set 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 exer-
cise 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 hav-
ing 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 op-
tions when management believes that a liquid
secondary market will exist on a
10
<PAGE>
national securities exchange for options of the
same series so that the Fund can effect a clos-
ing purchase transaction if it desires to close
out its position. Consistent with the invest-
ment policies of the Fund, a closing purchase
transaction will ordinarily be effected to re-
alize 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 transac-
tion will permit the Fund to write another op-
tion on the underlying security with either a
different exercise price or expiration date or
both.
The premium the Fund receives for writing an
option will reflect, among other things, the
current market price of the underlying securi-
ty, the relationship of the exercise price to
such market price, the historical price vola-
tility 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 ob-
tain physical delivery of underlying common
stocks upon conversion or exchange of convert-
ible 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 de-
livery. 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 under-
lying 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 op-
tion. Once an option writer has received an ex-
ercise notice he cannot effect a closing pur-
chase transaction.
If a call expires unexercised, the covered
writer realizes a gain in the amount of the
premium received, although there may have been
11
<PAGE>
a decline (unrealized loss) in the market value
of the underlying security during the option
period which may exceed such gain. If the cov-
ered 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 pro-
ceeds being increased by the amount of the pre-
mium. 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 be-
cause 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 in-
vestment 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 Transac-
tions" below. The Fund's hedging strategies are
fundamental policies which cannot be changed
without the approval of the holders of a major-
ity of the Fund's outstanding voting securi-
ties. (See "Investment Restrictions and Other
Investment Policies" in the Statement of Addi-
tional Information.) See the Appendix for a
more complete description of the instruments
discussed below and see the Statement of Addi-
tional Information for more discussion of the
various options, futures contracts and portfo-
lio hedging strategies that may be used by the
Fund.
The extent to which the Fund may engage in the
hedging techniques and strategies described be-
low, including spread transactions, covered
call options and "forward conversion" transac-
tions, may be limited by the Internal Revenue
Code's requirements for qualification as a reg-
ulated investment company. See "Tax Information
and Option Accounting Principles" in the State-
ment 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
12
<PAGE>
of loss through a decline in the market value
of the security until the put expires. The
amount of any appreciation in the value of the
underlying security will be partially offset by
the amount of the premium paid for the put op-
tion 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 securi-
ties 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 transac-
tion. Profit or loss from such a sale will de-
pend 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 under-
lying 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 secu-
rity, the Fund receives premiums which may off-
set part or all of the cost of purchasing the
puts while foregoing the opportunity for appre-
ciation in the value of the underlying securi-
ty. The use of options in connection with for-
ward conversions is intended to hedge against
fluctuations in the market value of the under-
lying security. Although it is generally in-
tended 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 pur-
chasing put options.
OTHER HEDGING TOOLS The Fund may engage in the following hedging
transactions which are described more fully in
the Appendix: Stock index futures and related
options, stock index options, and financial
futures and related options.
13
<PAGE>
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 oth-
erwise result. When the Fund is not fully in-
vested 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 equiv-
alent 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 re-
sults from the purchase of a stock index
futures contract or the purchase of a call op-
tion on a stock index futures contract, but un-
der unusual market conditions, a long futures
position may be terminated without the corre-
sponding purchase of equity securities.
FINANCIAL FUTURES:
The Fund may purchase and sell financial
futures on U.S. Government securities, includ-
ing 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 in-
dex 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 de-
pend 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 anal-
ogous to the sale of a stock index futures con-
tract. Purchasing a call or selling a put op-
tion on a stock index is analogous to the pur-
chase of a stock index futures contract.
OPTIONS ON STOCK INDEX FUTURES:
The Fund may purchase and sell exchange listed
call and put options on stock index futures to
hedge against risks of market-wide price move-
ments. 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
14
<PAGE>
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 de-
pend 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 in-
dex futures contract. Purchasing a call or
selling a put option on a financial future is
analogous to the purchase of a stock index fu-
ture.
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 specu-
lation but only as a hedge against changes re-
sulting 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 ex-
isting futures and related options positions
and premiums paid for related options would ex-
ceed 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 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 pur-
chase 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.
15
<PAGE>
RISK FACTORS IN HEDGING The Fund's ability to hedge effectively all or
TRANSACTIONS a portion of its securities through transac-
tions 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 se-
curities correlate with price movements in the
relevant portion of the Fund's securities. In-
asmuch 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 instru-
ment and the hedged securities which would re-
sult in a loss on both such securities and the
hedging instrument.
In addition, there is the risk that the antici-
pated spread between the prices may be dis-
torted due to differences in the nature of the
markets, such as speculators in the futures
market. However, the risk of imperfect correla-
tion generally tends to diminish as the matu-
rity date of the futures contract approaches.
Positions in stock index options, stock index
futures and financial futures and related op-
tions 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 op-
tion 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 posi-
tions also could have an adverse impact on the
Fund's ability to effectively hedge its securi-
ties. The Fund will enter into an option or
futures position only if there appears to be a
liquid secondary market for such options or
futures and does not intend to take delivery of
the instruments underlying financial futures
contracts it holds.
The Commodities Futures Trading Commission and
the various exchanges have established limits
referred to as "speculative position limits" on
the maximum net long or net short position
which any person may hold or control in a par-
ticular 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 liquida-
tion 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.
16
<PAGE>
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 ac-
count with its Custodian to broker-dealers pur-
suant 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 "In-
vestment Restrictions and Other Investment Pol-
icies" in the Statement of Additional Informa-
tion.) Such loans will not be made if as a re-
sult the aggregate of all outstanding securi-
ties 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 inter-
est 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 appli-
cable regulatory requirements. There may be
risks of delay in receiving additional collat-
eral, 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 con-
sideration which can be earned currently from
such securities loans justifies the attendant
risk.
SHORT SALES AGAINST THE BOX AND SYNTHETIC PUT
OPTIONS:
The Fund may make short sales of common stocks,
provided that at all times that a short posi-
tion is open the Fund owns at least an equal
amount of preferred stocks or debt securities
convertible or exchangeable into an equal num-
ber of shares of the common stocks sold short
(known as short sales "against the box") with-
out 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 se-
curities 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 corre-
sponding long position in a call option on the
same security is known as a "synthetic put" po-
sition because it has the same investment char-
acteristics as owning a protective put option
on the same underlying security.
17
<PAGE>
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 com-
mon stocks sold short, the Fund will receive
the dividends from the preferred stocks or in-
terest from the securities convertible into the
stocks sold short, plus a portion of the inter-
est earned from the proceeds of the short sale.
The Fund will not make short sales of any op-
tioned 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 lim-
ited by the Internal Revenue Code's (the
"Code") requirements for qualification as a
regulated investment company and the Fund's in-
tention to qualify as such. (See "Tax Informa-
tion and Option Accounting Principles" in the
Statement of Additional Information.)
Synthetic put positions are sometimes advanta-
geous for the Fund to enter instead of purchas-
ing an actual put option. For example, the Fund
may engage in spreads in which it is both the
purchaser and the covered writer of the same
type of option (puts or calls) on the same un-
derlying security with the options having dif-
ferent exercise prices and/or expiration dates.
When the Fund enters into such a spread involv-
ing two put options, it is sometimes advanta-
geous 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 invest-
ment companies are intended to (i) provide an
investment vehicle for the Fund's cash reserves
that the Fund does not want to commit to risk-
ier investments, (ii) facilitate investment
strategies in which high-grade collateral is
required, or (iii) facilitate investment strat-
egies 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
purchas-
18
<PAGE>
ing securities only to the extent that is per-
mitted under the 1940 Act. The 1940 Act gener-
ally permits the Fund to purchase or otherwise
acquire securities issued by another investment
company so long as, immediately after such ac-
quisition, 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 simi-
lar 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 pur-
chase that could not be made economically in a
direct fashion. As other investment companies
pay management fees to their investment advis-
ers, 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 Fund in an
amount exceeding 1% of the company's outstand-
ing shares during any period of less than
thirty days.
REPURCHASE AGREEMENTS:
The Fund may purchase U.S. Government securi-
ties and concurrently enter into so-called "re-
purchase 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 se-
curities, the Fund will follow procedures de-
signed 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 re-
purchase 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 bank-
ruptcy by a seller, the Fund will seek to liq-
uidate 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.
19
<PAGE>
PORTFOLIO TURNOVER The Fund will not attempt to achieve, nor will
it be limited to, a predetermined rate of port-
folio 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 150%; 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,
1997 and 1996, the Fund's portfolio turnover
rates were 75.41% and 43.17%, respectively.
Higher portfolio turnover involves correspond-
ingly greater brokerage commissions and other
transaction costs that must be borne by the
Fund and its shareholders. The Fund will pay
brokerage commissions on its securities trans-
actions and in connection with the purchase and
sale of options as well as for selling a secu-
rity on exercise of a call option and buying a
security on exercise of a put option. High
portfolio turnover may also result in the real-
ization of substantial net short-term capital
gains, and any distributions resulting from
such gains will be ordinary income for federal
income tax purposes.
FURTHER INFORMATION The Fund's investment objective and policies
are subject to certain restrictions, including
limitations on borrowing, short sales of secu-
rities and investments in real estate companies
or securities secured by real estate, which re-
strictions may not be changed without approval
of the holders of a majority of the Fund's out-
standing shares. In addition, certain factors
may restrict the ability of the Fund to write
options. These restrictions and factors are de-
scribed in the Statement of Additional Informa-
tion.
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 in-
vestment adviser of the Fund. The Adviser is a
wholly owned subsidiary of United Asset Manage-
ment Corporation, a holding company described
under "Management of the Fund" in the Statement
of Additional Information.
The Adviser was founded in 1970 as Analytic In-
vestment Management, Inc. one of the first in-
dependent 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
20
<PAGE>
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-shar-
ing plans, endowments, foundations, corporate
investment portfolios, mutual savings banks,
and insurance companies, for which it manages
in excess of $1 billion. It is also the invest-
ment adviser of The Analytic Series Fund, a
registered investment company which commenced
operations in late 1992. If the shareholders of
The Analytic Series Fund approve a proposal to
merge its various series into newly created se-
ries of PBHG Advisor Funds, Inc. (the "PBHG
Funds") at a shareholder meeting currently
scheduled to be held on May 28, 1998, the Ad-
viser will serve as sub-adviser of the corre-
sponding series of the PBHG Funds effective
upon consummation of the proposed merger.
Pursuant to an Investment Management Agreement
with the Fund, the Adviser, subject to the con-
trol and direction of the Fund's Officers and
Board of Directors, manages the portfolio of
the Fund in accordance with its stated invest-
ment objective and policies and makes invest-
ment decisions for the Fund. Dennis M. Bein and
Harindra de Silva are the portfolio managers
for the Fund. Mr. Bein has been a member of the
portfolio manager and research team for the Ad-
viser since August 1995. From August 1990 to
March 1998, he was with Analysis Group, Inc.,
most recently as a senior associate. Dr. de
Silva is the President of the Fund and of the
Adviser, which he joined as a managing director
in May 1995. Previously he served as a princi-
pal of Analysis Group, Inc. from March 1986
through March 1998. They are subject to the su-
pervision of the Adviser's investment manage-
ment committee.
MANAGEMENT FEES As compensation for furnishing investment advi-
sory, management, and other services, and costs
and expenses assumed, pursuant to the Invest-
ment Management Agreement the Fund pays the Ad-
viser an annual fee equal to 0.75% of the first
$100 million of average daily net assets, 0.65%
of the next $100 million of average daily net
assets, and 0.55% of average daily net assets
in excess of $200 million.
