PIC INVESTMENT TRUST
PROVIDENT INVESTMENT COUNSEL
TECHNOLOGY FUND A
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 29, 2000
AS AMENDED DECEMBER 1, 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 Technology Fund A, a series of PIC Investment Trust (the "Trust"). There
are eleven other series of the Trust: Provident Investment Counsel 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 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 911014106, telephone (818) 4498500.
TABLE OF CONTENTS
Investment Objective and Policies............................................B-2
Investment Restrictions......................................................B-9
Management..................................................................B-11
Custodian and Auditors......................................................B-14
Portfolio Transactions and Brokerage........................................B-15
Portfolio Turnover..........................................................B-16
Additional Purchase and Redemption Information..............................B-16
Net Asset Value.............................................................B-16
Taxation....................................................................B-17
Dividends and Distributions.................................................B-17
Performance Information.....................................................B-18
General Information.........................................................B-19
Appendix....................................................................B-21
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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 non-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) 6187643.
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.
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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 A1 by Standard & Poor's Rating Group ("S&P") or
Prime1 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 A1 or Prime1 rating. U.S. Government securities are always considered to
be high quality.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which 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 Portfolio intends 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 Portfolio intends 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.
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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 AND RELATED OPTIONS. The Portfolio may buy and sell stock
index futures contracts and options on futures contracts. The Portfolio will not
engage in transactions in futures contracts or related options for speculation,
but may enter into futures contracts and related options for hedging purposes,
for the purpose of remaining fully invested or maintaining liquidity to meet
shareholder redemptions, to minimize trading costs, or to invest cash balances.
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 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
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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.
A futures option gives the holder, in return for the premium paid, the
right to buy (call) or sell (put) to the writer of the option a futures contract
at a specified price at any time during the term of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price.
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
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.
Investments in futures options involve some of the same risks as
investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option, and an option may be more risky than
ownership of the futures contract. In general, the market prices of options are
more volatile than the market prices of the underlying futures contracts.
However, the purchase of options on futures contracts may involve less potential
risk to the Portfolio because the maximum amount at risk is limited to the
premium paid for the option plus transaction costs.
The Portfolio will not purchase or sell futures contracts or options on
futures contracts if, as a result, the sum of the amount of margin deposit on
the Portfolio's futures positions and premiums paid for such options would
exceed 5% of the market value of the Portfolio's net assets.
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,
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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 25% 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. 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
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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
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.
SHORT SALES. The Portfolio is authorized to make short sales of securities
in an amount not exceeding 5% of the Portfolio's net assets.
In a short sale, the Portfolio sells a security which it does not own, in
anticipation of a decline in the market value of the security. To complete the
sale, the Portfolio must borrow the security (generally from the broker through
which the short sale is made) in order to make delivery to the buyer. The
Portfolio is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. The Portfolio is said to have a
"short position" in the securities sold until it delivers them to the broker.
The period during which the Portfolio has a short position can range from one
day to more than a year. Until the security is replaced, the proceeds of the
short sale are retained by the broker, and the Portfolio is required to pay to
the broker a negotiated portion of any dividends or interest which accrue during
the period of the loan. To meet current margin requirements, the Portfolio is
also required to deposit with the broker additional cash or securities so that
the total deposit with the broker is maintained daily at 150% of the current
market value of the securities sold short (100% of the current market value if a
security is held in the account that is convertible or exchangeable into the
security sold short within 90 days without restriction other than the payment of
money).
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Short sales by the Portfolio that are not made "against the box" create
opportunities to increase the Portfolio's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Portfolio in effect profits from a decline in the price of the
securities sold short without the need to invest the full purchase price of the
securities on the date of the short sale, the Portfolio's net asset value per
share will tend to increase more when the securities it has sold short decrease
in value, and to decrease more when the securities it has sold short increase in
value, than would otherwise be the case if it had not engaged in such short
sales. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium, dividends or interest the Portfolio may
be required to pay in connection with the short sale. Furthermore, under adverse
market conditions, the Portfolio might have difficulty purchasing securities to
meet its short sale delivery obligations, and might have to sell portfolio
securities to raise the capital necessary to meet its short sale obligations at
a time when fundamental investment considerations would not favor such sales.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements, which involve the sale of a security by the Portfolio and
its agreement to repurchase the security at a specified time and price. The
Portfolio will maintain in a segregated account with the Custodian cash, U.S.
Government securities or other appropriate liquid securities in an amount
sufficient to cover its obligations under these agreements with broker-dealers
(no such collateral is required on such agreements with banks). Under the 1940
Act, these agreements are considered borrowings by the Portfolio and are subject
to the percentage limitations on borrowings described below. The agreements are
subject to the same types of risks as borrowings.
BORROWING. The Fund and the Portfolio each may borrow up to 10% of its
total assets from banks for temporary or emergency purposes, and may increase
its borrowings to up to one-third of its total assets (less its liabilities
other than borrowings) to meet redemption requests.
