[PROVIDENT INVESTMENT COUNSEL MUTUAL FUNDS LOGO]
SMALL CAP
GROWTH FUND I
PROSPECTUS
FEBRUARY 28, 2000
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
Please read this prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Fund invests and
the services available to shareholders.
<PAGE>
CONTENTS
KEY FACTS 3 RISK/RETURN SUMMARY
3 THE PRINCIPAL GOAL, STRATEGIES
AND RISKS OF THE FUND
4 WHO MAY WANT TO INVEST
4 PERFORMANCE
5 FEES AND EXPENSES
6 STRUCTURE OF THE FUND AND THE PORTFOLIO
7 MORE INFORMATION ABOUT THE FUND'S
INVESTMENTS, STRATEGIES AND RISKS
8 MANAGEMENT
YOUR ACCOUNT 9 CALCULATION OF NET ASSET VALUE
9 HOW TO BUY SHARES
9 HOW TO SELL SHARES
SHAREHOLDER ACCOUNT POLICIES 11 DIVIDENDS, CAPITAL GAINS AND TAXES
11 UNDERSTANDING DISTRIBUTIONS
11 TRANSACTION DETAILS
11 FINANCIAL HIGHLIGHTS
PROSPECTUS 2
<PAGE>
KEY FACTS
MANAGEMENT: Provident Investment Counsel (PIC), located in Pasadena, California
since 1951, is the Fund's Advisor. At December 31, 1999, total assets under
PIC's management were over $23 billion.
STRUCTURE: Unlike most mutual funds, the Fund's investment in portfolio
securities is indirect. The Fund first invests all of its assets in the PIC
Small Cap Portfolio. The PIC Small Cap Portfolio, in turn, acquires and manages
individual securities. The Fund has the same investment objective as the PIC
Small Cap Portfolio. This is often referred to as a master-feeder fund
structure. Investors should carefully consider this investment approach.
For reasons relating to costs or a change in investment goal, among others, the
Fund could switch to another pooled investment company or decide to manage its
assets itself. The Fund is currently not contemplating such a move.
RISK/RETURN SUMMARY
THE PRINCIPAL GOAL, STRATEGIES AND RISKS OF THE FUND
GOAL: Long term growth of capital. STRATEGY: The Fund invests in the PIC Small
Cap Portfolio. The Small Cap Portfolio invests at least 65% of its assets
primarily in the common stock of small-capitalization companies.
Small-capitalization companies are those whose market capitalization or annual
revenues at the time of initial purchase are $50 million to $2 billion. In
selecting investments, PIC does an analysis of individual companies and invests
in those small-capitalization companies which it believes have the best
prospects for future growth of earnings and revenue.
THE PRINCIPAL RISKS OF INVESTING IN THE FUND
By itself, the Fund is not a complete, balanced investment plan. And the Fund
cannot guarantee that it will reach its goal. As with all mutual funds, there is
the risk that you could lose money on your investment in the Fund. For example,
the following risks could affect the value of your investment:
MARKET RISK: The value of the Fund's investments will vary from day to day. The
value of the Fund's investments generally reflect market conditions, interest
rates and other company, political and economic news. Stock prices can rise and
fall in response to these factors for short or extended periods of time.
Therefore, when you sell your shares, you may receive more or less money than
you originally invested.
SMALL COMPANY RISK: The securities of small, less well-known companies may be
more volatile than those of larger companies. Small companies may have limited
product lines, markets or financial resources and their management be dependent
on a limited number of key individuals. Securities of these companies may have
limited market liquidity.
PORTFOLIO TURNOVER RISK: A high portfolio turnover rate (100% or more) has the
potential to result in the realization and distribution to shareholders of
higher
3 PROSPECTUS
<PAGE>
KEY FACTS - CONTINUED
capital gains. This may mean that you would be likely to have a higher tax
liability. A high portfolio turnover rate also leads to higher transactions
costs, which could negatively affect the Fund's performance.
WHO MAY WANT TO INVEST The Fund may be appropriate for investors who are seeking
capital appreciation through a portfolio of small-size companies and are willing
to accept the greater risk of investing in such companies.
Investments in the Fund are not bank deposits and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
PERFORMANCE
The following performance information indicates some of the risks of investing
in the Fund. The bar chart shows how the Fund's total return has varied from
year to year. The table shows the Fund's average returns over time compared with
a broad-based market index. This past performance will not necessarily continue
in the future.
PROSPECTUS 4
<PAGE>
SMALL CAP GROWTH FUND I
CALENDAR YEAR TOTAL RETURNS (%)
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
-2.51 58.73 18.20 -0.75 5.82 88.72
Best quarter: up 57.76%, fourth quarter 1999
Worst quarter: down -24.62%, third quarter 1998
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
Since Inception
1 Year 5 Years (September 30, 1993)
------ ------- --------------------
Small Cap Growth Fund 88.72% 30.04% 22.73%
Russell 2000 Growth Index* 43.09 18.99 14.87
- ----------
* The Russell 2000 Growth Index measures the performance of those companies in
the Russell 2000 Index with higher price-to-book ratios and lower forecasted
growth values. The Russell 2000 Index is a recognized index of small-
capitalization companies.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) None
Maximum deferred sales (load) charge (as a percentage
of purchase or sale price whichever is less) None
Redemption fee None
5 PROSPECTUS
<PAGE>
KEY FACTS - CONTINUED
ANNUAL FUND OPERATING EXPENSES*
(expenses that are deducted from Fund and/or Portfolio assets)
Management Fee (paid by the Portfolio) 0.80%
Administration Fee to PIC (paid by the Fund) 0.20%
Other Expenses (paid by both) 0.27%
-----
Total Annual Fund Operating Expenses 1.27%
Expense Reimbursements ** (0.27%)
-----
Net Expenses 1.00%
=====
- ----------
* The table above and the Example below reflect the expenses of the Fund and
the Portfolio.
** Pursuant to a contract with the Funds, PIC has agreed to reimburse the Fund
and Portfolio for investment advisory fees and other expenses for ten years
ending March 1, 2010. PIC reserves the right to be reimbursed for any waiver
of its fees or expenses paid on behalf of the Fund if, within three
subsequent years, the Fund's expenses are less than the limit agreed to by
PIC. Any reimbursements to PIC are subject to approval by the Board of
Trustees.
EXAMPLE: This Example will help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. These examples are only
illustrations, and your actual costs may be higher or lower. Let's say,
hypothetically, that the Fund's annual return is 5%, that all dividends and
distributions are reinvested and that its operating expenses remain the same.
For every $10,000 you invest, here's how much you would pay in total expenses
for the time periods shown if you redeemed your shares at the end of the period:
After 1 year $ 102
After 3 years $ 318
After 5 years $ 552
After 10 years $1,225
STRUCTURE OF THE FUND AND THE PORTFOLIO
The Fund seeks to achieve its investment objective by investing all of its
assets in the PIC Small Cap Portfolio. The PIC Small Cap Portfolio is a separate
registered investment company with the same investment objective as the Fund.