DISTRIBUTOR UAM Fund Distributors, Inc., (the "Distribu-
tor") a wholly-owned subsidiary of United Asset
Management Corporation, is the distributor of
the Fund's shares. Its principal office is lo-
cated at 211 Congress Street, Boston, Massachu-
setts 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 distrib-
utor of Fund shares. The Distributor does not
receive any
21
<PAGE>
fee or other compensation under the Distribu-
tion Agreement. The Distribution Agreement pro-
vides that the Fund will bear costs of regis-
tration of its shares with the SEC and various
states as well as the printing of its prospec-
tuses, 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 Man-
agement Corporation, performs and oversees all
administrative, fund accounting, dividend dis-
bursing 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 serv-
ices to Chase Global Funds Services Company, an
affiliate of The Chase Manhattan Bank. Chase
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 fiscal year ended December 31, 1997, the
Fund's ratio of operating expenses to average
net assets was 1.30% 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 pur-
chase and sale of portfolio securities, includ-
ing options and futures, who in its best judg-
ment 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 transac-
tion or transactions; the ability and willing-
ness of the broker-dealer to facilitate each
transaction by participation therein for its
own account; the importance to the Fund of
speed, efficiency, or
22
<PAGE>
confidentiality; the broker-dealer's apparent
familiarity with sources from or to whom par-
ticular 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 rele-
vant to the selection of a broker-dealer for
particular and related portfolio transactions
of the Fund. Subject to the foregoing obliga-
tion to seek best execution, the Adviser may
consider as factors in the allocation of port-
folio transactions to a broker-dealer the bro-
ker-dealer's sale of Fund shares, agreement to
pay operating expenses of the Fund, or the pro-
vision of research services to the Adviser.
Money market securities are traded primarily in
the over-the-counter market. Where possible,
the Fund will deal directly with the dealers
who make a market in the securities involved
except in those circumstances where better
prices and execution are available elsewhere.
Such dealers usually are acting as principal
for their own account. On occasion, securities
may be purchased directly from the issuer.
Money market securities are generally traded on
a net basis and do not normally involve either
brokerage commission or transfer taxes. The
cost of executing portfolio transactions will
primarily consist of dealer spreads and under-
writing 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 ex-
changes 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 val-
ued at fair value in accordance with methods
determined in good faith by or under the direc-
tion of the Fund's Board of Directors.
23
<PAGE>
Money market securities are valued at the most
recent bid price or yield equivalent as ob-
tained from dealers that make markets in such
securities. Securities with a remaining matu-
rity of 60 days or less are valued on an amor-
tized 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 im-
pact of fluctuating interest rates on the mar-
ket value of the security.
HOW TO PURCHASE SHARES Shares of the Fund are purchased directly from
the Fund with no sales charge or commission at
net asset value next computed after an order
and payment are received by the Fund. Any order
received after 1:00 P.M. Pacific Time will be
processed at the next day's closing net asset
value. There is no minimum on initial or subse-
quent 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 custom-
ers of broker-dealers or other financial inter-
mediaries ("Service Agents") which have estab-
lished a shareholder servicing relationship
with the Fund on behalf of their customers.
Service Agents may impose additional or differ-
ent 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 addi-
tional or different purchase or redemption con-
ditions. 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 attribut-
able 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 or-
ders on behalf of their customers. If shares of
the Fund are purchased in this manner, the
Service Agent must receive your investment or-
der 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
24
<PAGE>
priced on the following business day. Service
Agents are responsible to their customers and
the Fund for timely transmission of all sub-
scription and redemption requests, investment
information, documentation and money.
The Fund reserves the right to reject any pur-
chase order or to suspend or modify the contin-
uous offering of its shares.
PURCHASE BY MAIL Initial purchases of Fund shares may be made by
mailing a completed and signed application, to-
gether with a check payable to the Fund, to:
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
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 num-
ber, 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 ap-
plication 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 "Exchang-
ing Shares" discussed below.
25
<PAGE>
All shares (including reinvested dividends and
capital gain distributions) are issued or re-
deemed 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 except for investors whose regu-
lators require them to hold certificates. In-
stead, an account will be established for each
shareholder and all shares purchased will be
held in book entry form by the Fund. Any trans-
action respecting an account, including rein-
vestment 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 Provided the shareholder has previously estab-
PRIVILEGE lished the telephone redemption privilege (by
completing the telephone redemption portion of
his application to purchase shares or by subse-
quent 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. Tele-
phone redemption privileges are not permitted
for Analytic prototype retirement plans.
The Fund's sub-transfer agent will employ pro-
cedures designed to provide reasonable assur-
ance that instructions communicated by tele-
phone are genuine and, if it does not do so, it
may be liable for any losses due to unautho-
rized or fraudulent instructions. The proce-
dures employed by the sub-transfer agent in-
clude 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 tele-
phone redemption authorization. The Fund may
change or discontinue the telephone redemption
privilege without notice. For your protection,
the Fund and its agents reserve the right to
record all calls.
The Fund reserves the right to refuse a tele-
phone redemption if it believes it is advisable
to do so. Telephone redemptions may be
26
<PAGE>
difficult to implement during periods of dras-
tic economic or market changes, which may re-
sult 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
INSTRUCTIONS his shares by written request to the Fund's
sub-transfer agent at the address set forth
above under "Purchase by Mail." The written re-
quest must be endorsed by the registered own-
er(s) exactly as the account is registered, in-
cluding 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 sup-
porting 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 re-
quired 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 De-
posit Insurance Corporation, a member firm of a
national securities exchange or another eligi-
ble 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 in-
structions for the financial institution desig-
nated to receive redemption proceeds directly
into a shareholder's account; and
4. procedures involving disputed or deceased
shareholder accounts.
GENERAL Shares are redeemed without charge at the net
asset value next computed after instructions
and required documents are received in proper
form. Any instructions received after 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
27
<PAGE>
business days from the day the redemption re-
quest is received. Any letter of instruction
must be signed exactly as the account is regis-
tered, including any special capacity of the
registered owner. Under the Interest and Divi-
dend 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 fur-
nishing 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 de-
layed until the Fund has ascertained the with-
holding requirements applicable to the distri-
bution. Investors may send withholding instruc-
tions 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 withhold-
ing is desired and that the investor under-
stands 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 re-
deem 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 re-
demption check until such time as it has deter-
mined that good payment has been collected for
the purchase of such shares. In addition, the
Fund reserves the right to defer honoring re-
demption requests where the shares to be re-
deemed 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 ac-
count 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 ac-
count 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 portfo-
lio in The Analytic Series Fund. Ex-
28
<PAGE>
changes are processed at the net asset value
per share next computed after receipt of in-
structions in proper form. If the shareholders
of The Analytic Series Fund approve a proposal
to merge into the PBHG Funds at a shareholder
meeting currently scheduled to be held on May
28, 1998, this exchange privilege will termi-
nate.
EXCHANGING SHARES BY Provided that Telephone Exchange Privileges
TELEPHONE have been established (by completing the "Tele-
phone Exchange Privileges" portion of the Ac-
count Registration or by subsequent written in-
structions 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 pro-
vide 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 in-
structions. 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 tele-
phone 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 un-
usually high volume of telephone calls. If a
shareholder is unable to reach the Fund's sub-
transfer agent by telephone, shares may be ex-
changed in writing as described below.
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.
29
<PAGE>
IMPORTANT EXCHANGE Before you make an exchange you should consider
INFORMATION 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 transac-
tion is taxable.
3. Recently purchased shares may not be ex-
changed 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 re-
quest, 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 registra-
tions 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 af-
ter 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 The Fund's exchange privilege is not intended
LIMITATIONS 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 man-
agement of the Fund and increase transaction
costs, the Fund may establish a policy of lim-
iting 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 con-
firmation of the opening of his account. There-
after, whenever a transaction takes place in
the account, such as a purchase, redemption,
transfer, change of address, reinvestment of
income or capital gain distributions, or with-
drawal 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 distri-
butions 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
30
<PAGE>
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 un-
der "Purchase by Mail") or noting the appropri-
ate box on the application form. (See "With-
drawal Plan".)
TAX SHELTERED RETIREMENT Shares of the Fund may be purchased in connec-
PLANS tion with certain prototype tax sheltered re-
tirement plans, (IRA, SEP-IRA and profit shar-
ing and money-purchase plans) for corporations,
partnerships and self-employed individuals to
benefit themselves and their employees. Invest-
ors with existing plans who wish to invest
their plan assets in the Fund without adopting
a prototype may do so by completing the Appli-
cation 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 pro-
totype 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 custo-
dian, set-up, activity, and annual maintenance
fees. Complete information and simplified forms
to establish new accounts, or to transfer as-
sets 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 real-
ized gain distributions attributable to the ac-
count 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 with-
drawal payments. The shareholder may vary the
amount or frequency of withdrawal payments,
temporarily 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 disburse-
ments may reduce or even exhaust a shareholder
account.
31
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND
TAXES
TAX STATUS OF THE FUND The Fund intends to qualify as a "regulated in-
vestment 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 distribu-
tions. 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 qualifica-
tion which the Fund might not meet in any par-
ticular year. If it did not so qualify, it
would be treated for tax purposes as an ordi-
nary 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 an-
nually and may be distributed more frequently
at the discretion of the Fund's Board of Direc-
tors. 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 frac-
tional shares rounded to the third decimal
place, at the net asset value per share deter-
mined on the payment date.
TAXATION OF SHAREHOLDERS Dividends paid by the Fund from net investment
income, whether in cash or reinvested in
shares, are taxable to shareholders as ordinary
income. Short-term capital gains will be taxed
as ordinary income. Long-term capital gains
distributions are taxed as long-term capital
gains. Shareholders will be notified annually
of dividend income earned for tax purposes.
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.
Pursuant to the Interest and Dividend Tax Com-
pliance Act of 1983, shareholders may be sub-
ject to backup withholding of federal income
tax at a 31% rate on dividends and other pay-
ments made to shareholders if they have not
provided the Fund with their correct social se-
curity number or other taxpayer identification
number, or have not made the certifications re-
quired by the Internal Revenue Service. These
certifications must be made on the application
or on a separate form supplied by the Fund.
32
<PAGE>
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 capi-
tal gain distribution paid shortly after a pur-
chase 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 could
be subject to income taxes. Accordingly, prior
to purchasing shares of the Fund, an investor
should carefully consider the impact of divi-
dends or capital gains distributions which are
expected to be or have been announced. Each
shareholder of the Fund is advised to consult
his own tax adviser with respect to applicable
Federal, state and local tax laws.
TAX CONSIDERATIONS IN
PORTFOLIO TRANSACTIONS As a covered call and secured put option writ-
er, the Fund has great flexibility in determin-
ing the taxable nature of its investment re-
sults, 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 capi-
tal appreciation earned on such securities be-
low 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 in-
vestment objective, to minimize its sharehold-
ers' ordinary taxable income by offsetting, to
the extent possible, any net short-term capital
gains that may have been realized from expired
options and profitable closing purchase trans-
actions 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 in-
come, thus being subject to the payment of in-
come 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 mil-
lion 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 vot-
ing may apply, each share is entitled to one
33
<PAGE>
vote and to participate equally in dividends
and distributions declared by the Fund. Cumula-
tive voting means that each shareholder is en-
titled to as many votes as shall equal the num-
ber 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 sin-
gle 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 sharehold-
ers except when required by the 1940 Act.
GENERAL INFORMATION The Fund's Custodian is The Chase Manhattan
Bank.
Shareholder inquiries should be made by tele-
phone 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
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 state-
ments of the Fund will be audited by indepen-
dent certified public accountants.
GLOSSARY OF INVESTMENT TERMS QUARTERLY TOTAL RETURNS:
AND STOCK AND DEBT OPTION
TERMS
INVESTMENT TERMS The percentage change over a quarter in the
value of a shareholder's investment, assuming
immediate reinvestment of all distributions in
additional Fund shares and no adjustment for
the shareholder's income tax consequences. This
change derives from: dividends, interest, real-
ized capital gains or losses, changes in
unrealized capital appreciation or deprecia-
tion, premiums received from expired options
and gains or losses on closing purchase trans-
actions, 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 pe-
riod. If the value of his investment, after im-
mediate 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 re-
turn for the period would be -1%.
LONG TERM TOTAL RETURNS:
The percentage change in the value of a share-
holder's initial investment after a full market
cycle (usually 3 or more years), expressed
34
<PAGE>
as a constant annual compound rate of total re-
turn, assuming the reinvestment of all subse-
quent 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 distri-
butions 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 com-
puted 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. Similar-
ly, if after three years the net asset value
per share is $64.89 then the initial $100 in-
vestment is worth $77.87 (1.2 X $64.89) and has
had a negative return of 8% per annum compound-
ed. Also if after three years the net asset
value per share is $83.33 then the initial $100
investment is worth $100 (1.2 X $83.33) and has
had a net return of zero per cent per annum. As
these examples show, the basic components on
total return, income and the change in value of
the portfolio securities will vary and there
can be no assurance that the Fund's total re-
turn 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 invest-
ment portfolio. For example, the following ta-
ble shows the 112 quarterly total returns (as-
suming 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-eight year period ended Decem-
ber 31, 1997. The arithmetic average of these
quarterly returns is 3.63% and their standard
deviation is 7.96%. In 32 of these 112 quarters
the total return was negative.