The use of borrowing by the Fund or Portfolio involves special risk
considerations. Since substantially all of the Fund's or Portfolio's assets
fluctuate in value, whereas the interest obligation resulting from a borrowing
remains fixed by the terms of the Fund's or Portfolio's agreement with its
lender, the asset value per share of the Fund or Portfolio tends to increase
more when its portfolio securities increase in value and to decrease more when
its portfolio assets decrease in value than would otherwise be the case if the
Fund or Portfolio did not borrow funds. In addition, interest costs on
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the Fund or Portfolio might have to sell portfolio securities
to meet interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
LENDING FUND SECURITIES. To increase its income, the Portfolio may lend its
portfolio securities to financial institutions such as banks and brokers if the
loan is collateralized in accordance with applicable regulatory requirements.
The Portfolio has adopted an operating policy that limits the amount of loans to
not more than 25% of the value of the total assets of the Portfolio. During the
time portfolio securities are on loan, the borrower pays the Portfolio an amount
equivalent to any dividends or interest paid on such securities, and the
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Portfolio may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or secured a letter of credit. The amounts
received by the Portfolio will be reduced by any fees and administrative
expenses associated with such loans. In addition, such loans involve risks of
delay in receiving additional collateral or in recovering the securities loaned
or even loss of rights in the collateral should the borrower of the securities
fail financially However, such securities lending will be made only when, in
PIC's judgment, the income to be earned from the loans justifies the attendant
risks. Loans are subject to termination at the option of the Portfolio or the
borrower.
SEGREGATED ACCOUNTS. When the Portfolio writes an option on securities or
futures, 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 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. In the case of a call
that has been written on securities or futures contracts, the securities or
futures contracts 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 on securities or futures contracts 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.
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.
Although the Fund is classified as a "diversified" fund, the Portfolio is
classified as a "non-diversified" fund. As provided in the 1940 Act, a
diversified fund has, with respect to at least 75% of its total assets, no more
than 5% of its total assets invested in the securities of one issuer, plus cash,
U.S. Government securities and securities of other investment companies.
However, the Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code, and therefore is subject to diversification
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limits requiring that, as of the close of each fiscal quarter, (i) no more than
25% of the Portfolio's total assets may be invested in the securities of a
single issuer (other than U.S. Government securities), and (ii) with respect to
50% of the Portfolio's total assets, no more than 5% of such assets may be
invested in the securities of a single issuer (other than U.S. Government
securities) or invested in more than 10% of the outstanding voting securities of
a single issuer.
In addition, neither the Fund nor the Portfolio may:
1. Issue senior securities, borrow money or pledge its assets, except that
(a) the Fund or the Portfolio may borrow on an unsecured basis from banks for
temporary or emergency purposes or for the clearance of transactions in amounts
not exceeding 10% of its total assets (not including the amount borrowed); (b)
the Fund or the Portfolio may borrow on an unsecured basis from banks to meet
redemption requests, provided that such borrowings will be made only to the
extent that the value of the Fund's total assets, less its liabilities other
than borrowings (including borrowings pursuant to item (a) or otherwise), is
equal at all times to at least 300% of all borrowings (including the proposed
borrowing); and (c) the Fund 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 in excess of
5% of its net assets;
3. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
4. 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);
5. 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;
6. 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);
7. Purchase or sell commodities or commodity futures contracts, except that
the Portfolio may purchase and sell stock index futures contracts and options on
such futures contracts;
8. Invest in oil and gas limited partnerships or oil, gas or mineral
leases;
9. Make loans (except for purchases of debt securities consistent with the
investment policies of the Fund and the Portfolio, repurchase agreements and
loans of portfolio securities); or
10. Make investments for the purpose of exercising control or management.
The Fund and the Portfolio observe the following restrictions as a matter
of operating but not fundamental policy. Neither the Fund nor the Portfolio may:
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).
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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.
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Age With the Trust During Past 5 Years
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<S> <C> <C>
Thomas M. Mitchell* (age 56) Trustee and Managing Director of the Advisor since
300 North Lake Avenue President May 1995. Executive Vice President of the
Pasadena, CA 91101 Advisor from May 1983 to May 1999
Jettie M. Edwards (age 54) Trustee Consulting principal of
76 Seaview Drive Syrus Associates (consulting firm)
Santa Barbara, CA 93108
Richard N. Frank (age 76) Trustee Chief Executive Officer, Lawry's
234 E. Colorado Blvd. Restaurants, Inc. (restaurant company);
Pasadena, CA 91101 formerly, Chairman of Lawry's Foods,
Inc. (restaurants and food seasoning)
James Clayburn LaForce (age 76) Trustee Dean Emeritus, John E. Anderson Graduate
P.O. Box 1585 School of Management, University of
Pauma Valley, CA 92061 California, Los Angeles. Director of The
BlackRock Funds and Trustee of The Payden
& Rygel Investment Group and Trust for
Investment Managers (registered investment
companies). Director of the Timken Co.