Since the Fund will not invest in any securities other than shares of the PIC
Small Cap Portfolio, investors in the Fund will acquire only an indirect
interest in the Portfolio. The Fund's and Portfolio's investment objective
cannot be changed without shareholder approval.
The Portfolio may sell its shares to other funds and institutions as well as to
the Fund. All who invest in the Portfolio do so on the same terms and conditions
and pay a proportionate share of the Portfolio's expenses. However, these other
funds may sell their shares to the public at prices different from the Fund's
prices. This would be due to different sales charges or operating expenses, and
it might result in different investment returns to these other funds'
shareholders.
PROSPECTUS 6
<PAGE>
MORE INFORMATION ABOUT THE FUND'S INVESTMENTS, STRATEGIES AND RISKS
As described earlier, the Fund invests all of its assets in PIC Small Cap
Portfolio. This section gives more information about how the PIC Small Cap
Portfolio invests.
PIC supports its selection of individual securities through intensive research
and uses qualitative and quantitative disciplines to determine when securities
should be sold. PIC's research professionals meet personally with the majority
of the senior officers of the companies in the Portfolio to discuss their
abilities to generate strong revenue and earnings growth in the future.
PIC's investment professionals focus on individual companies rather than trying
to identify the best market sectors going forward. This is often referred to as
a "bottom-up" approach to investing. PIC seeks companies that have displayed
exceptional profitability, market share, return on equity, reinvestment rates
and sales and dividend growth. Companies with significant management ownership
of stock, strong management goals, plans and controls; and leading proprietary
positions in given market niches are especially attractive. Finally, the
valuation of each company is assessed relative to its industry, earnings growth
and the market in general.
The Fund seeks long term growth of capital by investing in the PIC Small Cap
Portfolio, which in turn invests primarily in the common stock of small
companies. PIC will invest at least 65%, and normally at least 95%, of the
Portfolio's total assets in these securities. The Small Cap Portfolio has
flexibility, however, to invest the balance in other market capitalizations and
security types. Investing in small capitalization stocks may involve greater
risk than investing in large or medium capitalization stocks, since they can be
subject to more abrupt or erratic movements in value. Small companies may have
limited product lines, markets or financial resources and their management may
be dependent on a limited number of key individuals. Securities of these
companies may have limited market liquidity and their prices tend to be more
volatile.
The Portfolio invests to a limited degree in foreign securities. Foreign
investments involve additional risks including currency fluctuations, political
and economic instability, differences in financial reporting standards, and less
stringent regulation of securities markets.
In determining whether to sell a security, PIC considers the following: (a) a
fundamental change in the future outlook of the company based on PIC's research;
(b) the company's performance compared to other companies in its peer group; and
(c) whether the security has reached the target price set by PIC. These
considerations are based on PIC's research, including analytical procedures,
market research and, although not always possible, meetings or discussions with
management of the company.
The Portfolio seeks to spread investment risk by diversifying its holdings among
many companies and industries. PIC normally invests the Portfolio's assets
according to its investment strategy. However, the Portfolio may depart from its
principal investment strategies by making short-term investments
7 PROSPECTUS
<PAGE>
KEY FACTS - CONTINUED
in high-quality cash equivalents for temporary, defensive purposes. At those
times, the Fund would not be seeking its investment objective.
MANAGEMENT
PIC is the advisor to the PIC Small Cap Portfolio, in which the Fund invests.
PIC's address is 300 North Lake Avenue, Pasadena, CA 91101. PIC traces its
origins to an investment partnership formed in 1951. It is now an indirect,
wholly owned subsidiary of United Asset Management Corporation (UAM), a publicly
owned corporation with headquarters located at One International Place, Boston,
MA 02110. UAM is principally engaged, through affiliated firms, in providing
institutional investment management services. An investment committee of PIC
formulates and implements an investment program for the Portfolio, including
determining which securities should be bought and sold.
The Portfolio pays an investment advisory fee to PIC for managing the
Portfolio's investments. Last year, as a percentage of net assets the Portfolio
paid 0.80%.
PROSPECTUS 8
<PAGE>
YOUR ACCOUNT
CALCULATION OF NET ASSET VALUE
Once each business day, the Fund calculates its net asset value (NAV). NAV is
calculated at the close of regular trading on the New York Stock Exchange
(NYSE), which is normally 4 p.m., Eastern time. NAV will not be calculated on
days that the NYSE is closed for trading.
The Fund's assets are valued primarily on the basis of market quotations. If
quotations are not readily available, assets are valued by a method that the
Board of Trustees believes accurately reflects fair value.
HOW TO BUY SHARES
The price you will pay to buy Fund shares is based on the Fund's NAV. Shares are
purchased at the next NAV calculated after the investment is received and
accepted.
You may buy shares of the Fund only through certain eligible institutions, such
as financial institutions and broker-dealers who have entered into an agreement
with the Fund to sell its shares. Such eligible institutions may charge you a
fee for this service. Before investing, read its program materials for any
additional service features or fees that may apply.
The minimum initial investment in the Fund is $1 million. This minimum may be
waived for certain investors. This includes investors who make investments for a
group of clients, such as financial or investment advisors or trust companies.
There is no minimum subsequent investment.
If you are making an initial investment in the Fund, the Eligible Institution
should call the Fund's Transfer Agent at 800-618-7643 to obtain an account
number. The Eligible Institution may then purchase shares of the Fund by wiring
the amount to be invested to the following address:
PNPC Bank
Philadelphia, PA
ABA #031-0000-53
DDA #86-0172-6604
For credit to Provident Investment Counsel
Small Cap Growth Fund
[Shareholder name and account number]
At the same time, you should mail an application form to the Fund's Transfer
Agent, Provident Financial Processing Corp., at the following address:
Provident Investment Counsel
Small Cap Growth Fund
P.O. Box 8943
Wilmington, DE 19899
Subsequent investments may be made by wiring funds to the custodian bank at the
above address.
If you buy shares by check then sell those shares within two weeks, the payment
may be delayed for up to seven business days to ensure that your purchase check
has cleared.
HOW TO SELL SHARES
You can arrange to take money out of your account at any time by selling
(redeeming) some or all of your shares. Your shares will be sold at the next NAV
calculated after your order is received by the Transfer Agent with complete
information and meeting all the requirements discussed in this Prospectus.
9 PROSPECTUS
<PAGE>
YOUR ACCOUNT - CONTINUED
When you open your Fund account, the person or persons who are authorized to
give instructions to the Fund on your behalf will be identified.
Written instructions signed by an authorized person may be mailed to the
Transfer Agent at P.O. Box 8943, Wilmington, DE 19899. The instructions may be
delivered to the Transfer Agent at 400 Bellevue Parkway, Wilmington, DE 19809.