35
<PAGE>
PERCENT QUARTERLY TOTAL
RETURN, S&P 500 STOCK INDEX,
1970-1997
<TABLE>
<CAPTION>
% % %
YEAR QTR RETURN YEAR QTR RETURN YEAR QTR RETURN
---- --- ------ ---- --- ------ ---- --- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1970 1 (1.77) 1971 1 9.69 1972 1 5.75
2 (18.03) 2 0.16 2 .67
3 16.92 3 (0.58) 3 3.92
4 10.41 4 4.64 4 7.56
1973 1 (4.89) 1974 1 (2.82) 1975 1 22.95
2 (5.77) 2 (7.56) 2 15.36
3 4.81 3 (25.16) 3 (10.95)
4 (9.18) 4 9.37 4 8.65
1976 1 14.98 1977 1 (7.45) 1978 1 (4.94)
2 2.47 2 3.31 2 8.51
3 1.91 3 (2.83) 3 8.67
4 3.22 4 (0.11) 4 (4.93)
1979 1 7.10 1980 1 (4.12) 1981 1 1.38
2 2.73 2 13.49 2 (2.30)
3 7.65 3 11.22 3 (10.23)
4 0.14 4 9.49 4 6.93
1982 1 (7.31) 1983 1 10.12 1984 1 (2.40)
2 (0.56) 2 11.10 2 (2.57)
3 11.52 3 (0.13) 3 9.70
4 18.25 4 0.40 4 1.89
1985 1 9.19 1986 1 14.11 1987 1 21.36
2 7.34 2 5.89 2 5.02
3 (4.10) 3 (6.97) 3 6.60
4 17.21 4 5.58 4 (22.53)
1988 1 5.70 1989 1 8.83 1990 1 (3.00)
2 6.67 2 7.09 2 6.28
3 0.33 3 10.71 3 (13.75)
4 3.08 4 2.07 4 8.96
1991 1 14.53 1992 1 (2.53) 1993 1 4.37
2 (0.22) 2 1.90 2 .49
3 5.35 3 3.16 3 2.58
4 8.38 4 5.04 4 2.32
1994 1 (3.79) 1995 1 9.74 1996 1 5.37
2 0.42 2 9.55 2 4.49
3 4.89 3 3.59 3 3.09
4 (0.02) 4 10.49 4 8.35
1997 1 2.69
2 17.44
3 7.49
4 2.88
</TABLE>
36
<PAGE>
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 se-
curity and traded on one or more Exchanges, as
defined below, or subject to regulatory ap-
proval is traded over-the-counter. Currently
options are traded on common stocks, stock in-
dexes, stock index futures; on U.S. Treasury
bonds, notes, and bills; and on GNMA securi-
ties. 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 secu-
rity covered by the option at a fixed or deter-
minable 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 obli-
gated as a writer (seller) of an option termi-
nates his obligation as a writer by purchasing
on an exchange, in a closing purchase transac-
tion, an option of the same series as the op-
tion previously written. Such a transaction has
the effect of canceling the option writer's po-
sition as a writer and does not result in the
ownership of a new option.
CLOSING SALE TRANSACTION:
A transaction in which an investor who is the
holder of an outstanding option liquidates his
position as a holder by selling an option of
the same series as the option previously pur-
chased. Such sale does not result in the in-
vestor 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 under-
lying security or a security which is immedi-
ately 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 se-
curities in a segregated account with the writ-
er's broker or custodian.
37
<PAGE>
COVERED PUT OPTION WRITER:
A writer of a put option who, so long as he re-
mains obligated as a writer, has deposited U.S.
Government securities with a value equal to or
greater than the exercise price with a securi-
ties depository and has pledged them to the Op-
tions Clearing Corporation for the account of
the broker-dealer carrying the writer's posi-
tion 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 differ-
ence is maintained by the writer in U.S. Gov-
ernment 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"), Phil-
adelphia Stock Exchange ("PHLX") and New York
Stock Exchange ("NYSE").
EXERCISE PRICE:
The price per unit at which the holder of a
call option may purchase (and the holder of a
put option may sell) the underlying security
upon exercise of the option, sometimes referred
to as the striking price.
EXPIRATION DATE:
The latest date when an option may be exer-
cised.
NASDAQ OPTIONS:
Standardized options on unlisted securities
which are displayed on the National Association
of Securities Dealers Automated Quotations Sys-
tem.
OPTION PERIOD:
The time during which an option may be exer-
cised, 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.
38
<PAGE>
PUT OPTION:
Any option issued by the Clearing Corporation
and traded on one or more of the Exchanges re-
ferred 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 expira-
tion 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. Compari-
sons of performance assume reinvestment of div-
idends.
UNDERLYING SECURITIES:
The securities subject to purchase upon the ex-
ercise of a call option or subject to sale upon
the exercise of a put option.
APPENDIX U.S. Government securities include (1) U.S.
DESCRIPTION OF U.S. Treasury obligations, which differ only in
GOVERNMENT SECURITIES. their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one
year or less), U.S. Treasury notes (maturities
of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten
years); and (2) obligations issued or guaran-
teed by U.S. Government agencies and instrumen-
talities which are supported by any of the fol-
lowing: (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 obliga-
tions of the U.S. Government agency or instru-
mentality, or (d) the credit of the instrumen-
tality. Agencies and instrumentalities include:
Federal Land Banks, Farmers Home Administra-
tion, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan
Banks, and Federal National Mortgage Associa-
tion.
39
<PAGE>
GNMA Certificates are mortgage-backed securi-
ties 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 in-
sured 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 inter-
est and principal on each mortgage is guaran-
teed 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 ON STOCK INDEXES:
OPTIONS, FUTURES CONTRACTS,
AND RELATED OPTIONS.
Options on stock indexes are similar to options
on stock except that the delivery requirements
are different. Instead of giving the right to
take or make delivery of stock at a specified
price, an option on a stock index gives the
holder the right to receive a cash "exercise
settlement amount" equal to (i) the amount by
which the fixed exercise price of the options
exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of
the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier".
Receipt of this cash amount will depend upon
the closing level of the stock index upon which
the option is based being greater than, in the
case of a call, or less than, in the case of a
put, the exercise price of the option. The
amount of cash received will be equal to such
difference between the closing price of the in-
dex and the exercise price of the option ex-
pressed in dollars times a specified multiple.
The writer of the option is obligated, in re-
turn 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 gener-
ally (or in a particular industry or segment of
the market) rather than price movements of in-
dividual securities.
As with stock options, the Fund may offset its
position in stock index options prior to expi-
ration by entering into a closing transaction
on an exchange or it may let the option expire
unexercised.
40
<PAGE>
A stock index fluctuates with changes in the
market value of the stocks included in the in-
dex. 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. In-
dexes are also based on an industry or market
segment such as the AMEX Oil and Gas Index or
the Computer and Business Equipment Index. Op-
tions on stock indexes are currently traded on
the following exchanges among others: The Chi-
cago Board Options Exchange, New York Stock Ex-
change 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 in-
dex 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 under-
lying instruments. The Fund will be required to
deposit with its Custodian or broker an amount
of cash, cash equivalents, money market instru-
ments or U.S. Treasury bills equal to approxi-
mately 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 in-
creases or decreases in the contract's value.
At any time prior to expiration of the stock
index futures contract, the Fund may elect to
close the position by taking an opposite posi-
tion. 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, includ-
ing offsetting transactions. Stock index
futures are currently traded on the following
exchanges among others: Chicago Mercantile Ex-
change, 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 ter-
minology similar to other exchange traded op-
tions discussed above. See "Stock Index
Futures" above for a description of the instru-
ments 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
41
<PAGE>
for in the contract at a specified future time
for a specified price. A financial futures con-
tract 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, respec-
tively, on the settlement date, are not deter-
mined until at or near that date. The determi-
nation 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 pur-
chase price, the Fund realizes a gain, and if
the purchase price exceeds the offsetting sale
price, the Fund realizes a loss.
The purchase or sale of a futures contract dif-
fers from the purchase or sale of the security,
in that no price or premium is paid or re-
ceived. 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 posi-
tion 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 transac-
tions.
Currently, financial futures contracts can be
purchased or sold on U.S. Treasury bills, U.S.
Treasury bonds, U.S. Treasury notes with
42
<PAGE>
maturities between 2 and 10 years, on GNMA Cer-
tificates, 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. Govern-
ment and GNMA Certificates are guaranteed by a
U.S. Government agency, the futures contracts
in U.S. Government securities are not obliga-
tions 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 re-
sponsible for handling daily accounting of de-
posits or withdrawals of margin.
OPTIONS ON FINANCIAL FUTURES:
Put and call options are traded on financial
futures contracts, and they have characteris-
tics and terminology similar to other exchange
traded options. See "Financial Futures Con-
tracts" above for a description of the instru-
ments underlying these options.
43
<PAGE>
ANALYTICFUNDS
THE DEFENSIVE
EQUITY PORTFOLIO
of Analytic Optioned
Equity Fund
PROSPECTUS
April 22, 1998
MEMBER OF
--------------------------------
100% NO-LOAD MUTUAL FUND COUNCIL
--------------------------------
OFFICERS AND DIRECTORS
CHAIRMAN OF THE
BOARD OF DIRECTORS
Michael F. Koehn
Michael D. Butler
DIRECTOR
Robertson Whittemore
DIRECTOR
Harindra de Silva
PRESIDENT
Gregory M. McMurran
TREASURER
SENIOR VICE PRESIDENT AND SECRETARY
Marie Nastasi Arlt
INVESTMENT ADVISER
Analytic . TSA Global Asset Management, 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
125 Summer Street
Boston, MA 02110
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.
<PAGE>
PART B
THE DEFENSIVE EQUITY PORTFOLIO
OF ANALYTIC OPTIONED EQUITY FUND
(800)374-2633
April 22, 1998
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus but should be
read in conjunction with the Prospectus for The Defensive Equity Portfolio of
Analytic Optioned Equity Fund, Inc. (the "Fund") dated April 22, 1998. A copy of
the Prospectus may be obtained by telephoning the Fund at the telephone number
shown above.
TABLE OF CONTENTS
Page
----
Investment Objective and Policies . . . . . . . . . . . . . . . . 1
Covered Option Writing . . . . . . . . . . . . . . . . . . . 2
Factors Which May Adversely Affect Transactions in Options . 3
Position Limitations . . . . . . . . . . . . . . . . . . . . 4
Investment Restrictions and Other Investment Policies . . . . . . 4
Hedging Transactions in Options, Futures and Related Options. . . 7
Stock Index Options. . . . . . . . . . . . . . . . . . . . . 7
Stock Index Futures. . . . . . . . . . . . . . . . . . . . . 7
Options on Stock Index Futures . . . . . . . . . . . . . . . 7
Financial Futures and Related Options. . . . . . . . . . . . 8
Management of the Fund. . . . . . . . . . . . . . . . . . . . . . 8
Investment Advisory and Other Services. . . . . . . . . . . . . . 9
Administrative Services . . . . . . . . . . . . . . . . . . 11
Distributor . . . . . . . . . . . . . . . . . . . . . . . . 11
Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Tax Information and Option Accounting Principles. . . . . . . . . 13
Calculation of Performance Data and Other Performance Comparisons
and Statistics. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Performance Quotations . . . . . . . . . . . . . . . . 16
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . 18
Pricing and Redemption of Fund Shares . . . . . . . . . . . . . . 18
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Transfer, Dividend Disbursing and Shareholder Servicing Agent . . 19
Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . 20
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 20
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve this objective. The following information supplements the
discussion in the Prospectus.
<PAGE>
COVERED OPTION WRITING. In return for the premium received, a covered call
option writer during the term of the option is subject to the risk of losing the
potential for capital appreciation above the exercise price. Likewise, a secured
put option writer retains the risk of loss should the value of the underlying
security decline below the exercise price. In both cases the writer has no
control over the time when he has to fulfill his obligation as a writer of the
option. Once an option writer has received an exercise notice he cannot effect a
closing purchase transaction.
