[PROVIDENT INVESTMENT COUNSEL LOGO]
GROWTH FUND I
SMALL COMPANY 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 Funds invest and
the services available to shareholders.
<PAGE>
CONTENTS
KEY FACTS 3 AN OVERVIEW OF THE FUNDS
3 RISK/RETURN SUMMARY
3 THE PRINCIPAL GOALS, STRATEGIES AND
RISKS OF THE FUNDS
5 WHO MAY WANT TO INVEST
5 PERFORMANCE
8 FEES AND EXPENSES
9 STRUCTURE OF THE FUNDS AND
THE PORTFOLIOS
10 MORE INFORMATION ABOUT THE
FUNDS' INVESTMENTS, STRATEGIES
AND RISKS
11 MANAGEMENT
YOUR ACCOUNT 12 WAYS TO SET UP YOUR ACCOUNT
13 CALCULATION OF NET ASSET VALUE
13 HOW TO BUY SHARES
14 HOW TO SELL SHARES
15 IMPORTANT REDEMPTION INFORMATION
16 INVESTOR SERVICES
SHAREHOLDER ACCOUNT POLICIES 17 DIVIDENDS, CAPITAL GAINS AND TAXES
17 DISTRIBUTION OPTIONS
17 UNDERSTANDING DISTRIBUTIONS
18 TRANSACTION DETAILS
19 FINANCIAL HIGHLIGHTS
PROSPECTUS 2
<PAGE>
KEY FACTS
AN OVERVIEW OF THE FUNDS
MANAGEMENT: Provident Investment Counsel (PIC), located in Pasadena, California
since 1951, is the Funds' Advisor. At December 31, 1999, total assets under
PIC's management were over $23 billion.
STRUCTURE: Unlike most mutual funds, each Fund's investment in portfolio
securities is indirect. A Fund first invests all of its assets in a PIC
Portfolio. The PIC Portfolio, in turn, acquires and manages individual
securities. Each Fund has the same investment objective as the PIC Portfolio in
which it invests. 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, each Fund could
switch to another pooled investment company or decide to manage its assets
itself. Neither Fund is currently contemplating such a move.
RISK/RETURN SUMMARY
THE PRINCIPAL GOALS, STRATEGIES AND RISKS OF THE FUNDS
GROWTH FUND I
GOAL: Long term growth of capital.
STRATEGY: The Growth Fund invests in the PIC Growth Portfolio. The Growth
Portfolio invests at least 65% of its assets in growth stocks. PIC defines
growth stocks as the stocks of those companies with high rates of growth in
sales and earnings, strong financial characteristics, a proprietary product,
industry leadership, significant management ownership and well thought out
management goals, plans and controls. Although PIC may invest in companies of
any size, it may choose to invest a significant portion of the Growth
Portfolio's assets in small and medium companies. In selecting common stocks,
PIC does an analysis of, and invests in, individual companies which are
currently experiencing a growth of earnings and revenue which is above the
average relative to its industry peers and the domestic equity market in
general.
RISKS: These primary investments risks apply to the Fund: market and small and
medium company. See page 4 for these risks and primary investment risks common
to both Funds.
3 PROSPECTUS
<PAGE>
KEY FACTS - CONTINUED
SMALL COMPANY GROWTH FUND I
GOAL: Long term growth of capital.
STRATEGY: The Small Company Growth 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.
RISKS: These primary investment risks apply to the Fund: market, small and
medium company and high portfolio turnover. See below for these risks and
primary investment risks common to both Funds.
THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS
By itself, neither Fund is a complete, balanced investment plan. And neither
Fund can 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 either Fund. For
example, the following risks could affect the value of your investment:
MARKET RISK: The value of each Fund's investments will vary from day to day. The
value of the Funds' 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 AND MEDIUM COMPANY RISK: Each Fund may invest in the securities of small
and medium-sized companies. However, the Small Company Growth Fund primarily
invests in the securities of small-sized companies. The securities of medium and
small, less well-known companies may be more volatile than those of larger
companies. Such companies may have limited product lines, markets or financial
resources and their securities may have limited market liquidity. These risks
are greater for small-sized companies.