The authorized person may send the written instructions by facsimile to
302-427-4511.
The redemption request should give the Fund's name, your account number and
specify the amount of shares to be redeemed.
Redemptions may be suspended or payment dates postponed when the NYSE is closed
(other than weekends or holidays), when trading on the NYSE is restricted, or as
permitted by the SEC.
You should make sure that the Transfer Agent and Administrator have a current
list of persons authorized to give instructions to the Fund on your behalf.
PROSPECTUS 10
<PAGE>
SHAREHOLDER ACCOUNT POLICIES
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund distributes substantially all of its net income and capital gains, if
any, to shareholders each year in December. Your dividend and capital gain
distributions will be automatically reinvested in additional shares of the Fund.
When the Fund deducts a distribution from its NAV, the reinvestment price is the
Fund's NAV at the close of business that day.
UNDERSTANDING DISTRIBUTIONS
As a Fund shareholder, you are entitled to your share of the Fund's net income
and gains on its investments. The Fund passes its net income along to investors
as distributions which are taxed as dividends; long term capital gain
distributions are taxed as long term capital gains regardless of how long you
have held your Fund shares. Every January, PIC will send you and the IRS a
statement showing the taxable distributions.
TAXES ON TRANSACTIONS. Your redemptions are subject to capital gains tax. A
capital gain or loss is the difference between the cost of your shares and the
price you receive when you sell them.
TRANSACTION DETAILS
The Fund is open for business each day the NYSE is open.
WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify that your
Social Security or taxpayer identification number is correct and that you are
not subject to 31% withholding for failing to report income to the IRS. If you
violate IRS regulations, the IRS can require the Fund to withhold 31% of your
taxable distributions and redemptions.
The Fund reserves the right to suspend the offering of its shares for a period
of time. The Fund also reserves the right to reject any specific purchase order.
Purchase orders may be refused if, in PIC's opinion, they would disrupt
management of the Fund.
FINANCIAL HIGHLIGHTS
This table show the Fund's financial performance for the past five years.
Certain information reflects financial results for a single Fund share. "Total
return" shows how much your investment in the Fund would have increased or
decreased during each period, assuming you had reinvested all dividends and
distributions. The information for the year ended October 31, 1999 has been
audited by PricewaterhouseCoopers LLP, Independent Certified Public Accountants.
Their reports and the Fund's financial statements are included in the Annual
Reports. The information for years prior to the year ended October 31, 1999 has
been audited by other accountants.
11 PROSPECTUS
<PAGE>
For a share outstanding throughout the year
<TABLE>
<CAPTION>
Years Ended October 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 18.13 $ 24.08 $ 23.19 $ 18.69 $ 12.90
------- ------- ------- ------- -------
Income from investment operations:
Net investment loss (0.20) (0.03) (0.40) (0.10) (0.07)
Net realized and unrealized gain
(loss) on investments 10.87 (3.99) 1.58 4.60 5.86
------- ------- ------- ------- -------
Total from investment operations 10.67 (4.02) 1.18 4.50 5.79
------- ------- ------- -------- -------
Less distributions to shareholders:
From net realized gains -- (1.93) (0.29) -- --
Net asset value, end of year $ 28.80 $ 18.13 $ 24.08 $ 23.19 $ 18.69
------- ------- ------- ------- -------
TOTAL RETURN 58.85% (17.85%) 5.15% 24.08% 44.88%
======= ======= ======= ======= =======
Ratios/supplemental data:
Net assets, end of year (millions) $ 218.0 $ 141.2 $ 105.5 $ 196.1 $ 130.3
Ratios to average net assets:+
Expenses 1.00% 1.00% 1.00% 1.00% 1.00%
Net investment loss (0.79%) (0.67%) (0.48%) (0.60%) (0.51%)
Portfolio turnover rate++ 133.24% 81.75% 151.52% 53.11% 45.45%
</TABLE>
- ----------
+ Net of fee waivers and expense reimbursements of the Fund and the
Portfolio. The combined expense reimbursements and waivers of the Fund and
the Portfolio were 0.27%, 0.26%, 0.25%, 0.25% And 0.34%, Respectively.
++ Portfolio turnover rate of PIC Small Cap Portfolio, in which all of the
Fund's assets are invested.
PROSPECTUS 12
<PAGE>
PROVIDENT INVESTMENT COUNSEL
SMALL CAP GROWTH FUND I
For investors who want more information about the Fund, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Fund and is incorporated by reference into this
Prospectus.
You can get free copies of the Fund's reports and SAI, request other information
and discuss your questions about the Fund by contacting the Fund at:
Provident Investment Counsel
P.O. Box 8943
Wilmington, DE 19899
Telephone: 1-800-618-7643
You can review and copy information including the Fund's reports and SAI at the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. You can obtain information on the operation of the Public Reference Room by
calling the Commission at 1-202-942-8090. Reports and other information about
the Fund are available:
Free of charge from the Commission's EDGAR database on the Commission's Internet
website at http://www.sec.gov
For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 20549-0102 or by electronic request at the following e-mail
address: [email protected].
(The Trust's SEC Investment Company Act
File No. is 811-06498)
<PAGE>
PIC INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 28, 2000
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the prospectus of the Provident Investment
Counsel Small Cap Growth Fund I, a series of PIC Investment Trust (the "Trust").
There are twelve other series of the Trust: Provident Investment Counsel Growth
Fund I, Provident Investment Counsel Small Company Growth Fund I, Provident
Investment Counsel Balanced Fund A, Provident Investment Counsel Growth Fund A,
Provident Investment Counsel Mid Cap Fund A, Provident Investment Counsel Small
Company Growth Fund A, Provident Investment Counsel Balanced Fund B, Provident
Investment Counsel Growth Fund B, Provident Investment Counsel Mid Cap Fund B,
Provident Investment Counsel Small Company Growth Fund B, Provident Investment
Counsel Mid Cap Fund C and Provident Investment Counsel Small Company Growth
Fund C. The Provident Investment Counsel Small Cap Growth Fund I (the "Fund")
invests in the PIC Small Cap Portfolio (the "Portfolio"). Provident Investment
Counsel (the "Advisor") is the Advisor to the Portfolio. A copy of the Fund's
prospectus may be obtained from the Trust at 300 North Lake Avenue, Pasadena, CA
91101-4106, telephone (818) 449-8500.
TABLE OF CONTENTS
Investment Objective and Policies ....................................... B-2
Investment Restrictions ................................................. B-7
Management .............................................................. B-9
Custodian and Auditors .................................................. B-14
Portfolio Transactions and Brokerage .................................... B-14
Portfolio Turnover ...................................................... B-15
Additional Purchase and Redemption Information .......................... B-15
Net Asset Value ......................................................... B-16
Taxation ................................................................ B-16
Dividends and Distributions ............................................. B-17
Performance Information ................................................. B-17
General Information ..................................................... B-19
Financial Statements .................................................... B-20
Appendix ................................................................ B-21
B-1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INTRODUCTION. The investment objective of the Fund is to provide capital
appreciation. There is no assurance that the Fund will achieve its objective.