If a call option expires unexercised, the covered option writer realizes a
gain in the amount of the premium received although there may have been a
decline (unrealized loss) in the market value of the underlying security during
the option period which may exceed such gain. If the covered option writer has
to sell the underlying security because of the exercise of a call option, the
writer will realize a gain or loss from the sale of the underlying security with
the proceeds being increased by the amount of the premium. If a put option
expires unexercised, the secured put option writer realizes income from the
amount of the premium plus the interest income of the money market investment.
If the secured put writer has to buy the underlying security because of the
exercise of the put option, the secured put writer incurs an unrealized loss to
the extent that the current market value of the underlying security is less than
the exercise price of the put option. However, this may be offset in whole or in
part by the premium received and any interest income earned on the money market
investment.
A call option gives the purchaser of the option the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security at the exercise
price during the option period. So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates upon expiration of the option,
or such earlier time at which the writer effects a closing purchase transaction
by purchasing an option of the same series as he previously sold. Once a writer
has been assigned an exercise notice in respect of an option, he is thereafter
not allowed to effect a closing purchase transaction. To secure his obligation
to deliver the underlying security in the case of a call option, or to pay for
the underlying security in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "Clearing
Corporation") and of the Exchanges.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater long term total
return and smaller fluctuations in quarterly return than would be realized on
the securities alone. The covered call option writer has, in return for the
premium, given up the opportunity for profit from a price increase in the
underlying security above the exercise price so long as his obligation as a
writer continues, but has retained the risk of loss should the price of the
security decline. Conversely, the put option writer has, in the form of the
premium, gained a profit as long as the price of the underlying security remains
above the exercise price, but has assumed an obligation to purchase the
underlying security from the buyer of the put option at the exercise price, even
though the security may fall below the exercise price, at any time during the
option period. The option writer has no control over when he may be required to
<PAGE>
sell his securities in the case of a call option, or to purchase securities in
the case of a put option, since he may be assigned an exercise notice at any
time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer realizes a gain or loss from
the sale of the underlying security. If a put option is exercised, the writer
must fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security. Options written by the Fund will normally have expiration dates not
more than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market prices of the underlying
securities at the times the options are written.
FACTORS WHICH MAY ADVERSELY AFFECT TRANSACTIONS IN OPTIONS. An option
position may be closed out only on an Exchange which provides a secondary market
for an option of the same series. Although the Fund will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an Exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an Exchange may exist. In such event, it might not be
possible to effect closing transactions in particular options. If as a covered
call option writer the Fund is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Likewise, a secured put writer could not sell the money market instrument and
use the proceeds for other investments, such as an investment in common stocks,
while he was obligated as a put writer.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an Exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Clearing Corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more Exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market thereon would cease to exist, although outstanding options on
that Exchange which have been issued by the Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms.
There can be no assurance that higher than anticipated trading activity or
order flow or other unforeseen events might not, at times, render certain of the
facilities of the Clearing Corporation and the Exchanges inadequate. Such events
have in the past resulted, and may again result, in the institution by an
Exchange of special procedures, such as trading rotations, restrictions on
certain types of orders, or trading halts or suspensions, with respect to one or
more options, or may otherwise interfere with the timely execution of customers'
orders.
<PAGE>
In the event that NASDAQ options are traded, it is anticipated that many of
the factors which may adversely affect transactions in Exchange listed options
may also adversely affect NASDAQ options.
The size of the premiums which the Fund may receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option writing activities.
POSITION LIMITATIONS. Each of the Exchanges has established limitations
governing the maximum number of calls and puts in each class (whether or not
covered) which may be written by a single investor, or group of investors acting
in concert, (regardless of whether the options are written on the same or
different Exchanges or are held or written in one or more accounts or through
one or more brokers). It is possible that the Fund and clients advised by the
Adviser may constitute such a group. An Exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. At the date of this Prospectus, the only such limits which may
affect the operations of the Fund are those which limit the writing of call
options on the same underlying security by an investor or such group to 4,500
options (450,000 shares), 7,500 options (750,000 shares), 10,500 options
(1,050,000 shares) 20,000 options (2,000,000 shares) or 25,000 options
(2,500,000 shares) in each class regardless of expiration date. Whether the
applicable limit is 4,500, 7500, 10,500, 20,000 or 25,000 options is determined
by the most recent six-month trading volume of the underlying security. Every
six months each Exchange reviews the status of underlying securities to
determine which limit should apply. These position limits may limit the number
of options which the Fund can write on a particular security.
INVESTMENT RESTRICTIONS AND OTHER INVESTMENT POLICIES
The following restrictions are fundamental policies for the protection of
the Fund's shareholders and cannot be changed without the approval of the
holders representing a majority of the Fund's outstanding voting securities,
which for purposes of such approval shall be the lesser of (i) 67% or more of
the shares present at a meeting of shareholders if the holders of more than 50%
of the outstanding voting securities of the Fund are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the Fund.
The Fund may not:
(1) Purchase securities of any issuer (other than U.S. Government
obligations) if, as a result, more than 5% of the value of the Fund's assets
would be invested in securities of that issuer, nor may it concentrate its
investments in any single industry except that it may invest up to 25% of its
net asset value in a single industry.
(2) Purchase more than 10% of the voting securities or more than 10% of any
class of securities of any issuer. (For this purpose, all outstanding debt
securities of an issuer are considered as one class, and all preferred stocks of
an issuer are considered as one class.)
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). (The deposit or payment by the Fund of initial or variation margin
in connection with futures contracts or related options is not considered the
purchase of a security on margin.)
(4) Write, purchase or sell puts, calls or combinations thereof, except
<PAGE>
that the Fund may write covered call options with respect to all of its
portfolio securities, write covered put options, and enter into closing purchase
transactions with respect to such options, engage in put and call option
transactions, and engage in interest rate and stock index futures contracts and
related options transactions, as described under "Investment Objective and
Policies".
(5) Make short sales of securities or maintain a short position, unless at
all times when a short position is open the Fund owns an equal amount of such
securities or owns securities convertible into or exchangeable for securities,
without payment of additional consideration (except upon exercise of covered
call options on such securities with a strike price no higher than the price at
which the securities were sold short or, if higher, if the difference between
the strike price and the price at which the securities were sold short is
maintained in U.S. Government securities in a segregated account with the Fund's
custodian or a broker), which are at least equal in amount to and of the same
issue as the securities sold short and such securities are not subject to
outstanding call options, and unless not more than 10% of the Fund's net assets
(taken at current value) are held as collateral for such sales at any one time.
(6) Invest in real estate although the Fund may invest in marketable
securities which are secured by real estate and securities of companies which
invest in or deal in real estate. The Fund will not invest more than 10% of the
value of its total assets in securities which are not readily marketable,
including real estate interests.
(7) Invest more than 5% of the value of its total assets in securities of
issuers which have a record of less than three years continuous operation,
including in such three years the operation of any predecessor company or
companies, partnership or individual proprietorship if the company whose
securities are to be purchased by the Fund has come into existence as a result
of a distribution, merger, consolidation, reorganization or the purchase of all
or substantially all of the assets of such predecessor.
(8) Purchase or retain the securities of any issuer if, to the knowledge of
the Fund, any of the officers or directors of the Fund or its investment adviser
owns individually more than one-half of one percent of the securities of such
issuer and together own more than 5% of the securities of such issuer.
(9) Make loans, except through the making of time or demand deposits with
banks, and subject to paragraphs 6 and 16, the purchase of bonds, debentures,
commercial paper and other short term obligations, and except through repurchase
agreements (provided however, that the Fund will not invest more than 10% of its
total net assets in repurchase agreements of more than seven days duration).
(10) Borrow money in excess of 10% of the Fund's total assets at current
value and then only as a temporary measure for extraordinary or emergency
purposes and not for leverage.
(11) Pledge more than 10% of the Fund's total assets at current value.
Neither the deposit or escrow of underlying securities, convertible preferred
stocks or convertible debt securities, or U.S. Government securities, in
connection with the writing of call options, nor the deposit of U.S. Government
securities in escrow in connection with the writing of put options, nor the
segregation in a segregated account with the Custodian of securities in
connection with short sales "against the box," nor the deposit of cash, cash
equivalents, or money market instruments in a segregated account with the
<PAGE>
Custodian and/or a broker in connection with futures contracts or related
options, is deemed to be a pledge.
(12) Underwrite securities of others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(13) Purchase securities of other investment companies, except as permitted
under the Investment Company Act of 1940.
(14) Invest for the purpose of exercising control or management of another
company.
(15) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in the common stock of
companies which invest in or sponsor such programs.
(16) Invest in securities restricted as to disposition under the Federal
securities laws.
(17) Participate on a joint or a joint and several basis in any trading
account in securities.
(18) Buy or sell commodities or commodity contracts except that the Fund
may engage in interest rate futures contracts, stock index futures contracts and
related options, as described under "Hedging Transactions in Options, Futures
and Related Options".
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in percentage beyond the specified limit resulting
from a change in values of net assets will not be considered a violation of
these restrictions.
In addition to the policies described above, the Fund has adopted the
following investment policies which are not deemed to be fundamental, which may
be changed without shareholder approval, and are not otherwise described in the
Fund's Prospectus:
It is contrary to the Fund's present policies to:
- Sell or buy options which are not listed for trading on a
national securities exchange if, as a result, more than 5% of the
Fund's net assets would be at risk in connection with all such
unlisted options;
- Sell any covered put stock option if, as a result, the Fund would then
have more than 50% of its total assets at current value subject to
being invested upon the exercise of put options;
- Make short sales "against the box", except for the purpose of
deferring realization of gain or loss for Federal income tax purposes
and/or to receive interest on the proceeds of such sales when made in
connection with convertible securities. Such sales will not be made of
securities subject to outstanding options;
- Lend its unencumbered portfolio securities against collateral if the
Fund's aggregate lending will exceed 30% of its total net assets;
- Borrow securities, except as a temporary measure, to enable the Fund
to meet, in a timely manner, obligations to deliver such securities
upon the exercise of a call option written by it in connection with a
<PAGE>
convertible security. If, due to market fluctuations or other reasons,
the value of the Fund's assets fall below 300% of its borrowings, the
Fund will reduce its borrowings to the required level within three
days thereafter (not including Sundays and holidays) which reduction
may result in the Fund's being required to sell securities at a time
when it may otherwise be disadvantageous to do so.
HEDGING TRANSACTIONS IN OPTIONS, FUTURES AND RELATED OPTIONS
The Fund does not intend to enter into transactions in stock index options,
stock index futures and related options or financial futures and related options
except in connection with hedging its portfolio. The Fund will invest in stock
index options, futures and options on futures only if, in the judgment of
management, there is a sufficient degree of correlation between movements in the
value of such instrument and movements in the value of the relevant portion of
the Fund's investments for such hedge to be effective. There can be no assurance
that such judgment will be accurate or that hedging transactions will be
successful. As noted in the Prospectus, the Fund may purchase options to hedge
its portfolio securities or securities which it intends to purchase, but as set
forth above its option writing strategies are intended to obtain a greater long
term total return with smaller fluctuations in quarterly total return than would
be realized on the securities alone.
STOCK INDEX OPTIONS. The Fund may purchase exchange listed call and put
options on stock indexes for the purpose of hedging its portfolio. As stated in
the Prospectus, the effectiveness of this hedging technique will depend upon the
extent to which price movements in the portion of the Fund's portfolio being
hedged correlate with price movements of the stock index selected. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss from purchases of options on an index depends upon movements in the level
of stock prices in the stock market generally or in an industry or market
segment rather than movements in the price of a particular stock.
STOCK INDEX FUTURES. The Fund may sell stock index futures contracts in
anticipation of or during a market decline in an endeavor to offset the decrease
in market value of portfolio securities that would otherwise result from a
market decline. When the Fund is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures in
order to gain rapid market exposure that may in part or entirely offset
increases in the cost of the securities that it intends to purchase. No purchase
of stock index futures will be made, however, unless the Fund intends to
purchase securities in approximately the amount of the market value of the
stocks represented by the index futures purchased and it has identified the cash
or cash equivalents needed to make such a purchase. An amount of cash and cash
equivalents equal to the market value of the futures contracts will be deposited
in a segregated account with the Fund's Custodian to collateralize its position
in stock index futures.
OPTIONS ON STOCK INDEX FUTURES. The Fund may sell options on stock index
futures only to terminate an existing position. Put options on stock index
futures sometimes may be purchased in lieu of the sale of a stock index future
for the purpose of hedging a portion of the securities portfolio of the Fund.