PORTFOLIO TURNOVER RISK: The Small Company Growth Fund may experience high
portfolio turnover. A high portfolio turnover rate (100% or more) has the
potential to result in the realization and distribution to shareholders of
higher 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 a Fund's performance.
PROSPECTUS 4
<PAGE>
WHO MAY WANT TO INVEST
The Growth Fund may be appropriate for investors who are seeking capital
appreciation through a diversified portfolio of securities of companies of any
size, but are willing to accept the greater risk of investing in growth stocks.
The Small Company Growth 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 Funds 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 Funds. The bar charts show how the Funds' total returns have varied from
year to year. The tables show the Funds' average returns over time compared with
broad-based market indexes. This past performance will not necessarily continue
in the future.
5 PROSPECTUS
<PAGE>
KEY FACTS - CONTINUED
Growth Fund I
Calendar Year Total Returns (%)
1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
0.80 -2.55 23.53 20.69 27.35 39.10 34.36
Best quarter: up 28.81%, fourth quarter 1999
Worst quarter: down -8.74%, third quarter 1998
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
Since Inception
1 Year 5 Years (June 11, 1992)
------ ------- ---------------
Growth Fund 34.36% 28.83% 19.88%
S&P 500 Index* 21.14 28.66 21.05
Russell 1000 Growth Index** 33.16 32.41 23.14
- ----------
* The S&P 500 Index is an unmanaged index generally representative of the
market for the stocks of large-sized U.S. companies.
** The Russell 1000 Growth Index measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values. The Russell 1000 Index is a recognized index of large-capitalization
companies.
PROSPECTUS 6
<PAGE>
Small Company Growth Fund I
Calendar Year Total Returns (%)
1997 1998 1999
---- ---- ----
-1.36 5.43 87.94
Best quarter: up 57.57%, fourth quarter 1999
Worst quarter: down -24.76%, third quarter 1998
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1999
Since Inception
1 Year (June 28, 1996)
------ ---------------
Small Company Growth Fund 87.94% 19.39%
Russell 2000 Growth Index* 43.09 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.
7 PROSPECTUS
<PAGE>
KEY FACTS - CONTINUED
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
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
Exchange fee None
ANNUAL FUND OPERATING EXPENSES*
(expenses that are deducted from Fund and/or Portfolio assets)
Growth Small Company
Fund Growth Fund
---- -----------
Management Fee (paid by the Portfolio) 0.80% 0.80%
Administration Fee to PIC (paid by the Fund) 0.20% 0.20%
Other Expenses (paid by both) 0.36% 0.52%
----- -----
Total Annual Fund Operating Expenses 1.36% 1.52%
Expense Reimbursements ** (0.11%) (0.07%)
----- -----
Net Expenses 1.25% 1.45%
===== =====
- ----------
* The table above and the Example below reflect the expenses of the Funds and
the Portfolios.
** Pursuant to a contract with the Funds, PIC has agreed to reimburse each 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 Funds if, within three
subsequent years, a 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.
PROSPECTUS 8
<PAGE>
EXAMPLES: These examples will help you compare the cost of investing in the
Funds 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 each 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:
Growth Small Company
Fund Growth Fund
---- -----------
After 1 year $ 127 $ 148
After 3 years 397 459
After 5 years 686 792
After 10 years 1,511 1,735
STRUCTURE OF THE FUNDS AND THE PORTFOLIOS
Each Fund seeks to achieve its investment objective by investing all of its
assets in a PIC Portfolio. Each Portfolio is a separate registered investment
company with the same investment objective as the Fund. Since a Fund will not
invest in any securities other than shares of a Portfolio, investors in the Fund
will acquire only an indirect interest in the Portfolio. Each Fund's and
Portfolio's investment objective cannot be changed without shareholder approval.
A Portfolio may sell its shares to other funds and institutions as well as to a
Fund. All who invest in a 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 Funds'
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.
9 PROSPECTUS
<PAGE>
MORE INFORMATION ABOUT THE FUNDS' INVESTMENTS, STRATEGIES AND RISKS
As described earlier, each Fund invests all of its assets in a PIC Portfolio.