The Fund will attempt to achieve its objective by investing all of its assets in
shares of the Portfolio. The Portfolio is a diversified open-end management
investment company having the same investment objective as the Fund. Since the
Fund will not invest in any securities other than shares of the Portfolio,
investors in the Fund will acquire only an indirect interest in the Portfolio.
The Fund's and the Portfolio's investment objective cannot be changed without
shareholder approval.
In addition to selling its shares to the Fund, the Portfolio may sell its
shares to other mutual funds or institutional investors. All investors in the
Portfolio invest on the same terms and conditions and pay a proportionate share
of the Portfolio's expenses. However, other investors in the Portfolio may sell
their shares to the public at prices different from those of the Fund as a
result of the imposition of sales charges or different operating expenses. You
should be aware that these differences may result in different returns from
those of investors in other entities investing in the Portfolio. Information
concerning other holders of interests in the Portfolio is available by calling
(800) 618-7643.
The Trustees of the Trust believe that this structure may enable the Fund
to benefit from certain economies of scale, based on the premise that certain of
the expenses of managing an investment portfolio are relatively fixed and that a
larger investment portfolio may therefore achieve a lower ratio of operating
expenses to net assets. Investing the Fund's assets in the Portfolio may produce
other benefits resulting from increased asset size, such as the ability to
participate in transactions in securities which may be offered in larger
denominations than could be purchased by the Fund alone. The Fund's investment
in the Portfolio may be withdrawn by the Trustees at any time if the Board
determines that it is in the best interests of the Fund to do so. If any such
withdrawal were made, the Trustees would consider what action might be taken,
including the investment of all of the assets of the Fund in another pooled
investment company or the retaining of an investment advisor to manage the
Fund's assets directly.
Whenever the Fund is requested to vote on matters pertaining to the
Portfolio, the Fund will hold a meeting of its shareholders, and the Fund's
votes with respect to the Portfolio will be cast in the same proportion as the
shares of the Fund for which voting instructions are received.
SECURITIES AND INVESTMENT PRACTICES
The discussion below supplements information contained in the prospectus as
to policies of the Fund and the Portfolio. Because the investment
characteristics of the Fund will correspond directly to those of the Portfolio,
the discussion refers to those investments and techniques employed by the
Portfolio. PIC may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help the Portfolio achieve its goals.
B-2
<PAGE>
EQUITY SECURITIES. Equity securities are common stocks and other kinds of
securities that have the characteristics of common stocks. These other
securities include bonds, debentures and preferred stocks which can be converted
into common stocks. They also include warrants and options to purchase common
stocks.
SHORT-TERM INVESTMENTS. Short-Term Investments are debt securities that
mature within a year of the date they are purchased by the Portfolio. Some
specific examples of short-term investments are commercial paper, bankers'
acceptances, certificates of deposit and repurchase agreements. The Portfolio
will only purchase short-term investments which are "high quality," meaning the
investments have been rated A-1 by Standard & Poor's Rating Group ("S&P") or
Prime-1 by Moody's Investors Service, Inc. ("Moody's"), or have an issue of debt
securities outstanding rated at least A by S&P or Moody's. The term also applies
to short-term investments that PIC believes are comparable in quality to those
with an A-1 or Prime-1 rating. U.S. Government securities are always considered
to be high quality.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Fund or the Portfolio purchases a security from a bank or recognized securities
dealer and simultaneously commits to resell that security to the bank or dealer
at an agreed-upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased security. The purchaser
maintains custody of the underlying securities prior to their repurchase; thus
the obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such underlying securities. If the value of
such securities is less than the repurchase price, the other party to the
agreement will provide additional collateral so that at all times the collateral
is at least equal to the repurchase price.
Although repurchase agreements carry certain risks not associated with
direct investments in securities, the Fund and the Portfolio intend to enter
into repurchase agreements only with banks and dealers believed by the Advisor
to present minimum credit risks in accordance with guidelines established by the
Boards of Trustees. The Advisor will review and monitor the creditworthiness of
such institutions under the Boards' general supervision. To the extent that the
proceeds from any sale of collateral upon a default in the obligation to
repurchase were less than the repurchase price, the purchaser would suffer a
loss. If the other party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to bankruptcy or other liquidation proceedings, there
might be restrictions on the purchaser's ability to sell the collateral and the
purchaser could suffer a loss. However, with respect to financial institutions
whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy
Code, the Fund and the Portfolio intend to comply with provisions under such
Code that would allow them immediately to resell the collateral.
OPTIONS ACTIVITIES. The Portfolio may write call options on stocks and
stock indices, if the calls are "covered" throughout the life of the option. A
call is "covered" if the Portfolio owns the optioned securities. When the
Portfolio writes a call, it receives a premium and gives the purchaser the right
to buy the underlying security at any time during the call period at a fixed
exercise price regardless of market price changes during the call period. If the
call is exercised, the Portfolio will forgo any gain from an increase in the
market price of the underlying security over the exercise price.
B-3
<PAGE>
The Portfolio may purchase a call on securities to effect a "closing
purchase transaction," which is the purchase of a call covering the same
underlying security and having the same exercise price and expiration date as a
call previously written by the Portfolio on which it wishes to terminate its
obligation. If the Portfolio is unable to effect a closing purchase transaction,
it will not be able to sell the underlying security until the call previously
written by the Portfolio expires (or until the call is exercised and the
Portfolio delivers the underlying security).
The Portfolio also may write and purchase put options ("puts"). When the
Portfolio writes a put, it gives the purchaser of the put the right to sell the
underlying security to the Portfolio at the exercise price at any time during
the option period. When the Portfolio purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date.
The Portfolio's option positions may be closed out only on an exchange
which provides a secondary market for options of the same series, but there can
be no assurance that a liquid secondary market will exist at a given time for
any particular option.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
FUTURES CONTRACTS. The Portfolio may buy and sell stock index futures
contracts. A futures contract is an agreement between two parties to buy and
sell a security or an index for a set price on a future date. Futures contracts
are traded on designated "contract markets" which, through their clearing
corporations, guarantee performance of the contracts.
Entering into a futures contract for the sale of securities has an effect
similar to the actual sale of securities, although sale of the futures contract
might be accomplished more easily and quickly. Entering into futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities other
than the underlying securities.
A stock index futures contract may be used as a hedge by the Portfolio with
regard to market risk as distinguished from risk relating to a specific
security. A stock index futures contract does not require the physical delivery
of securities, but merely provides for profits and losses resulting from changes
in the market value of the contract to be credited or debited at the close of
each trading day to the respective accounts of the parties to the contract. On
the contract's expiration date, a final cash settlement occurs. Changes in the
market value of a particular stock index futures contract reflects changes in
the specified index of equity securities on which the future is based.