The purchase of a call option on a stock index futures contract is intended to
serve as a temporary substitute for the purchase of individual securities which
may subsequently be purchased in an orderly fashion. However, if such options
are exercised and futures contracts are purchased to hedge against a possible
<PAGE>
increase in the price of a security before the Fund is able to purchase such
security in an orderly fashion and the security declines instead, the Fund may
then decide not to purchase the security because of concerns of possible further
declines or for other reasons. Thus, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
When it purchases a call on stock index futures, the Fund will set aside the
amount of additional cash or cash equivalents necessary to meet its obligations
on the underlying index futures contract.
FINANCIAL FUTURES AND RELATED OPTIONS. The Fund may purchase and sell
financial futures on U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury
notes, and GNMA mortgage-backed certificates, or sell call options or purchase
put options on such futures, in order to hedge U.S. Government and other
portfolio securities and convertible preferred stocks, whose prices are or may
be sensitive to changing interest rates. Certain convertible preferred stocks
tend to trade more like fixed-income securities than other equity securities.
However, the values of convertible preferred stocks are also affected by changes
in the prices of the securities into which they are convertible; thus, at times,
there may not be a close correlation between such convertible preferred stocks
and financial futures or related options. The effectiveness of these hedging
strategies will depend upon the correlation between interest rates and changes
in the value of the Fund's securities. In addition, due to temporary price
distortions in the market, even a correct forecast of general interest trends by
management may still not result in an effective use of these instruments as a
hedge.
MANAGEMENT OF THE FUND
The officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Directors. The following is a list of
directors and officers of the Fund and their principal occupations during the
past five years. The mailing address of the directors and officers of the Fund
is 700 South Flower Street, Suite 2400, Los Angeles, CA 90017. (no director is
an interested person of the Fund, as defined under the Investment Company Act of
1940 (the "1940 Act").)
MICHAEL F. KOEHN. Chairman of the Board of Directors, Date of Birth: 9/16/46.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
Trustee of The Analytic Series Fund and member of the Board of Directors of
Analysis Group, Inc., a consulting firm providing economic and financial
consulting services. Former member of the Board of Directors, President and
Chief Executive Officer of the Adviser. He earned a Ph.D. in Finance at the
Wharton School, University of Pennsylvania.
MICHAEL D. BUTLER. Director, Date of Birth: 4/24/35.
28775 EL MIO LANE, MISSION VIEJO, CA 92692
Trustee of The Analytic Series Fund. Professor emeritus of Social Sciences,
former Dean of Undergraduate Studies at the University of California at Irvine
and former member of the Society of Fellows, Harvard University.
ROBERTSON WHITTEMORE. Director, Date of Birth: 10/30/44.
8470 EL PASEO GRANDE, LA JOLLA, CA 92037
Trustee of The Analytic Series Fund and Partner, Encore of La Jolla, retail
clothing store. Former real estate broker, attorney, President of La Jolla Town
Council; trustee of Combined Arts and Education Council of San Diego, and
Executive Director of the San Diego Community Foundation. He earned his B.A.
from Yale University, and his J.D. and M.B.A. from University of California at
<PAGE>
Berkeley.
HARINDRA DE SILVA. President, Date of Birth: 9/15/60.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
President of the Adviser and The Analytic Series Fund. He previously served as
Principal of Analysis Group, Inc. and Managing Director and Treasurer of the
Adviser. He holds a B.S. from the University of Manchester at Manchester
England, a M.B.A. from Simon School at Rochester New York and a Ph.D. in Finance
from the University of California at Irvine.
GREGORY M. MC MURRAN. Treasurer, Date of Birth: 7/20/54.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
Chief Investment Officer of the Adviser and Treasurer of The Analytic Series
Fund. He holds a B.A. in Economics from the University of California, Irvine
and a M.A. Economics from California State University at Fullerton.
MARIE NASTASI ARLT. Senior Vice President and Secretary, Date of Birth: 11/8/49.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
Chief Operating Officer, Treasurer and Secretary of the Adviser and Senior Vice
President and Secretary of The Analytic Series Fund and Vice President of
Analytic-TSA Investors, Inc. She holds a B.A. from California State University,
Fullerton. Formerly she served as Managing Director and Executive Vice President
of TSA Capital Management.
Officers and directors of the Fund who are affiliates of the Adviser receive no
fee or salary from the Fund. Each director who is not an affiliate of the
Adviser receives an annual fee of $2,000 plus $1,000 per meeting attended and
reimbursement for expenses. As of March 31, 1998, to the Fund's knowledge,
officers and Directors owned less than 1% of the outstanding shares of the Fund.
For the fiscal year ended December 31, 1997, total compensation received by the
directors who are not affiliates of the Adviser is as follows:
<TABLE>
<CAPTION> Total
Compensation
From Analytic
Pension/Retire- Optioned
ment Benefits Estimated Equity Fund
Aggregate Accrued as Annual and The
Compensation Part of Fund Benefits from Analytic
Name from the Fund Expenses Retirement Series Fund
---- ------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Michael D. $6,000 None None $12,000
Butler
Robertson $6,000 None None $12,000
Whittemore
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER: Analytic-TSA Global Asset Management, Inc. (the
"Adviser") is the investment adviser of the Fund pursuant to an Investment
Management Agreement between the Fund and the Adviser, dated August 12, 1993
(the "Management Agreement"). The Management Agreement was last approved by the
Board of Directors, including the unanimous vote of the Fund's Directors who are
not parties to the agreement or "interested persons" of the Fund, on February
26, 1998, at a meeting called for the purpose of voting on such approval.
<PAGE>
The Adviser is a wholly owned subsidiary of United Asset Management
Corporation ("UAMC"). UAMC was organized in 1980 by its Chief Executive
Officer, Norton H. Reamer, for the purpose of acquiring firms engaged in the
institutional investment management business. UAMC has indicated that on or
about April 20, 1998, the Adviser will become a subsidiary of Pilgrim Baxter &
Associates, Ltd. ("Pilgrim Baxter"), a wholly-owned subsidiary of UAMC.
The officers and directors of the Adviser are:
Roger G. Clarke Chairman of the Board
Harindra de Silva President
Gregory M. McMurran Chief Investment Officer
Robert Bannon Managing Director
Marie Nastasi Arlt Chief Operating Officer, Treasurer and Secretary
THE INVESTMENT MANAGEMENT AGREEMENT: Pursuant to the Management
Agreement with the Fund, the Adviser, subject to the control and direction of
the Fund's Officers and Board of Directors, manages the Fund in accordance with
its stated investment objective and policies, and makes investment decisions for
the Fund. At its expense, the Adviser provides the office space and all
necessary office facilities, equipment, and personnel for providing these
services to the Fund.
As compensation for furnishing investment advisory, management and other
services, and expenses assumed, pursuant to the Management Agreement,
the Fund pays the Adviser an annual fee equal to 0.75% of the first $100 million
of the Fund's average daily net assets, 0.65% of the next $100 million of
average daily net assets, and 0.55% of average net assets in excess of
$200 million. For the fiscal years ended December 31, 1995, 1996 and 1997, the
Fund paid advisory fees of $346,095, $363,576, and $389,998, respectively,
pursuant to the Management Agreement.
The Adviser has agreed that if in any fiscal year the expenses borne by the
Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of such Fund are registered or
qualified for sale to the public, it will reimburse the Fund for any excess to
the extent required by such regulations. Unless otherwise required by law such
reimbursement would be accrued and paid on the same basis that the advisory fees
are accrued and paid by the Fund. To the Fund's knowledge, there are no state
expense limitation in effect on the date of this Statement of Additional
Information.
<PAGE>
Under the Management Agreement, any liability of the Adviser to the Fund and
its shareholders is limited to situations involving its own willful misfeasance,
bad faith, gross negligence or reckless disregard of its duties and obligations
under the Management Agreement.
The Management Agreement continues from year to year so long as it is
approved annually by a majority of the Board of Directors or of the outstanding
voting securities of the Fund, and by a majority of the Directors who are not
"interested persons" of any party to the Agreement (as defined in the 1940 Act).
The Management Agreement may not be assigned by the Adviser and will
terminate automatically upon assignment. It may be terminated without penalty
upon 60-days' written notice by either party or by a vote of a majority of the
Fund's outstanding voting securities (as defined in the 1940 Act). The
Management Agreement may be amended by a vote of a majority of the Directors of
the Fund, including a majority of the disinterested directors, cast in person at
a meeting called for that purpose, subject to approval by the vote of a majority
of the Fund's outstanding voting securities. "A majority of the Fund's
outstanding voting securities" as used herein, is defined in the first paragraph
of "Investment Restrictions and Other Investment Policies."
Personnel of the Adviser may invest in securities for their own accounts
pursuant to a Code of Ethics that sets forth all employees' fiduciary
responsibilities regarding the Fund, established procedures for personal
investing, and restricts certain transactions. For example, the Code restricts
the timing of personal investing in relation to trades by the Fund, prohibits
participating by employees in initial public offerings, and requires approval of
private placement purchases and service on boards of directors of publicly held
companies.
ADMINISTRATIVE SERVICES. UAM Fund Services, Inc. ("UAM Fund Services"),
a wholly-owned subsidiary of UAMC, has agreed to perform and oversee 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") dated May 16, 1997. UAM Fund Services has
subcontracted some of these services to Chase Global Funds Services Company
("Chase Global Funds Services"), an affiliate of The Chase Manhattan Bank.
The Fund pays UAM Fund Services a two part monthly fee: a Fund-specific
fee at the annual rate of 0.06% of net assets which is retained by UAM Fund
Services, and a sub-administration fee which UAM Fund Services in turn pays to
Chase Global Funds Services. The fees paid to Chase Global Funds Services are
the responsibility of UAM Fund Services, and not the Fund.
Under the Administration Agreement, any liability of UAM Fund Services
to the Fund and its shareholders is limited to situations involving its own
willful misfeasance, bad faith, gross negligence or reckless disregard of
duties. In addition, the Fund has agreed to indemnify UAM Fund Services against
certain matters, including all expenses arising out of actions of UAM Fund
Services pursuant to the Administration Agreement (other than those involving
UAM Fund Services' willful misfeasance, bad faith, gross negligence or reckless
disregard of duties).
UAM Fund Services may assign its obligations under the Administration
Agreement to subcontractors approved by the Board of Directors, but no such
<PAGE>
assignment will relieve UAM Fund Services of its obligations to the Fund. The
Agreement may be terminated without penalty upon 60-days' written notice by
either party.
DISTRIBUTOR. UAM Fund Distributors, Inc. (the "Distributor"), a
wholly-owned subsidiary of UAMC, distributes shares of the Fund. Under the
Distribution Agreement (the "Distribution Agreement"), the Distributor, as
agent of the Fund, agrees 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 continues in effect
as long as it is approved at least annually by the Fund's Board of Directors.
Those approving the Distribution Agreement must include a majority of
Directors who are not interested persons of any party to the Distribution
Agreement.
The term and termination provisions of the Distribution Agreement are
similar to those of the Fund's Management Agreement. In addition, it contains
provisions limiting the liability of, and providing indemnification to, the
Distributor, that are similar to those of the Administration Agreement, except
that nothing in the Distribution Agreement protects the Distributor from any
liabilities which it may have under the Securities Act of 1933 or the Investment
Company Act of 1940.
BROKERAGE
Under the terms of the Management Agreement, the Adviser is authorized to
employ brokers and dealers to execute orders for the purchase and sale of the
Fund's portfolio securities, including the writing of option contracts, who, in
its best judgment , can provide "best execution" (prompt and reliable execution
at a reasonable competitive price). During the fiscal the years ended December
31, 1995, 1996, and 1997, aggregate commissions paid by the Fund amounted to
$159,118, $149,614, and $159,674, respectively. During the fiscal year ended
December 31, 1997, none of the Fund's commissions were allocated to brokers who
also provided research services to the Adviser.
In determining the abilities of the broker-dealer to provide best execution
of a particular portfolio transaction, the Adviser considers all relevant
factors including the execution capabilities required by the transaction or
transactions; the ability and willingness of the broker-dealer to facilitate
each transaction by participation therein for its own account; the importance to
the Fund of speed, efficiency, or confidentiality; the broker-dealer's apparent
familiarity with sources from or to whom particular securities might be
purchased or sold; 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 or agreement to pay operating expenses of the Fund.