(bearings and alloy steel manufacturing firm),
Rockwell International (defense contractor),
Eli Lily (pharmaceuticals company), Jacobs
Engineering Group (engineering firm).
Angelo R. Mozilo (age 61) Trustee Vice Chairman and Executive Vice
155 N. Lake Avenue President of Countrywide Credit Industries
Pasadena, CA 91101 (mortgage banking)
Wayne H. Smith (age 58) Trustee Vice President and Treasurer of Avery
150 N. Orange Grove Blvd. Dennison Corporation (pressure sensitive
Pasadena, CA 91103 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. (age 37) Vice President Senior Vice President of the Advisor.
300 North Lake Avenue and Secretary
Pasadena, CA 91101
William T. Warnick (age 31) Vice President Vice President of the Advisor
300 North Lake Avenue and Treasurer
Pasadena, CA 91101
</TABLE>
B-11
<PAGE>
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.
<TABLE>
<CAPTION>
Name, Address Position(s) Held Principal Occupation(s)
and Age With the Portfolios During Past 5 Years
------- ------------------- -------------------
<S> <C> <C>
Thomas M. Mitchell* (age 56) Trustee and Managing Director of the Advisor since
300 North Lake Avenue President May 1995. Executive Vice President of
Pasadena, CA 91101 the Advisor from May 1983 to May 1999
Jettie M. Edwards (age 54) 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. (restaurant company);
Pasadena, CA 91101 formerly, Chairman of Lawry's Foods,
Inc. (restaurants and food seasoning)
James Clayburn LaForce (age 76) Trustee Dean Emeritus, John E. Anderson Graduate
P.O. Box 1585 School of Management, University of
Pauma Valley, CA 92061 California, Los Angeles. Director of The
BlackRock Funds and Trustee of The Payden
& Rygel Investment Group and Trust for
Investment Managers (registered investment
companies). Director of the Timken Co.
(bearings and alloy steel manufacturing
firm), Rockwell International (defense
contractor), Eli Lily (pharmaceuticals
company), Jacobs Engineering Group
(engineering firm).
Angelo R. Mozilo (age 61) Trustee Vice Chairman and Executive Vice
155 N. Lake Avenue President of Countrywide Credit Industries
Pasadena, CA 91101 (mortgage banking)
Wayne H. Smith (age 58) Trustee Vice President and Treasurer of Avery
150 N. Orange Grove Blvd. Dennison Corporation (pressure sensitive
Pasadena, CA 91103 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. (age 37) Vice President Senior Vice President of the Advisor.
300 North Lake Avenue and Secretary
Pasadena, CA 91101
William T. Warnick (age 31) Vice President Vice President of the Advisor
300 North Lake Avenue and Treasurer
Pasadena, CA 91101
</TABLE>
----------
* denotes Trustees who are "interested persons" of the Trust or Portfolio
under the 1940 Act.
B-12
<PAGE>
The following compensation was paid to each of the following Trustees during the
Trust's last fiscal year. 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 Compensation Total
Compensation Accrued as Compensation
Aggregate Aggregate Accrued as Part Part of From Trust and
Compensation Compensation of Trust 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>
All of the outstanding shares of the Fund as of September 29, 2000 are
owned by Larry D. Tashjiam, La Canada, CA 91011, an affiliate of the Advisor.
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 nonrecurring 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.
B-13
<PAGE>
For its services, the Advisor receives a fee from the Portfolio at an
annual rate of 0.80% of its average net assets. However, the Advisor has agreed
to limit the aggregate expenses of the Portfolio to 1.60% of its average net
assets.
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. However, the Advisor has agreed
to limit the aggregate expenses of the Fund to 1.60% of its average daily net
assets.
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.
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.
B-14
<PAGE>
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.
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.
B-15
<PAGE>
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 is not expected to
exceed 200%.
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.
NET ASSET VALUE
The net asset value of the Fund'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 Fund, plus any cash or other assets held by the Fund,
minus all liabilities (including accrued expenses), by the total number of
shares of the Fund outstanding at such time. Substantially all of the assets of
the Fund are invested in shares of the PIC Technology Portfolio, and the value
of the securities held by the Fund will be the Fund's proportionate share of the
value of the securities held by the Portfolio, plus any cash or other assets
held by the Portfolio (including interest and dividends accrued but not yet
received), minus any liabilities of the Portfolio (including accrued expenses).
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.
B-16
<PAGE>
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.
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 non-corporate 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.
B-17
<PAGE>
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.
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
thirtyday period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semiannual 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 [(ab + 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.
B-19
<PAGE>
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
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 preemptive or conversion rights. Shares when issued
are fully paid and nonassessable, 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 18f2 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.
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
midrange 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.
B-21
<PAGE>
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.
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 A1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A2" is strong. However, the
relative degree of safety is not as high as for issues designated A1. Issues
carrying the designation "A3" 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