There are several risks in connection with the use of futures contracts. In
the event of an imperfect correlation between the futures contract and the
B-4
<PAGE>
portfolio position which is intended to be protected, the desired protection may
not be obtained and the Portfolio may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the Portfolio than if it had not entered into any
futures on stock indices.
In addition, the market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time.
FOREIGN SECURITIES. The Portfolio may invest in foreign issuers in foreign
markets. In addition, the Portfolio may invest in American Depositary Receipts
("ADRs"), which are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities. Generally, ADRs are issued in
registered form, denominated in U.S. dollars, and are designed for use in the
U.S. securities markets. A depositary may issue unsponsored ADRs without the
consent of the foreign issuer of securities, in which case the holder of the ADR
may incur higher costs and receive less information about the foreign issuer
than the holder of a sponsored ADR. The Portfolio may invest no more than 20% of
its total assets in foreign securities, and it will only purchase foreign
securities or American Depositary Receipts which are listed on a national
securities exchange or included in the NASDAQ system.
Foreign securities and securities issued by U.S. entities with substantial
foreign operations may involve additional risks and considerations. These
include risks relating to political or economic conditions in foreign countries,
fluctuations in foreign currencies, withholding or other taxes, operational
risks, increased regulatory burdens and the potentially less stringent investor
protection and disclosure standards of foreign markets. All of these factors can
make foreign investments, especially those in developing countries, more
volatile.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolio may enter into
forward contracts with respect to specific transactions. For example, when the
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when it anticipates the receipt in a
foreign currency of dividend or interest payments on a security that it holds,
the Portfolio may desire to "lock in" the U.S. dollar price of the security or
the U.S. dollar equivalent of the payment, by entering into a forward contract
for the purchase or sale, for a fixed amount of U.S. dollars or foreign
currency, of the amount of foreign currency involved in the underlying
transaction.
B-5
<PAGE>
The Portfolio will thereby be to protect itself against a possible loss
resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Portfolio is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transaction costs. The
Portfolio may enter into forward contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency or (2) the
Portfolio maintains a segregated account as described below. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Advisor believes it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
At or before the maturity date of a forward contract that requires the
Portfolio to sell a currency, the Portfolio may either sell a security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, the
Portfolio may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. The Portfolio
would realize a gain or loss as a result of entering into such an offsetting
forward contract under either circumstance to the extent the exchange rate
between the currencies involved moved between the execution dates of the first
and second contracts.
The cost to the Portfolio of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Portfolio owns or intends to acquire, but it does fix
a rate of exchange in advance. In addition, although forward contracts limit the
B-6
<PAGE>
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.
SEGREGATED ACCOUNTS. When the Portfolio writes an option, sells a futures
contract or enters into a forward foreign currency exchange contract, it will
establish a segregated account with its custodian bank, or a securities
depository acting for it, to hold assets of the Portfolio in order to insure
that the Portfolio will be able to meet its obligations. In the case of a call
that has been written, the securities covering the option will be maintained in
the segregated account and cannot be sold by the Portfolio until released. In
the case of a put that has been written or a forward foreign currency contract
that has been entered into, liquid securities will be maintained in the
segregated account in an amount sufficient to meet the Portfolio's obligations
pursuant to the put or forward contract. In the case of a futures contract,
liquid securities will be maintained in the segregated account equal in value to
the current value of the underlying contract, less the margin deposits. The
margin deposits are also held, in cash or U.S. Government securities, in the
segregated account.
DEBT SECURITIES AND RATINGS. Ratings of debt securities represent the
rating agencies' opinions regarding their quality, are not a guarantee of
quality and may be reduced after the Portfolio has acquired the security. The
Advisor will consider whether the Portfolio should continue to hold the security
but is not required to dispose of it. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than the rating indicates.
INVESTMENT RESTRICTIONS
The Trust (on behalf of the Fund) and the Portfolio have adopted the
following restrictions as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority," as defined in the Investment
Company Act of 1940 (the "1940 Act"), of the outstanding voting securities of
the Fund or the Portfolio. Under the 1940 Act, the "vote of the holders of a
majority of the outstanding voting securities" means the vote of the holders of
the lesser of (i) 67% of the shares of the Fund or the Portfolio represented at
a meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of the Fund or the
Portfolio. Except with respect to borrowing, changes in values of assets of the
Fund or Portfolio will not cause a violation of the investment restrictions so
long as percentage restrictions are observed by the Fund or Portfolio at the
time it purchases any security.
As a matter of fundamental policy, the Portfolio is diversified; i.e., as
to 75% of the value of its total assets, no more than 5% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities). The Fund invests all of its assets in shares of the
Portfolio. The Fund's and the Portfolio's investment objective is fundamental.
In addition, the Fund or Portfolio may not:
1. Issue senior securities, borrow money or pledge its assets, except that
the Fund or the Portfolio may borrow on an unsecured basis from banks for
B-7
<PAGE>
temporary or emergency purposes or for the clearance of transactions in amounts
not exceeding 10% of its total assets (not including the amount borrowed),
provided that it will not make investments while borrowings in excess of 5% of
the value of its total assets are outstanding;
2. Make short sales of securities or maintain a short position;
3. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
4. Write put or call options, except that the Portfolio may write covered
call and cash secured put options and purchase call and put options on stocks
and stock indices;
5. Act as underwriter (except to the extent the Fund or Portfolio may be
deemed to be an underwriter in connection with the sale of securities in its
investment portfolio);
6. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities), except that the Fund may invest more than 25% of its
assets in shares of the Portfolio;
7. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although the Portfolio may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
8. Purchase or sell commodities or commodity futures contracts, except that
the Portfolio may purchase and sell stock index futures contracts;
9. Invest in oil and gas limited partnerships or oil, gas or mineral
leases;
10. Make loans (except for purchases of debt securities consistent with the
investment policies of the Fund and the Portfolio and except for repurchase
agreements); or
11. Make investments for the purpose of exercising control or management.
The Portfolio observes the following restrictions as a matter of operating
but not fundamental policy.
The Portfolio may not:
1. Invest more than 10% of its assets in the securities of other investment
companies or purchase more than 3% of any other investment company's voting
securities or make any other investment in other investment companies except as
permitted by federal and state law; or
2. Invest more than 15% of its net assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities issued under Rule 144A which are
determined by the Board of Trustees to be liquid).
B-8
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
Likewise, the Portfolio has a Board of Trustees which has comparable
responsibilities, including approving agreements with the Advisor. The day to
day operations of the Trust and the Portfolio are delegated to their officers,
subject to their investment objectives and policies and to general supervision
by their Boards of Trustees.