This section gives more information about how the PIC Portfolios invest.
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 Portfolios 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.
Each 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.
Each Portfolio seeks to spread investment risk by diversifying its holdings
among many companies and industries. PIC normally invests each Portfolio's
assets according to its investment strategy. However, each Portfolio may depart
from its principal investment strategies by making short-term investments in
high-quality cash equivalents for temporary, defensive purposes. At those times,
a Fund would not be seeking its investment objective.
PROSPECTUS 10
<PAGE>
PROVIDENT INVESTMENT COUNSEL GROWTH FUND I
The Growth Fund seeks long term growth of capital by investing in the PIC Growth
Portfolio, which in turn invests primarily in shares of common stock. Under
normal circumstances, the Growth Portfolio will invest at least 65% of its
assets in shares of common stock. In selecting investments for the Growth
Portfolio, PIC will include companies of various sizes which are currently
experiencing a growth of earnings and revenue which is above the average
relative to its industry peers and the stock market in general.
PROVIDENT INVESTMENT COUNSEL SMALL COMPANY GROWTH FUND I
The Small Company Growth 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.
MANAGEMENT
PIC is the advisor to the PIC Portfolios, in which the respective Funds invest.
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 each of the Portfolios,
including determining which securities should be bought and sold. Each Portfolio
pays an investment advisory fee to PIC for managing the Portfolio's investments.
Last year, as a percentage of net assets each Portfolio paid 0.80%.
11 PROSPECTUS
<PAGE>
YOUR ACCOUNT
WAYS TO SET UP YOUR ACCOUNT
INDIVIDUAL OR JOINT TENANT
FOR YOUR GENERAL INVESTMENT NEEDS
Individual accounts are owned by one person. Joint accounts can have two or more
owners (tenants).
RETIREMENT
TO SHELTER YOUR RETIREMENT SAVINGS FROM TAXES
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. In addition, contributions to these accounts may be
tax deductible. Retirement accounts require special applications and typically
have lower minimums.
* INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow anyone of legal age and under
70 1/2 with earned income to invest up to $2,000 per tax year. Individuals
can also invest in a spouse's IRA if the spouse has earned income of less
than $250.
* ROLLOVER IRAS retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
* KEOGH OR CORPORATE PROFIT SHARING AND MONEY PURCHASE PENSION PLANS allow
self-employed individuals or small business owners (and their employees) to
make tax-deductible contributions for themselves and any eligible employees
up to $30,000 per year.
* SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh, but with fewer administrative
requirements.
* 403(B) CUSTODIAL ACCOUNTS are available to employees of most tax-exempt
institutions, including schools, hospitals and other charitable
organizations.
* 401(K) PROGRAMS allow employees of corporations of all sizes to contribute
a percentage of their wages on a tax-deferred basis. These accounts need to
be established by the trustee of the plan.
GIFTS OR TRANSFERS TO MINOR (UGMA, UTMA)
TO INVEST FOR A CHILD'S EDUCATION OR OTHER FUTURE NEEDS
These custodial accounts provide a way to give money to a child and obtain tax
benefits. An individual can give up to $10,000 a year per child without paying
federal gift tax. Depending on state laws, you can set up a custodial account
under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors
Act (UTMA).
TRUST
FOR MONEY BEING INVESTED BY A TRUST
The trust must be established before an account can be opened.
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS OR OTHER GROUPS
Does not require a special application.
PROSPECTUS 12
<PAGE>
CALCULATION OF NET ASSET VALUE
Once each business day, each 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.
Each 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.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Retirement investing
also involves its own investment procedures. Call (800) 618-7643 for more
information and a retirement application.
If you buy shares by check and 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.