If the Fund effects a closing purchase transaction with respect to an
option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option, except where the Fund
utilizes a clearing agent with respect to certain put and call options.
Likewise, if an option written by the Fund is exercised, normally the sale or
purchase of the underlying securities will be executed by the same broker-dealer
or clearing agent who executed the sale of the option. During the year ended
December 31, 1997, such clearing agents received commissions of $186,093.
<PAGE>
The Fund may purchase or sell listed securities in the over-the-counter
market ("the third market"). Where transactions are executed in the third
market, the Fund generally will deal with the primary market makers; however, if
it is to the advantage of the Fund, the services of other brokers may be
utilized.
The Adviser currently manages separate accounts and other mutual funds
aggregating in excess of $1 billion which employ investment strategies
similar to those used by the Fund. At times, investment decisions may be made to
purchase or sell the same investment security for the Fund and one or more of
the other clients advised by the Adviser. When two or more of such clients are
simultaneously engaged in the purchase or sale of the same security or option,
the transactions will be allocated as to amount and price in a manner considered
equitable to each and so that each receives, to the extent practicable, the
average price or premium for such transaction. There may be circumstances in
which such simultaneous transactions would be disadvantageous to the Fund with
respect to price and availability of securities. In other cases, however, it is
believed that transactions would be advantageous to the Fund.
TAX INFORMATION AND OPTION ACCOUNTING PRINCIPLES
As of the date of this Prospectus, the Fund is qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended, and the Fund intends to continue to qualify under said Subchapter M. As
a result of such qualification the Fund will not be subject to Federal income
taxes to the extent that it distributes not less than 98% of its investment
company taxable income and its capital gains net income. Investment company
taxable income includes net income from dividends, interest and net short-term
capital gain. Premiums from expired options written by the Fund and net gains,
if any, from closing purchase transactions are treated as short-term capital
gains for Federal income tax purposes.
When the Fund writes an option, an amount equal to the premium received is
recorded by the Fund as an asset and an equivalent liability. The liability is
thereafter valued to reflect the current value of the option which is either the
last sale price, or, in the absence of a sale, the mean between the last current
bid and asking price. If the option is not exercised and expires, or if the Fund
effects a closing purchase transaction, the Fund will realize a gain (or a loss
in the case of a closing purchase transaction where the cost exceeds the
original premium received) and the liability related to the option will be
extinguished. Any such gain or loss is a short-term capital gain or loss for
Federal income tax purposes, except that a short-term loss realized when the
Fund closes certain in-the-money covered call options involving portfolio equity
securities will be converted to a long-term capital loss if the hypothetical
sale of the underlying security on the date of such transaction would have given
rise to a long-term capital gain. If a call option which the Fund has written on
any equity security is exercised, the Fund realizes a capital gain or loss
(long-term or short-term, depending on the holding period of the underlying
security) from the sale of the underlying security and the proceeds from such
sale are increased by the premium originally received. If a put option which the
Fund has written on an equity security is exercised, the amount of the premium
originally received will reduce the cost of the security which the Fund
purchases upon exercise of the option.
In the case of put and call options on nonequity securities, the principle
of marking-to-market carries over to the Federal income tax treatment of such
<PAGE>
options in that an option is treated as having been closed on the last day of
the Fund's taxable year, giving rise to a capital gain or loss. Nonequity
options include broad-based stock index options, debt options, commodity options
and currency options. Sixty percent of any net gain or loss recognized on such
deemed closings, as well as 60% of the gain or loss with respect to such options
on any actual closing transactions or exercises will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. Also, 60% of the gain on the expiration of any such option on its
stipulated expiration date will be treated as long-term capital gain, and the
balance as short-term capital gain. However, if a put or call option the Fund
has written or holds relating to a nonequity security is part of a "mixed
straddle," as defined by the Internal Revenue Code (the "Code") (see discussion
of straddles below), the Fund may be able to make an election under which these
provisions will be inapplicable in whole or in part to such option, and the
rules applicable to options on equity securities described above will apply. In
any event, the provisions of Code Section 1092 described below in Special Tax
Rules Applicable to Straddles will be applicable to such straddles.
THE PURCHASE OF CALLS AND PUTS ON DEBT AND EQUITY SECURITIES - IN GENERAL -
the premium paid by the Fund for the purchase of a call or put option is
included in the asset section of the Fund's "Statement of Assets and
Liabilities" as an investment and subsequently adjusted to the current market
value of the option. For example, if the current market value of the option
exceeds the premium paid, the excess would be unrealized appreciation. The
current market value of a purchased option is the last sale price on the
principal Exchange on which such option is traded or, in the absence of a sale,
the mean between the last bid and offering prices.
If the option on an equity security which the Fund has purchased expires on
the stipulated expiration date, the Fund realizes a short-term or long-term loss
for tax purposes in the amount of the cost of the option. If the Fund enters
into a closing sale transaction with respect to such an option, it realizes a
capital gain or loss, depending on whether the sales proceeds from the closing
sale transaction are greater or less than the cost of the option. The gain or
loss will be short-term or long-term, depending on the Fund's holding period in
the option. If the Fund exercises a put option on an equity security, it will
realize a gain or loss (long-term or short-term, depending on the period for
which the Fund has held the underlying security prior to the time it purchased
the put) from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. However, since the
purchase of a put option is treated as a short sale for Federal income tax
purposes, the holding period of a hedged underlying security held for not more
than one year will be terminated by such a purchase and will start again only
when the Fund enters into a closing sale transaction with respect to such option
or it expires. If the Fund exercises a call option on an equity security, the
premium paid for the option will be added to the cost of the security purchased.
SPECIAL TAX RULES APPLICABLE TO "STRADDLES" - Section 1092 of the Code may
affect the taxation of options on debt or equity securities. Section 1092
defines a "straddle" as offsetting positions with respect to personal property.
A position in personal property is generally defined as any interest, including
an option, in personal property. A position in personal property includes a debt
security and certain options written thereon and also includes a stock position
and "deep-in-the-money" options (as defined in the Code) written thereon.
Section 1092 generally provides that in the case of a straddle, any loss
from the disposition of a position in the straddle can only be deducted to the
<PAGE>
extent that the loss exceeds the unrealized gains on all offsetting straddle
positions. For example, if the Fund owns a stock and has purchased a put option
with respect to such stock, any loss realized from a closing sale transaction
with respect to the option can only be recognized to the extent that such loss
exceeds any unrealized gain on the underlying stock. Section 1092 also provides
that "wash sale" rules are applicable to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period
and that "short sale" rules are applicable to offsetting positions. These rules
are applicable to the Fund's debt option positions, "deep-in-the-money" stock
option positions, options on convertible securities and certain of the Fund's
hedging transactions in options, stock index options, stock index and financial
futures contracts and related options described under "Hedging Transactions in
Options, Futures and Related Options". In addition, Section 1092 will suspend or
terminate the Fund holding period in certain stocks with respect to which the
Fund writes or acquires options, including non-"deep-in-the-money" options which
are "qualified covered call options" and stock index options and subject stocks
to restrictions comparable to the "wash sale rules" of Code Section 1091.
Moreover, a Portfolio will not be able to deduct currently part of the
interest and other expenses which are attributable to positions that are
governed by the straddle rules of Section 1092 of the Code. Losses which the
Fund realizes on certain transactions involving certain in-the-money covered
call options may be converted from short-term to long-term capital loss.
Management will manage the Fund to take into account Section 1092 and such
Regulations.
FUTURES CONTRACTS - Accounting for futures contracts will be in accordance
with generally accepted accounting principles. The amount of any realized gain
or loss on closing out of futures contracts will result in a realized capital
gain or loss for tax purposes. Futures contracts held by the Fund at the end of
each fiscal year will be required to be "marked-to-market" for Federal income
tax purposes. Sixty percent of any net gain or loss recognized on such deemed
sales or on any actual sales will be treated as long-term capital gain or loss,
and the remainder will be treated as short-term capital gain or loss. However,
if a futures contract is part of "mixed straddle," as defined by the Code, the
Fund may be able to make an election under which these provisions will be
inapplicable in whole or in part to such futures contracts,. In any event, the
provisions of Section 1092 described above will be applicable to such straddles.
OPTIONS ON CERTAIN STOCK INDEXES AND ON FUTURES CONTRACTS - accounting for
options on futures contracts and on certain stock indexes will be in accordance
with generally accepted accounting principles. The amount of any realized gain
or loss on closing out such a position will result in a realized capital gain or
loss for tax purposes. Such options held by the Fund at the end of each fiscal
year will be required to be "marked-to-market" for Federal income tax purposes.
Sixty percent of any net gain or loss recognized on such deemed sales or on any
actual sales will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. However, if the
option is part of a "mixed straddle," as defined by the Code, the Trust may be
able to make an election under which these provisions will be inapplicable in
whole or in part to such option. In any event, the provisions of Section 1092
described above will be applicable to such straddles. The above rules apply to
options on stock indexes if there is in effect a designation by the Commodities
Futures Trading Commission (the "CFTC") of a contract market based on such stock
index or the Treasury Department determines that such options meet the
requirements of law for such a designation. Options on "broad-based" stock
indexes have generally been so designated. Options on stock indexes for which
<PAGE>
the CFTC has not designated a contract market and which the Treasury Department
has not determined meet the requirements of law for such designation, generally
including options on "narrow-based" stock indexes, will receive Federal income
tax treatment similar to that of stock options.
CALCULATION OF PERFORMANCE DATA AND OTHER
PERFORMANCE COMPARISONS AND STATISTICS
From time to time the Fund may report its "total return" in prospectuses,
the Fund's annual reports, shareholder communications, and advertising.
Total return for a performance period is calculated by assuming a
hypothetical initial investment ("p") in the Fund at the beginning of the
period. Then, assuming reinvestment of all distributions into new Fund shares, a
redeemable value at the end of the performance period ("ERV") is calculated
based on actual Fund performance. The percentage change between the ending value
and initial investment is the "cumulative total return". The "average annual
total compound return" (growth rate) expresses the total return as an annual
rate, which, if compounded annually over the period ("n" is the number of
years), would increase or decrease the initial investment to the ending value.
(Formula for calculating average annual total compound return: (ERV/p)1/n - 1)).
See the "Glossary" in the Prospectus for further discussion and examples of
total return and fluctuations in total return.
For example, the Fund's total return for various periods has been as follows:
<TABLE>
<CAPTION>
1 year 5 years 10 years
1/1/97 - 12/31/97 1/1/92 - 12/31/97 1/1/87 - 12/31/97
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cumulative Total Return 19.11% 83.17% 204.43%
Average Annual
Total Return Compound 19.11% 12.86% 11.77%
</TABLE>
VOLATILITY. Occasionally statistics may be used to specify the Fund's
volatility or risk. Measures of volatility or risk are generally used to
compare the Fund's net asset value or performance relative to a market index.
One measure of volatility is beta. Beta is the volatility of the Fund relative
to the total market as represented by the Standard & Poor's 500 Stock Index. A
beta of more than 1.00 indicates volatility less than the market. Sometimes beta
may be calculated relative to a different market index. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS. One measure of performance that adjusts for
risk is alpha. Alpha is a measure of the difference between the Fund's
performance and a market index portfolio with the same beta.
For example, suppose the Fund's beta is approximately 0.5 over a historical
period. Then, a similar risk market index portfolio can be constructed with a
beta of 0.5 by creating an index with a weight of 50% in the S & P 500 Index and
50% in U.S. Treasury Bills. The Fund's return is then compared to the return of
the market index.
Sales literature referring to the use of the Fund as a potential investment
<PAGE>
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which is it presumed no federal income tax applies.
Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to shareholders
only for the limited historical period used.
COMPARISONS. To help investors better evaluate how an investment in the
Fund might satisfy their investment objective, advertisements and other
materials regarding the Fund may discuss various measures of the Fund's
performance as reported by various financial publications. Materials may also
compare performance (as calculated above) to performance as reported by other
investments, indices, and averages. The following publications, indices, and
averages, among others, may be used:
a) The Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow
Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks. Comparisons of performance
assume reinvestment of dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities stocks, and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Mixtures of indexes and U.S. Treasury Bills which approximate the
historical risk level of the Fund. In particular: mixtures of the S & P 500
Stock Index and U.S. Treasury Bills such as the 50%/50% mixture discussed under
"Other Performance Quotations."
f) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income
Fund Performance Analysis - measure total return and average current yield for
the mutual fund industry, and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
g) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- - analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
h) Financial publications: The Wall Street Journal and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in the
<PAGE>
price of goods and services, in major expenditure groups.
j) Stocks, Bonds Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, The J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers, Smith Barney Shearson and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the
prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and five financial institutions. The S & P 100 Stock
Index is a smaller more flexible index for options trading.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Fund, that the averages are generally
unmanaged. In addition there can be no assurance that the Fund will continue
this performance as compared to such other averages.