The following table lists the Trustees and officers of the Trust, their
business addresses and principal occupations during the past five years. Unless
otherwise noted, each individual has held the position listed for more than five
years.
Name, Address Position(s) Held Principal Occupation(s)
and Age With the Trust During Past 5 Years
-------------- ---------------- -----------------------
Douglass B. Allen* (age 37) Trustee and Vice President of the Advisor
300 North Lake Avenue President
Pasadena, CA 91101
Jettie M. Edwards (age 53) Trustee Consulting principal of Syrus
76 Seaview Drive Associates (consulting firm)
Santa Barbara, CA 93108
Richard N. Frank (age 76) Trustee Chief Executive Officer, Lawry's
234 E. Colorado Blvd. Restaurants, Inc.; formerly,
Pasadena, CA 91101 Chairman of Lawry's Foods, Inc.
James Clayburn LaForce Trustee Dean Emeritus, John E. Anderson
(age 76) Graduate School of Management,
P.O. Box 1585 University of California, Los
Pauma Valley, CA 92061 Angeles. Director of The BlackRock
Funds. Trustee of Payden & Rygel
Investment Trust. Director of the
Timken Co., Rockwell
International, Eli Lily, Jacobs
Engineering Group and Imperial
Credit Industries.
Anthony R. Mozilo (age 60) Trustee Vice Chairman and Executive Vice
155 N. Lake Avenue President of Countrywide Credit
Pasadena, CA 91101 Industries (mortgage banking)
B-9
<PAGE>
Wayne H. Smith (age 58) Trustee Vice President and Treasurer of
150 N. Orange Grove Blvd. Avery Dennison Corporation
Pasadena, CA 91103 (pressure sensitive material and
office products manufacturer)
Thomas J. Condon* (age 61) Trustee Managing Director of the Advisor.
300 North Lake Avenue
Pasadena, CA 91101
Aaron W.L. Eubanks, Sr. Vice President Senior Vice President of the
(age 37) and Secretary Advisor.
300 North Lake Avenue
Pasadena, CA 91101
William T. Warnick (age 31) Vice President Vice President of the Advisor
300 North Lake Avenue and Treasurer
Pasadena, CA 91101
The following table lists the Trustees and officers of the Portfolio, their
business addresses and principal occupations during the past five years. Unless
otherwise noted, each individual has held the position listed for more than five
years.
Name, Address Position(s) Held Principal Occupation(s)
and Age With the Portfolios During Past 5 Years
------------- ------------------- ----------------------
Douglass B. Allen* (age 37) Trustee and Vice President of the Advisor
300 North Lake Avenue President
Pasadena, CA 91101
Jettie M. Edwards (age 53) Trustee Consulting principal of Syrus
76 Seaview Drive Associates (consulting firm)
Santa Barbara, CA 93108
Richard N. Frank (age 76) Trustee Chief Executive Officer, Lawry's
234 E. Colorado Blvd. Restaurants, Inc.; formerly,
Pasadena, CA 91101 Chairman of Lawry's Foods, Inc.
James Clayburn LaForce Trustee Dean Emeritus, John E. Anderson
(age 76) Graduate School of Management,
P.O. Box 1585 University of California, Los
Pauma Valley, CA 92061 Angeles. Director of The BlackRock
Funds. Trustee of Payden & Rygel
Investment Trust. Director of the
Timken Co., Rockwell
International, Eli Lily, Jacobs
Engineering Group and Imperial
Credit Industries.
B-10
<PAGE>
Name, Address Position(s) Held Principal Occupation(s)
and Age With the Portfolios During Past 5 Years
------------- ------------------- ----------------------
Anthony R. Mozilo (age 60) Trustee Vice Chairman and Executive Vice
155 N. Lake Avenue President of Countrywide Credit
Pasadena, CA 91101 Industries (mortgage banking)
Wayne H. Smith (age 58) Trustee Vice President and Treasurer of
150 N. Orange Grove Blvd. Avery Dennison Corporation
Pasadena, CA 91103 (pressure sensitive material and
office products manufacturer)
Thomas J. Condon* (age 61) Trustee Managing Director of the Advisor.
300 North Lake Avenue
Pasadena, CA 91101
Aaron W.L. Eubanks, Sr. Vice President Senior Vice President of the
(age 37) and Secretary Advisor.
300 North Lake Avenue
Pasadena, CA 91101
William T. Warnick (age 31) Vice President Vice President of the Advisor
300 North Lake Avenue and Treasurer
Pasadena, CA 91101
- ----------
* denotes Trustees who are "interested persons" of the Trust or Portfolio
under the 1940 Act.
The following compensation was paid to each of the following Trustees. No
other compensation or retirement benefits were received by any Trustee or
officer from the Registrant or other registered investment company in the "Fund
Complex."
<TABLE>
<CAPTION>
Deferred Deferred Total
Compensation Compensation Compensation
Aggregate Aggregate Accrued as Part Accrued as Part From Trust and
Compensation Compensation of Trust of Portfolios Portfolios paid
Name of Trustee from Trust from Portfolios Expenses Expenses to Trustee
--------------- ---------- --------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Jettie M. Edwards $10,000 $ -0- $ -0- $ -0- $10,000
Wayne H. Smith $ -0- $ -0- $15,500 $ 1,158 $16,658
Richard N. Frank $ -0- $ -0- $ 658 $12,000 $12,658
James Clayburn LaForce $ 2,500 $12,000 $ -0- $ -0- $14,500
Angelo R. Mozilo $ -0- $ -0- $ 1,158 $ -0- $ 1,158
</TABLE>
B-11
<PAGE>
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Fund as of January 31, 2000:
HSBC Bank, Trustee - 15.34%
Buffalo, NY 14240
Summit Bank, Trustee - 17.14%
Hackensack, NJ 07602
US Bank National Assoc, Cust. - 12.49%
St. Paul, MN 55164
State Street Bank and Trust Company, Trustee - 36.64%
Westwood, MA 01090
As of January 31, 2000, shares of the Fund owned by the Trustees and
officers as a group were less than 1%.
THE ADVISOR
The Trust does not have an investment advisor, although the Advisor
performs certain administrative services for it, including providing certain
officers and office space.
The following information is provided about the Advisor and the Portfolio.
Subject to the supervision of the Board of Trustees of the Portfolio, investment
management and services will be provided to the Portfolio by the Advisor,
pursuant to an Investment Advisory Agreement (the "Advisory Agreement"). Under
the Advisory Agreement, the Advisor will provide a continuous investment program
for the Portfolio and make decisions and place orders to buy, sell or hold
particular securities. In addition to the fees payable to the Advisor and the
Administrator, the Portfolio and the Trust are responsible for their operating
expenses, including: (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of Trustees other than those
affiliated with the Advisor or the Administrator; (v) legal and audit expenses;
(vi) fees and expenses of the custodian, shareholder service and transfer
agents; (vii) fees and expenses for registration or qualification of the Trust
and its shares under federal or state securities laws; (viii) expenses of
preparing, printing and mailing reports and notices and proxy material to
shareholders; (ix) other expenses incidental to holding any shareholder
meetings; (x) dues or assessments of or contributions to the Investment Company
Institute or any successor; (xi) such non-recurring expenses as may arise,
including litigation affecting the Trust or the Portfolio and the legal
obligations with respect to which the Trust or the Portfolio may have to
indemnify their officers and Trustees; and (xii) amortization of organization
costs.