If you are investing by wire, please be sure to call (800) 618-7643 before
sending each wire.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $1 MILLION
The Funds may, at their discretion, waive the minimum investment for employees
and affiliates, of PIC or any other person or organization deemed appropriate
For retirement accounts $250
TO ADD TO AN ACCOUNT $250
For retirement plans $250
Through automatic investment plans $100
MINIMUM BALANCE $1,000
For retirement accounts $500
FOR INFORMATION: (800) 618-7643
TO INVEST
BY MAIL:
Provident Investment Counsel Funds
P.O. Box 8943
Wilmington, DE 19899
BY WIRE:
Call: (800) 618-7643 to set up an
account and arrange a wire transfer
BY OVERNIGHT DELIVERY:
Provident Investment Counsel Funds
400 Bellevue Parkway
Wilmington, DE 19809
13 PROSPECTUS
<PAGE>
YOUR ACCOUNT - CONTINUED
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.
To sell shares in a non-retirement account, you may use any of the methods
described on these two pages. If you are selling some but not all of your
shares, you must leave at least $1,000 worth of shares in the account to keep it
open ($500 for retirement accounts).
Certain requests must include a signature guarantee. It is designed to protect
you and the Funds from fraud. Your request must be made in writing and include a
signature guarantee if any of the following situations apply:
* You wish to redeem more than $100,000 worth of shares,
* Your account registration has changed within the last 30 days,
* The check is being mailed to a different address from the one on your
account (record address), or
* The check is being made payable to someone other than the account owner.
Shareholders redeeming their shares by mail should submit written instructions
with a guarantee of their signature(s) by an eligible institution acceptable to
the Funds' Transfer Agent, such as a domestic bank or trust company, broker,
dealer, clearing agency or savings association, who are participants in a
medallion program recognized by the Securities Transfer Association. The three
recognized medallion programs are Securities Transfer Agents Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). Signature guarantees that are not part
of these programs will not be accepted. A notary public cannot provide a
signature guarantee.
SELLING SHARES IN WRITING
Write a "letter of instruction" with:
* Your name,
* Your Fund Account number,
* The dollar amount or number of shares to be redeemed, and
* Any other applicable requirements listed under "Important Redemption
Information."
* Unless otherwise instructed, PIC will send a check to the record address.
MAIL YOUR LETTER TO:
Provident Investment Counsel Funds
P.O. Box 8943
Wilmington, DE 19899
PROSPECTUS 14
<PAGE>
IMPORTANT REDEMPTION INFORMATION
Account Type Special Requirements
------------ --------------------
PHONE (800) 618-7643 All account types * Your telephone call must be
except retirement received by 4 p.m. Eastern time
to be redeemed on that day
(maximum check request
$100,000).
MAIL OR IN PERSON Individual, Joint * The letter of instructions must
Sole Proprietorship, be signed by all Tenant, persons
UGMA, UTMA required to sign for
transactions, exactly as their
names appear on the account.
Retirement Account * The account owner should
complete a retirement
distribution form. Call (800)
618-7643 to request one.
Trust * The trustee must sign the letter
indicating capacity as trustee.
If the trustee's name is not in
the account registration,
provide a copy of the trust
document certified within the
last 60 days.
Business or * At least one person authorized
Organization by corporate resolutions to act
on the account must sign the
letter.
* Include a corporate resolution
with corporate seal or a
signature guarantee.
Executor, * Call (800) 618-7643 for
Administrator, instructions.
Conservator, Guardian
WIRE All account types * You must sign up for the wire
except retirement feature before using it. To
verify that it is in place, call
(800) 618-7643. Minimum
redemption wire: $5,000.
* Your wire redemption request
must be received by the Fund
before 4 p.m. Eastern time for
money to be wired the next
business day.
15 PROSPECTUS
<PAGE>
YOUR ACCOUNT - CONTINUED
INVESTOR SERVICES
PIC provides a variety of services to help you manage your account.
INFORMATION SERVICES
PIC'S TELEPHONE REPRESENTATIVES can be reached at (800) 618-7643.
STATEMENTS AND REPORTS that PIC sends to you include the following:
* Confirmation statements (after every transaction that affects your account
balance or your account registration)
* Annual and semi-annual shareholder reports (every six months)
TRANSACTION SERVICES
EXCHANGE PRIVILEGE. You may sell your Provident Investment Counsel Fund I shares
and buy shares of any other Provident Investment Counsel Fund I by telephone or
in writing. You may not exchange your Fund shares for shares of Provident
Investment Counsel Small Cap Growth Fund I. Note that exchanges into each Fund
are limited to four per calendar year, and that they may have tax consequences
for you. Also see "Shareholder Account Policies."