PRINCIPAL SHAREHOLDERS
The following table shows as of March 31, 1998, the beneficial ownership of
shares of the Fund's common stock by all officers and directors of the Fund as a
group and the record ownership of shares by each person known to the Fund to be
a record owner of more than 5% of its issued and outstanding common stock
(174,792 shares). Except for the shares held by officers and directors, the Fund
has no information regarding beneficial ownership of such shares.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage of Class
- ---------------- ---------------- -------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 411,095 11.7%
101 Montgomery Street
San Francisco, CA 94104
LaSalle National Bank 334,106 9.5%
Metz Banking Pension Trust
c/o Mutual Funds, 18th Floor
135 LaSalle Street
Chicago, IL 60603
All Officers and Directors of the Fund as a group
owned less than 1% of the Fund's outstanding shares
as of March 31, 1998.
</TABLE>
PRICING AND REDEMPTION OF FUND SHARES
The Fund's net asset value per share is calculated by taking the total
value of the Fund's assets, deducting total liabilities and dividing the result
<PAGE>
by the number of shares outstanding. Portfolio securities which are traded on a
national securities exchange are valued at the last sale price or if there is no
recent sale, at the mean between the last current bid and asked prices. All
other securities not so traded are valued at the mean between the last current
bid and asked prices if market quotations are available. Other securities and
assets are valued at fair value in accordance with methods determined in good
faith by the Fund's Board of Directors.
The Fund may suspend the right of redemption or delay payment more than
three (3) business days: (a) during any period when the New York Stock Exchange
is closed (other than customary weekend and holiday closings); (b) when trading
on the New York Stock Exchange is restricted; (c) when an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
Fund's investments or determination of its net asset value is not reasonably
practicable; or (d) for such other periods as the Securities and Exchange
Commission by order may permit for protection of the Fund's shareholders. The
amount received by a shareholder upon redemption may be more or less than he
paid for his shares depending on the market value of the Fund's portfolio
securities at the time.
Shares of the Fund may be transferred upon delivery to the Fund of (1) a
letter of instructions, signed by each registered owner exactly as the shares
are registered, which clearly identifies the exact names in which the account is
presently registered, the account number, the number of shares to be
transferred, and the names, addresses and social security or tax identification
number of the account to which the shares are to be transferred, (2) stock
certificates, if any, which are the subject of the transfer, and (3) an
instrument of assignment ("stock power"), which should specify the total number
of shares to be transferred and on which the signature(s) of the registered
owner(s) have been guaranteed by a commercial bank or trust company which is a
member of the Federal Deposit Insurance Corporation, or by a member firm of a
national securities exchange. Additional documents are required for transfers by
corporations, executors, administrators, trustees and guardians; if a
shareholder is in doubt as to what documents are required, he should contact the
Fund. The Fund is not bound to record any transfer of the stock transfer books
until the Fund has received all required documents.
CUSTODIAN
The Fund's custodian is The Chase Manhattan Bank. Pursuant to the terms of
the Custodian Agreement the Fund will forward to the Custodian the proceeds of
each purchase of Fund shares. The Custodian will hold such proceeds and make
disbursements therefrom in accordance with the terms of the Custodian Agreement.
It will retain possession of the securities purchased with such proceeds and
maintain appropriate records with respect to receipt and disbursements of money,
receipt and release of securities, and all other transactions of the Custodian
with respect to the securities and other assets of the Fund.
TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT
UAM Fund Services is responsible for performing and overseeing all
administrative, fund accounting, dividend disbursing and transfer agent services
for the Fund. UAM Fund Services has also contracted certain of these services
to Chase Global Funds Services Company. Chase Global Funds Services will act as
the Fund's sub-dividend disbursing agent, sub-transfer agent and sub-shareholder
servicing agent. (see "Investment Advisory and Other Services").
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 125 Summer Street, Boston, MA 02110 serves as
independent auditors to the Fund. The services provided by the firm include the
audit of the financial statements of the Fund included in the Statement of
Additional Information and services related to other filings made with the
Securities and Exchange Commission.
LEGAL COUNSEL
The Fund's legal counsel is Paul, Hastings, Janofsky & Walker LLP, 555
South Flower Street, Los Angeles, California 90071.
FINANCIAL STATEMENTS
The financial statements in the Fund's 1997 Annual Report to Shareholders
are incorporated in this Statement of Additional Information by reference. Such
financial statements have been audited by the Fund's independent auditors,
Deloitte & Touche LLP, whose report thereon also appears in such Annual Report
and is incorporated herein by reference. Such financial statements have been
incorporated hereby in reliance upon such reports given upon their authority as
experts in accounting and auditing. Copies of the Fund's Annual Report to
Shareholders may be obtained at no charge by telephoning the Fund at the number
on the front page of this Statement of Additional Information.
<PAGE>
PART C
OTHER INFORMATION
Item 24: FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
(1) The following information is included in Part A -Prospectus:
Financial Highlights
(2) The following audited information is included
in Part B - Statement of Additional Information:
Registrant's Statement of Assets and Liabilities including
Schedules of Portfolio Investments, Statement of Changes in Net
Assets, Statement of Operations, related notes, and Independent
Auditors' Report, are included as part of Registrant's Annual
Report to Shareholders for the period ended December 31, 1997,
and are incorporated by reference in Part B.
(b) Exhibits
1 Articles of Incorporation, as amended -- filed as Exhibit 1
to Registrant's Form N-1A Registration Statement on April
26, 1990 and incorporated herein by reference.
2 Bylaws, as amended -- filed as Exhibit 2 to Registrant's
Form N-1A Registration Statement on April 26, 1990 and
incorporated herein by reference.
3 None.
4 Specimen of share certificate of Registrant -- filed as
Exhibit 4 to Registrant's Form N-1A Registration Statement
on April 26, 1990 and incorporated herein by reference.
5 Investment Advisory Agreement dated August 12, 1993 between
Registrant and Analytic Investment Management, Inc. -- filed
as Exhibit 5 to Post Effective Amendment No. 21 to
Registrant's Form N-1A Registration Statement on June 10,
1993 and incorporated herein by reference.
6 Distribution Agreement between Registrant and UAM Fund
Distributors, Inc. dated May 1, 1997 -- filed as Exhibit 6
to Registrant's Form N-1A Registration Statement on August
21, 1997 and incorporated herein by reference.
7 None.
8.1 Custodian Agreement between Registrant and The Chase
Manhattan Bank dated September 8, 1997 -- filed as Exhibit 8
to Registrant's Form N-1A Registration Statement on October
20, 1997 and incorporated herein by reference;
8.2 Amendment to Custodian Agreement between Registrant and The
Chase Manhattan Bank dated February 26, 1998.
8.3 Letter Agreement between the Registrant and Analytic-TSA
Global Asset Management, Inc. dated February 26, 1998.
9.1 Fund Administration Agreement between Registrant and UAM
Fund Services, Inc. dated May 16, 1997 -- filed as Exhibit
9.1 to Registrant's Form N-1A Registration Statement on
August 21, 1997 and incorporated herein by reference.
<PAGE>
9.2 Mutual Funds Service Agreement between UAM Fund Services,
Inc. and Chase Global Funds Services Company dated May 16,
1997 -- filed as Exhibit 9.2 to Registrant's Form N-1A
Registration Statement on August 21, 1997 and incorporated
herein by reference.
10 Opinion and Consent of Counsel - included as part of
Registrant's Form 24f-2 Notice filed February 27, 1997 and
incorporated herein by reference.
11 Consent of Deloitte & Touche LLP.
12 None.
13 None.
14 Analytic Individual Retirement Account and Disclosure
Statement -- filed as Exhibit 14 to Post Effective Amendment
No. 17 to the Registrant's Form N-1A Registration Statement
on April 26, 1990 and incorporated herein by reference..
15 None.
16 Schedule of Computation of Performance Quotations in
Registration Statement -- filed as Exhibit 16 to Post
Effective Amendment No. 22 to the Registrant's Form N-1A
Registration Statement on April 29, 1994 and incorporated
herein by reference.
17 Financial Data Schedule.
18 None
19 Power of Attorney filed as Exhibit 19 to Post Effective
Amendment No. 28 to the registrant's Form N-1A Registration
Statement on October 29, 1997 and incorporated herein by
reference.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
By reason of its common Board of Trustees and investment adviser, The
Analytic Series Fund, a Delaware business trust which is registered as a
diversified, open-end management investment company under the 1940 Act, may be
deemed to be under common control with the Registrant.
Item 26: NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders as of
March 31, 1998
Common Stock, No Par Value 1,347
Item 27: INDEMNIFICATION
Article V of Registrant's Articles of Incorporation and Article VI of
Registrant's Bylaws provide for indemnification of Registrant's officers and
directors.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
<PAGE>
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the two years ended December 31, 1997, Analytic-TSA Global
Asset Management, Inc. has engaged only in the business of acting as investment
adviser to fiduciaries and other long-term investors. It also acts as adviser to
The Analytic Series Fund, an open-end, diversified registered investment
company. During such period, the other substantial business, professions,
vocations or employments of the directors and officers of Analytic-TSA Global
Asset Management, Inc. have been as follows:
<TABLE>
<CAPTION>
Name Office Other Employment
- ----- ------ ----------------
<S> <C> <C>
Roger G. Clarke Chairman of the Board of Directors President of Analytic-TSA Investors
(wholly owned subsidiary of Adviser)
and Director of Investment Securities
of the Church of Jesus Christ of
Latter Day Saints, since January
1996. Formerly, Managing Director,
President, Chief Executive Officer
and Chief Investment of TSA Capital
Management.
Gregory M. McMurran Chief Investment Officer Treasurer of Analytic Optioned Equity
Fund and The Analytic Series Fund.
Harindra de Silva President President of Analytic Optioned Equity
Fund and The Analytic Series Fund.
Formerly, President of AG Risk
Management and Principal of Analysis
Group.
Robert J. Bannon Managing Director Portfolio Manager of Analytic-TSA
Investors (wholly owned subsidiary of
Adviser) since March,
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
1996. Formerly, Senior Vice President and Senior
Investment Strategist of TSA Capital Management.
Marie Nastasi Arlt Chief Operating Officer, Treasurer Senior Vice President and Secretary of Analytic
and Secretary Optioned Equity Fund and The Analytic
Series Fund. Secretary, Treasurer,
Principal and Vice President of
Analytic-TSA Investors (wholly owned
subsidiary of Adviser). Executive
Vice President, Managing Director,
Principal, Treasurer and Secretary of
TSA Capital Management.
</TABLE>
The business address of such persons is 700 South Flower Street, Suite 2400, Los
Angeles, CA 90017.
Item 29. PRINCIPAL UNDERWRITERS
(a) UAM Fund Distributors, Inc. (the "Distributor"), the firm
which acts as sole distributor of the Registrant's shares,
also acts as distributor for UAM Funds Trust, UAM Funds, Inc.
and The Analytic Series Fund.
(b) The information required with respect to each Director and
officer of the Distributor is incorporated by reference to
Schedule A of Form BD filed by the Distributor pursuant to the
Securities and Exchange Act of 1934 (SEC File No. 8-41126).
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained at the offices of the Registrant and its
investment adviser (700 South Flower Street, Suite 2400, Los Angeles, CA 90017),
the Registrant's sub-transfer agent, sub-dividend disbursing agent and
sub-shareholder servicing agent (Chase Global Funds Services Company, 73 Tremont
Street, Boston, MA 02108) and the Registrant's custodian bank (The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, NY 11245).
Item 31. Not applicable.
Item 32. UNDERTAKINGS
The Fund hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, and State of California,
on the 22 day of April, 1998.
ANALYTIC OPTIONED EQUITY FUND, INC.