The Advisor is an indirect, wholly owned subsidiary of United Asset
Management Corporation ("UAM"), a New York Stock Exchange listed holding company
principally engaged, through affiliated firms, in providing institutional
investment management services. On February 15, 1995, UAM acquired the assets of
the Advisor's predecessor, which had the same name as the Advisor; on that date
the Advisor entered into a new Advisory Agreement having the same terms as the
previous Advisory Agreement with the Portfolio. The term "Advisor" also refers
to the Advisor's predecessor.
For its services, the Advisor receives a fee from the Portfolio at an
annual rate of 0.80% of its average net assets. For the fiscal year ended
B-12
<PAGE>
October 31, 1999, the Portfolio paid the Advisor fees of $1,789,614, net of a
waiver of $3,878. During the fiscal years ended October 31, 1998 and 1997, the
Advisor earned fees pursuant to the Advisory Agreement in the amounts of
$1,418,731 and $1,525,768, respectively. However, the Advisor has agreed to
limit the aggregate expenses of the Portfolio to 1.00% of its average net
assets. As a result, the Advisor paid expenses of the Portfolio that exceeded
these expense limits in the amounts of $24,020 and $24,879 during the fiscal
years ended October 31, 1998 and 1997, respectively.
Under the Advisory Agreement, the Advisor will not be liable to the
Portfolio for any error of judgment by the Advisor or any loss sustained by the
Portfolio except in the case of a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of damages will be
limited as provided in the 1940 Act) or of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
The Advisory Agreement will remain in effect for two years from its
execution. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Portfolio.
The Advisory Agreement is terminable by vote of the Board of Trustees or by
the holders of a majority of the outstanding voting securities of the Portfolio
at any time without penalty, on 60 days written notice to the Advisor. The
Advisory Agreement also may be terminated by the Advisor on 60 days written
notice to the Portfolio. The Advisory Agreement terminates automatically upon
its assignment (as defined in the 1940 Act).
The Advisor also provides certain administrative services to the Trust
pursuant to an Administration Agreement, including assisting shareholders of the
Trust, furnishing office space and permitting certain employees to serve as
officers and Trustees of the Trust. For its services, it earns a fee at the rate
of 0.20% of the average net assets of the Fund. During the fiscal years ended
October 31, 1999, 1998 and 1997, the Advisor earned fees pursuant to the
Administration Agreement from the Fund in the amounts of $386,716, $278,287 and
$334,603, respectively. However, the Advisor has agreed to limit the aggregate
expenses of the Fund to 1.00% of its average daily net assets. As a result, for
the fiscal years ended October 31, 1999, 1998 and 1997, the Advisor waived all
of its fee and reimbursed certain expenses of the Fund in the amounts of
$142,279, $75,766 and $94,203, respectively.
THE ADMINISTRATOR
The Fund and the Portfolio each pay a monthly administration fee to
Investment Company Administration, LLC for managing some of their business
affairs.
During each of the three years ended October 31, 1999, 1998 and 1997, the
Fund paid the Administrator fees in the amount of $10,000.
B-13
<PAGE>
During the fiscal years ended October 31, 1999, 1998 and 1997, the
Portfolio paid the Administrator fees in the amounts of $224,187, $177,341 and
$190,721, respectively.
THE DISTRIBUTOR
First Fund Distributors, Inc., 4455 E. Camelback Road, Suite 261E, Phoenix
AZ 85018, is the Trust's principal underwriter.
CUSTODIAN AND AUDITORS
The Trust's custodian, Provident National Bank, 200 Stevens Drive, Lester,
PA 19113 is responsible for holding the Fund's assets. Provident Financial
Processing Corporation, 400 Bellevue Parkway, Wilmington, DE 19809, acts as the
Fund's transfer agent; its mailing address is P.O. Box 8943, Wilmington, DE
19899. The Trust's independent accountants, PricewaterhouseCoopers LLP, 1177
Avenue of the Americas, New York, NY 10036, assist in the preparation of certain
reports to the Securities and Exchange Commission and the Fund's tax returns.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that in connection with its duties to arrange
for the purchase and the sale of securities held by the Portfolio by placing
purchase and sale orders for the Portfolio, the Advisor shall select such
broker-dealers ("brokers") as shall, in its judgment, achieve the policy of
"best execution," i.e., prompt and efficient execution at the most favorable
securities price. In making such selection, the Advisor is authorized in the
Advisory Agreement to consider the reliability, integrity and financial
condition of the broker. The Advisor also is authorized by the Advisory
Agreement to consider whether the broker provides research or statistical
information to the Portfolio and/or other accounts of the Advisor. The Advisor
may select brokers who sell shares of the Portfolio or the Fund.
The Advisory Agreement states that the commissions paid to brokers may be
higher than another broker would have charged if a good faith determination is
made by the Advisor that the commission is reasonable in relation to the
services provided, viewed in terms of either that particular transaction or the
Advisor's overall responsibilities as to the accounts as to which it exercises
investment discretion and that the Advisor shall use its judgment in determining
that the amount of commissions paid are reasonable in relation to the value of
brokerage and research services provided and need not place or attempt to place
a specific dollar value on such services or on the portion of commission rates
reflecting such services. The Advisory Agreement provides that to demonstrate
that such determinations were in good faith, and to show the overall
reasonableness of commissions paid, the Advisor shall be prepared to show that
commissions paid (i) were for purposes contemplated by the Advisory Agreement;
(ii) were for products or services which provide lawful and appropriate
assistance to its decision-making process; and (iii) were within a reasonable
range as compared to the rates charged by brokers to other institutional
investors as such rates may become known from available information. During the
fiscal year ended October 31, 1997, the amount of brokerage commissions paid by
the Portfolio was $218,087. During the fiscal year ended October 31, 1998, the
Portfolio paid $208,083 in brokerage commissions. Of that amount, $9,449 was
B-14
<PAGE>
paid in brokerage commissions to brokers who furnished research services. During
the fiscal year ended December 31, 1999, the Small Cap Portfolio paid $341,189
in brokerage commissions, of which $25,493 was paid to brokers who furnished
research services.
The research services discussed above may be in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas and
information assisting the Portfolio in the valuation of its investments. The
research which the Advisor receives for the Portfolio's brokerage commissions,
whether or not useful to the Portfolio, may be useful to it in managing the
accounts of its other advisory clients. Similarly, the research received for the
commissions may be useful to the Portfolio.