SYSTEMATIC WITHDRAWAL PLANS let you set up periodic redemptions from your
account. These redemptions take place on the 25th day of each month or, if that
day is a weekend or holiday, on the prior business day. This service is
available to Fund A account holders only.
REGULAR INVESTMENT PLANS
One easy way to pursue your financial goals is to invest money regularly. PIC
offers convenient services that let you transfer money into your Fund account
automatically. Automatic investments are made on the 20th day of each month or,
if that day is a weekend or holiday, on the prior business day. While regular
investment plans do not guarantee a profit and will not protect you against loss
in a declining market, they can be an excellent way to invest for retirement, a
home, educational expenses, and other long term financial goals. Certain
restrictions apply for retirement accounts. Call (800) 618-7643 for more
information.
PROSPECTUS 16
<PAGE>
SHAREHOLDER ACCOUNT POLICIES
DIVIDENDS, CAPITAL GAINS AND TAXES
The Funds distribute substantially all of their net income and capital gains, if
any, to shareholders each year in December.
DISTRIBUTION OPTIONS
When you open an account, specify on your application how you want to receive
your distributions. If the option you prefer is not listed on the application,
call (800) 618-7643 for instructions. The Funds offer three options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions will be
automatically reinvested in additional shares of the Fund. If you do not
indicate a choice on your application, you will be assigned this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be automatically
reinvested, but you will be sent a check for each dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital gain
distributions.
FOR RETIREMENT ACCOUNTS, all distributions are automatically reinvested. When
you are over 59 1/2 years old, you can receive distributions in cash.
When a Fund deducts a distribution from its NAV, the reinvestment price is the
Fund's NAV at the close of business that day. Cash distribution checks will be
mailed within seven days.
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 -- including exchanges -- 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 or exchange them.
Whenever you sell shares of a Fund, PIC will send you a confirmation statement
showing how many shares you sold and at what price. You will also receive a
consolidated transaction statement every January. However, it is up to you or
your tax preparer to determine whether the sale resulted in a capital gain and,
if so, the amount of the tax to be paid. Be sure to keep your regular account
statements; the information they contain will be essential in calculating the
amount of your capital gains.
17 PROSPECTUS
<PAGE>
SHAREHOLDER ACCOUNT POLICIES - CONTINUED
TRANSACTION DETAILS
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 a Fund to withhold 31% of your
taxable distributions and redemptions.
YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. PIC may only be liable for
losses resulting from unauthorized transactions if it does not follow reasonable
procedures designed to verify the identity of the caller. PIC will request
personalized security codes or other information, and may also record calls. You
should verify the accuracy of your confirmation statements immediately after you
receive them. If you do not want the liability to redeem or exchange by
telephone, call PIC for instructions.
EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period of
time. Each Fund also reserves the right to reject any specific purchase order,
including certain purchases by exchange. See "Exchange Privilege." Purchase
orders may be refused if, in PIC's opinion, they would disrupt management of the
Fund.
Please note this about purchases:
* All of your purchases must be made in U.S. dollars, and checks must be drawn
on U.S. banks.
* PIC does not accept cash or third party checks.
* When making a purchase with more than one check, each check must have a value
of at least $50.
* Each Fund reserves the right to limit the number of checks processed at one
time.
* If your check does not clear, your purchase will be canceled and you could be
liable for any losses or fees the Fund or its transfer agent has incurred.
TO AVOID THE COLLECTION PERIOD associated with check purchases, consider buying
shares by bank wire, U.S. Postal money order, U.S. Treasury check, Federal
Reserve check, or direct deposit instead.
YOU MAY BUY SHARES OF A FUND OR SELL THEM THROUGH A BROKER, who may charge you a
fee for this service. If you invest through a broker or other institution, read
its program materials for any additional service features or fees that may
apply.