(Registrant)
By /s/ Michael F. Koehn
-----------------------------
Michael F. Koehn, Chairman
Pursuant to the requirements of the Securities Act of 1933, this
amended Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
NAME TITLE DATE
/s/ Harindra de Silva
- --------------------------
Harindra de Silva President April 22, 1998
/s/ Gregory M. McMurran
- --------------------------
Gregory M. McMurran Treasurer (Chief Financial April 22, 1998
Officer)
/s/ Michael F. Koehn
- --------------------------
Michael F. Koehn Chairman of the Board of April 22, 1998
Directors
/s/ Michael D. Butler
- --------------------------
Michael D. Butler* Director April 22, 1998
/s/ Robertson Whittemore
- --------------------------
Robertson Whittemore* Director April 22, 1998
*By /s/ Marie Nastasi Arlt
----------------------
Marie Nastasi Arlt
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description
- -------------------------------------------------------
8.2 Amendment to Custodian Agreement
8.3 Letter Agreement
11 Consent of Independent Accountants
27 Financial Data Schedule
<PAGE>
Exhibit 8.2
AMENDMENT TO GLOBAL CUSTODY AGREEMENT
-------------------------------------
AMENDMENT, dated February 26, 1998 to the September 8, 1997 custody agreement
("Agreement"), between The Analytic Optioned Equity Fund, Inc. ("Customer"),
having a place of business at 700 South Flower Street, Los Angeles, CA 90017 and
The Chase Manhattan Bank ("Bank"), having a place of business at 270 Park Ave.,
New York, N.Y. 10017-2070.
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement.
Section 2. The Agreement is amended by deleting the investment company rider
thereto and inserting, in lieu thereof, the following investment company rider:
"A. Add a new Section 15 to the Agreement as follows:
15. Compliance with SEC rule 17f-5.
------------------------------
(a) Customer's board of directors (or equivalent body) (hereinafter
"Board") hereby delegates to Bank, and, except as to the country or countries
as to which Bank may, from time to time, advise Customer that it does not
accept such delegation, Bank hereby accepts the delegation to it, of the
obligation to perform as Customer's "Foreign Custody Manager" (as the term is
defined in SEC rule 17f-5(a)(2), both for the purpose of selecting Eligible
Foreign Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as
the same may be amended from time to time, or that have otherwise been made
exempt pursuant to an SEC exemptive order) to hold Assets and of evaluating
the contractual arrangements with such Eligible Foreign Custodians (as set
forth in SEC rule 17f-5(c)(2)); provided that, the term Eligible Foreign
Custodian shall not include any "Compulsory Depository." For each Compulsory
Depository used or intended to be used by Customer of which Bank is advised,
Bank shall provide Customer from time to time with information addressing the
factors set forth in SEC Rule 17f-5(c)(1) to the extent reasonably available
to Bank, together with Bank's analysis of the same (as an example of which is
set forth in Appendix 1 hereto) to assist Customer in determining the
appropriateness of
<PAGE>
placing Assets therein. A Compulsory Depository shall mean a securities
depository or clearing agency the use of which is compulsory because: (1) its
use is required by law or regulation, (2) securities cannot be withdrawn from
the depository, or (3) maintaining securities outside the depository is not
consistent with prevailing custodial practices in the country which the
depository serves. Compulsory Depositories used by Chase as of the date hereof
are set forth in Appendix 1-A hereto, and as the same may be amended on notice
to Customer from time to time.
(b) In connection with the foregoing, Bank shall:
(i) provide written reports notifying Customer's Board of the placement of
Assets with particular Eligible Foreign Custodians and of any material change
in the arrangements with such Eligible Foreign Custodians, with such reports
to be provided to Customer's Board at such times as the Board deems reasonable
and appropriate based on the circumstances of Customer's foreign custody (and
until further notice from Customer such reports shall be provided not less
than quarterly with respect to the placement of Assets with particular
Eligible Foreign Custodians and with reasonable promptness, but not less than
quarterly, upon the occurrence of any material change in the contracts,
arrangements, procedures or practices with such Eligible Foreign Custodians);
(ii) exercise such reasonable care, prudence and diligence in performing as
Customer's Foreign Custody Manager as a person having responsibility for the
safekeeping of Assets would exercise.
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Assets placed and maintained in the safekeeping of such Eligible Foreign
Custodian shall be subject to reasonable care, based on the standards
applicable to custodians in the relevant market, after having considered all
factors relevant to the safekeeping of such Assets, including, without
limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv).
(iv) determine that the written contract with the Eligible Foreign
Custodian (or, in the case
2
<PAGE>
of an Eligible Foreign Custodian that is a securities depository or clearing
agency, such contract, the rules or established practice or procedures of the
depository, or any combination of the foregoing) requires that the Eligible
Foreign Custodian will provide reasonable care for Assets based on the
standards applicable to custodians in the relevant market. In making this
determination, Bank shall consider the provisions of Rule 17f-5(c)(2),
together with whether Bank shall be liable to Customer for any loss which
shall occur as the result of the failure of the Eligible Foreign Custodian to
exercise reasonable care with respect to the safekeeping of such Assets to the
same extent that Bank would be liable to Customer if Bank were holding such
Assets in New York; and
(v) have established a system to monitor the continued appropriateness of
maintaining Assets with particular Eligible Foreign Custodians and of the
governing contractual arrangements; it being understood, however, that in that
event that Bank shall have determined that the existing Eligible Foreign
Custodian in a given country would no longer afford Assets reasonable care and
that no other Eligible Foreign Custodian in that country would afford
reasonable care, Bank shall promptly so advise Customer and shall then act in
accordance with the Instructions of Customer with respect to the disposition
of the affected Assets.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Assets on behalf of Customer with Eligible Foreign Custodians pursuant to a
written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, Customer shall be solely
responsible to assure that the maintenance of Assets hereunder complies with
the rules, regulation, interpretations and exemptive orders promulgated by or
under the authority of the SEC.
(d) Bank represents to Customer that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Customer represents to Bank that: (1) the Assets being placed and
maintained in Bank's custody are subject to the Investment Company Act of
1940, as amended (the "1940 Act"), as the same may be amended from time to
time; (2) its Board: (i)
3
<PAGE>
has determined that it is reasonable to rely on Bank to perform as Customer's
Foreign Custody Manager (ii) or its Foreign Custody Manager (other than Bank)
shall have determined that Customer may maintain Assets in each country in
which Customer's Assets shall be held hereunder and determined to accept the
risks arising therefrom (including, but not limited to, a country's financial
infrastructure (and including any Compulsory Depository operating in such
country), prevailing custody and settlement practices, laws applicable to the
safekeeping and recovery of Assets held in custody, and the likelihood of
nationalization, currency controls and the like).
B. Add the following after the first sentence of Section 3 of the Agreement:
At the request of Customer, Bank may, but need not, add to Schedule A an
Eligible Foreign Custodian that is either a bank or a non-Compulsory
Depository where Bank has not acted as Foreign Custody Manager with respect to
the selection thereof. Bank shall notify Customer in the event that it elects
not to add any such entity.
C. Add the following language to the end of Section 3 of the Agreement:
(a) a "U.S. Bank," which shall mean a U.S. bank as defined in SEC rule 17f-
5(a)(7); and
(b) an "Eligible Foreign Custodian," which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws of a
country other than the United States, that is regulated as such by that
country's government or an agency thereof, (ii) a majority-owned direct or
indirect subsidiary of a U.S. bank or bank holding company which subsidiary is
incorporated or organized under the laws of a country other than the United
States; (iii) a securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United States, that acts
as a system for the central handling of securities or equivalent book-entries
in that country and that is regulated by a foreign financial regulatory
authority as defined under section 2(a)(5) of the 1940 Act, (iv) a securities
depository or clearing agency organized under the laws of a country other than
the United States to the extent acting as a transnational system for the
central handling of securities
4
<PAGE>
or equivalent book-entries, and (v) any other entity that shall have been so
qualified by exemptive order, rule or other appropriate action of the SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall include neither any Eligible Foreign Custodian as to which
Bank has not acted as Foreign Custody Manager nor any Compulsory Depository.
D. Insert the following language at the beginning of the second sentence of
Section 4(d): "or, in the case of cash deposits, except for liens or rights in
favor of creditors of the Subcustodian arising under bankruptcy, insolvency or
similar laws."
E. Insert the following language at the beginning of the second sentence of
Section 12(a)(i):
Except with respect to those countries as to which the parties may from
time to time agree in writing otherwise."
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE ANALYTIC OPTIONED EQUITY FUND, INC.
By:
------------------------------------
Title:
THE CHASE MANHATTAN BANK
By:
------------------------------------
Title:
5
<PAGE>
Appendix 1-A
Compulsory Depositories
-----------------------
6
<PAGE>
Appendix 1-B
Information Regarding Country Risk
----------------------------------
1. To aid Customer's investment advisers in their determinations
regarding Country Risk, Bank shall furnish Customer annually and upon the
initial placing of Assets into a country the following information (check items
applicable):
A. Opinions of local counsel concerning:
____ i. Whether applicable foreign law would restrict the access afforded
Customer's independent public accountants to books and records kept by
an eligible foreign custodian located in that country.
____ ii. Whether applicable foreign law would restrict the Customer's
ability to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.
____ iii. Whether applicable foreign law would restrict the Customer's
ability to recover assets that are lost while under the control of an
Eligible foreign Custodian located in the country.
B. Written information concerning:
____ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Customer's assets.
____ ii. Whether difficulties in converting Customer's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.
C. A market report with respect to the following topics:
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories
(including depository evaluation).
2. To aid Customer's investment advisers in monitoring Country Risk,
Bank shall furnish Customer the following additional information:
Market flashes, including with respect to changes in the information in market
reports.
7
<PAGE>
Exhibit 8.3
THE ANALYTIC OPTIONED EQUITY FUND, INC.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
February 26, 1998
Marie Nastasi Arlt
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
Dear Marie:
This will confirm our understanding regarding the delegation of certain
matters to you with respect to the maintenance by The Analytic Optioned Equity
Fund, Inc. (the "Fund") of certain assets in foreign countries, pursuant to Rule
17f-5 under the Investment Company Act of 1940, as amended.
In accordance with Rule 17f-5, we have executed an Amendment to our Global
Custody Agreement dated February 26, 1998 (the "Custody Agreement") with The
Chase Manhattan Bank, the custodian for certain assets of the Fund (the
"Custodian"), pursuant to which we have delegated to the Custodian certain
matters relating to maintenance of assets of the Fund in foreign countries with
certain sub-custodians and depositories. However, the Custody Agreement does
not delegate to the Custodian responsibility for evaluation of systemic risks
with respect to each of the foreign countries in which assets of the Fund are
maintained ("Country Risks"), including without limitation the following: (a)
the risks of maintaining assets of the Fund with Compulsory Securities
Depositories (as defined in the Custody Agreement); (b) the risks of a foreign
country's financial infrastructure; (c) a foreign country's prevailing custody
and settlement practices; (d) risks of nationalization, expropriation, or other
governmental actions; (e) regulation of the banking and securities industries;
(f) currency controls, restrictions, devaluation or fluctuation; and (g) market
conditions which may affect the orderly execution of securities transactions or
affect the value of the transactions.
You have agreed, in connection with your duties as investment adviser to
the Fund to accept the responsibility for evaluation such Country Risks on
behalf of the Fund in accordance with Rule 17f-5. Such delegation is subject to
the provisions of your Investment Management Agreement with us.
Please sign this letter agreement below to evidence your acceptance of this
delegation and return it to us in the self-addressed stamped envelope. If you
have any questions or concerns, please do not hesitate to call Gary French, Mike
DeFao or me.
Sincerely,
Robert R. Flaherty
Assistant Treasurer
AGREED:
ANALYTIC-TSA GLOBAL
ASSET MANGEMENT, INC.
By:
-------------------------
Name:
Title:
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 29 to the Registration Statement on Form N-1A of The Defensive Equity
Portfolio of Analytic Optioned Equity Fund, Inc. (File No. 2-60792) of our
report dated February 6, 1998 appearing in the annual reports to shareholders
for the year ended December 31, 1997 of The Defensive Equity Portfolio of
Analytic Optioned Equity Fund, Inc., and to the references to us under the
headings "Financial Highlights" in the Prospectus and "Independent Auditors" and
"Financial Statements" in the Statement of Additional Information, all of which
are part of this Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 22, 1998
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