The debt securities are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission although
the price of the security usually includes a profit to the dealer. Money market
instruments usually trade on a "net" basis as well. On occasion, certain money
market instruments may be purchased by the Portfolio directly from an issuer in
which case no commissions or discounts are paid. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
PORTFOLIO TURNOVER
Although the Portfolio generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in the Portfolio's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to higher transaction costs and may
result in a greater number of taxable transactions. See "Portfolio Transactions
and Brokerage." The Portfolio's portfolio turnover rate for the fiscal years
ended October 31, 1999 and1998 was 133.24% and 81.75%, respectively. As a result
of volatility in the equity markets during the fiscal year ended October 31,
1999, the Portfolio had a higher rate of portfolio turnover than in the prior
fiscal year.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Reference is made to "Ways to Set Up Your Account - How to Buy Shares - How
To Sell Shares" in the prospectus for additional information about purchase and
redemption of shares. You may purchase and redeem shares of the Fund on each day
on which the New York Stock Exchange ("Exchange") is open for trading. The
Exchange annually announces the days on which it will not be open for trading.
The most recent announcement indicates that it will not be open on the following
days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, the Exchange may close on days not included in that announcement.
B-15
<PAGE>
NET ASSET VALUE
The net asset value of the Portfolio's shares will fluctuate and is
determined as of the close of trading on the Exchange (normally 4:00 p.m.
Eastern time) each business day.
The net asset value per share is computed by dividing the value of the
securities held by the Portfolio plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of interests in the Portfolio
outstanding at such time.
Equity securities listed on a national securities exchange or traded on the
NASDAQ system are valued on their last sale price. Other equity securities and
debt securities for which market quotations are readily available are valued at
the mean between their bid and asked price, except that debt securities maturing
within 60 days are valued on an amortized cost basis. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
TAXATION
The Fund will be taxed as a separate entity under the Internal Revenue Code
(the "Code"), and intends to elect to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Code. In each taxable year
that the Fund qualifies, the Fund (but not its shareholders) will be relieved of
federal income tax on its investment company taxable income (consisting
generally of interest and dividend income, net short-term capital gain and net
realized gains from currency transactions) and net capital gain that is
distributed to shareholders.
In order to qualify for treatment as a RIC, the Fund must distribute
annually to shareholders at least 90% of its investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) at least 90%of the Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or foreign currencies, or
other income derived with respect to its business of investing in securities or
currencies; (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other
securities, limited in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
B-16
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income (whether paid
in cash or invested in additional shares) will be taxable to shareholders as to
the extent of the Fund's earnings and profits. Distributions of the Fund's net
capital gain (whether paid in cash or invested in additional shares) will be
taxable to shareholders as long-term capital gain, regardless of how long they
have held their Fund shares.
Dividends declared by the Fund in October, November or December of any year
and payable to shareholders of record on a date in one of such months will be
deemed to have been paid by the Fund and received by the shareholders on the
record date if the dividends are paid by the Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year in which
the record date falls.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Fund's advertising and
promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
B-17
<PAGE>
The Fund's average annual total return for the periods ending October 31,
1999 are as follows*:
One Year 58.85%
Five Years 19.79%
Since Inception 16.08%
(September 30, 1993)
* Certain fees and expenses of the Fund have been reimbursed from inception
through October 31, 1999. Accordingly, return figures are higher than they
would have been had such fees and expenses not been reimbursed.
YIELD
Annualized yield quotations used in the Fund's advertising and promotional
materials are calculated by dividing the Fund's interest income for a specified
thirty-day period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the period. Yield quotations are calculated according to the following
formula:
YIELD = 2 [(a-b + 1){6} - 1]
---
cd
where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the last
day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), the Fund calculates interest earned on
each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
B-18
<PAGE>
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other promotional
materials represents past performance and is not intended to predict or indicate
future results. The return and principal value of an investment in the Fund will
fluctuate, and an investor's redemption proceeds may be more or less than the
original investment amount. In advertising and promotional materials the Fund
may compare its performance with data published by Lipper Analytical Services,
Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). The Fund also may
refer in such materials to mutual fund performance rankings and other data, such
as comparative asset, expense and fee levels, published by Lipper or CDA.
Advertising and promotional materials also may refer to discussions of the Fund
and comparative mutual fund data and ratings reported in independent periodicals
including, but not limited to, The Wall Street Journal, Money Magazine, Forbes,
Business Week, Financial World and Barron's.
GENERAL INFORMATION
The Trust is a diversified trust, which is an open-end investment
management company, organized as a Delaware business trust on December 11, 1991.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest and to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the Fund. Each share represents an interest
in the Fund proportionately equal to the interest of each other share. Upon the
Trust's liquidation, all shareholders would share pro rata in the net assets of
the Fund in question available for distribution to shareholders. If they deem it
advisable and in the best interest of shareholders, the Board of Trustees may
create additional series of shares which differ from each other only as to
dividends. The Board of Trustees has created twelve series of shares, and may
create additional series in the future, which have separate assets and
liabilities. Income and operating expenses not specifically attributable to the
Fund are allocated fairly among the Funds by the Trustees, generally on the
basis of the relative net assets of each Fund.
The Fund is one of a series of shares, each having separate assets and
liabilities, of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for its acts or obligations and provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations.
The Declaration of Trust further provides the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares) and may vote in the election of Trustees
and on other matters submitted to meetings of shareholders. It is not
contemplated that regular annual meetings of shareholders will be held.
The Declaration of Trust provides that the shareholders have the right,
upon the declaration in writing or vote of more than two-thirds of its
B-19
<PAGE>
outstanding shares, to remove a Trustee. The Trustees will call a meeting of
shareholders to vote on the removal of a Trustee upon the written request of the
record holders of ten per cent of its shares. In addition, ten shareholders
holding the lesser of $25,000 worth or one per cent of the shares may advise the
Trustees in writing that they wish to communicate with other shareholders for
the purpose of requesting a meeting to remove a Trustee. The Trustees will then,
if requested by the applicants, mail at the applicants' expense the applicants'
communication to all other shareholders. Except for a change in the name of the
Trust, no amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of more than 50% of its outstanding shares. The
holders of shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth above. The Trust may be
terminated upon the sale of its assets to another issuer, if such sale is
approved by the vote of the holders of more than 50% of its outstanding shares,
or upon liquidation and distribution of its assets, if approved by the vote of
the holders of more than 50% of its shares. If not so terminated, the Trust will
continue indefinitely.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for the fiscal year ended
October 31, 1999 is a separate documents supplied with this SAI, and the
financial statements, accompanying notes and report of independent accountants
appearing therein are incorporated by reference into this SAI.
B-20
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP: CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
B-21
<PAGE>
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are assessments of the issuer's ability to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-22