CERTAIN FINANCIAL INSTITUTIONS that have entered into sales agreements with PIC
may enter confirmed purchase orders on behalf of customers by phone, with
payment to follow no later than the time when the Funds are priced on the
following business day. If payment is not received by that time, the financial
institution could be held liable for resulting fees or losses.
Please note this about redemptions:
* Normally, redemption proceeds will be mailed to you on the next business day,
but if making immediate payment could adversely affect the Fund, it may take
up to seven days to pay you.
* Redemptions may be suspended or payment dates postponed beyond seven days
when the NYSE is closed (other than weekends or holidays), when trading on
the NYSE is restricted, or as permitted by the SEC.
PROSPECTUS 18
<PAGE>
* PIC reserves the right to deduct an annual maintenance fee of $12.00 from
accounts with a value of less than $1,000. It is expected that accounts will
be valued on the second Friday in November of each year. Accounts opened
after September 30 will not be subject to the fee for that year. The fee,
which is payable to the transfer agent, is designed to offset in part the
relatively higher cost of servicing smaller accounts.
* PIC also reserves the right to redeem the shares and close your account if it
has been reduced to a value of less than $1,000 as a result of a redemption
or transfer. PIC will give you 30 days prior notice of its intention to close
your account.
Please note this about exchanges
As a shareholder, you have the privilege of exchanging shares of Provident
Investment Counsel Fund I for shares of any other Provident Investment Counsel
Fund I, other than Provident Investment Counsel Small Cap Growth Fund I.
However, you should note the following:
* The Fund you are exchanging into must be registered for sale in your state.
* You may only exchange between accounts that are registered in the same name,
address, and taxpayer identification number.
* Before exchanging into a Fund, read its prospectus.
* Exchanges are considered a sale and purchase of Fund shares for tax purposes
and may result in a capital gain or loss.
* You may exchange Provident Investment Counsel Fund I shares only for other
Provident Investment Counsel Fund I shares, other than Provident Investment
Counsel Small Cap Growth Fund I.
* Because excessive trading can hurt fund performance and shareholders, each
Fund reserves the right to temporarily or permanently terminate the exchange
privilege of any investor who makes more than four exchanges out of a Fund
per calendar year. Accounts under common ownership or control, including
accounts with the same taxpayer identification number, will be counted
together for the purposes of the four exchange limit.
* Each Fund reserves the right to refuse exchange purchases by any person or
group if, in PIC's judgment, a Portfolio would be unable to invest the money
effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
FINANCIAL HIGHLIGHTS
These tables show the Funds' financial performance for up to the past five
years. Certain information reflects financial results for a single Fund share.
"Total return" shows how much your investment in a 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 Funds' financial statements are included in the Annual
Reports. The information for periods prior to the year ended October 31, 1999
has been audited by other accountants.
19 PROSPECTUS
<PAGE>
PROVIDENT INVESTMENT COUNSEL GROWTH FUND I
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $17.75 $18.14 $16.25 $14.25 $11.70
------ ------ ------ ------ ------
Income from investment operations:
Net investment loss (0.15) (0.06) (0.15) (0.06) (0.02)
Net realized and unrealized gain
on investments 5.40 3.04 3.98 2.06 2.57
------ ------ ------ ------ ------
Total from investment operations 5.25 2.98 3.83 2.00 2.55
------ ------ ------ ------ ------
Less distributions:
From net realized gains (1.28) (3.37) (1.94) 0.00 0.00
------ ------ ------ ------ ------
Net asset value, end of year $21.72 $17.75 $18.14 $16.25 $14.25
------ ------ ------ ------ ------
TOTAL RETURN 31.08% 19.60% 26.44% 14.04% 21.79%
====== ====== ====== ====== ======
Ratios/supplemental data:
Net assets, end of period (millions) $174.4 $132.4 $ 80.0 $116.1 $131.1
Ratios to average net assets:* +
Expenses 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment loss (0.73%) (0.57%) (0.38%) (0.28%) (0.17%)
Portfolio turnover rate++ 80.34% 81.06% 67.54% 64.09% 54.89%
</TABLE>
- ----------
* Includes the Fund's share of expenses allocated from PIC Growth Portfolio.
+ Net of fee waivers and expense reimbursements which were 0.11%, 0.14%,
0.10%, 0.05% and 0.05%, respectively.
++ Portfolio turnover rate of PIC Growth Portfolio, in which all of the Fund's
assets are invested.
PROSPECTUS 20
<PAGE>
PROVIDENT INVESTMENT COUNSEL SMALL COMPANY GROWTH FUND I
<TABLE>
<CAPTION>
June 28,
1996*
Year Ended October 31, through
------------------------------ October 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.11 $ 9.91 $ 9.48 $10.00
------- ------- ------- ------
Income from investment operations:
Net investment loss (0.13) (0.10) (0.05) (0.03)
Net realized and unrealized gain
(loss) on investments 4.85 (1.70) 0.48 (0.49)
------- ------- ------- ------
Total from investment operations 4.72 (1.80) 0.43 (0.52)
------- ------- ------- ------
Net asset value, end of period $ 12.83 $ 8.11 $ 9.91 $ 9.48
------- ------- ------- ------
TOTAL RETURN 58.20% (18.16%) 4.54% (5.20%)+++
======= ======= ======= ======
Ratios/supplemental data:
Net assets, end of period (millions) $ 35.6 $ 29.7 $ 31.0 $ 5.2
Ratios to average net assets:** ^
Expenses 1.45% 1.45% 1.45% 1.43%+
Net investment loss (1.24%) (1.13%) (0.96%) (0.91%)+
Portfolio turnover rate++ 133.24% 81.75% 151.52% 53.11%
</TABLE>
- ----------
* Commencement of operations
+ Annualized.
** Includes the Fund's share of expenses allocated from PIC Small Cap
Portfolio.
^ Net of fee waivers and expense reimbursements which were 0.07%, 0.04%,
0.16% and 2.60%, respectively.
++ Portfolio turnover rate of PIC Small Cap Portfolio, in which all of the
Fund's assets are invested.
+++ Not annualized
21 PROSPECTUS
<PAGE>
PROVIDENT INVESTMENT COUNSEL
GROWTH FUND I
SMALL COMPANY GROWTH FUND I
For investors who want more information about the Funds, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Funds' investments
is available in the Funds' annual and semi-annual reports to shareholders. In
each 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 Funds and is incorporated by reference into this
Prospectus.
You can get free copies of the Funds' reports and SAI, request other information
and discuss your questions about the Funds by contacting the Funds at:
Provident Investment Counsel
P.O. Box 8943
Wilmington, DE 19899
Telephone: 1-800-618-7643
You can review and copy information including the Funds' 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 Funds 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)
PROSPECTUS 22
<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 Growth Fund I and Provident Investment Counsel Small Company Growth Fund
I, series of PIC Investment Trust (the "Trust"). There are eleven other series
of the Trust: the 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, Provident Investment
Counsel Small Company Growth Fund C, and Provident Investment Counsel Small Cap
Growth Fund I. The Provident Investment Counsel Growth Fund I (the "Growth
Fund") invests in the PIC Growth Portfolio and the Provident Investment Counsel
Small Company Growth Fund I (the "Small Company Growth Fund") invests in the PIC
Small Cap Portfolio. (In this SAI, the Growth Fund and the Small Company Growth
Fund may be referred to as the "Funds", and the PIC Growth Portfolio and PIC
Small Cap Portfolio may be referred to as the "Portfolios.") Provident
Investment Counsel (the "Advisor") is the Advisor to the Portfolios. A copy of
the prospectus may be obtained from the Trust at 300 North Lake Avenue,
Pasadena, CA 91101-4106, telephone (818) 449-8500.
TABLE OF CONTENTS
Investment Objectives and Policies B-2
Investment Restrictions B-8
Management B-9
Custodian and Auditors B-15
Portfolio Transactions and Brokerage B-16
Portfolio Turnover B-17
Additional Purchase and Redemption Information B-17
Net Asset Value B-17
Taxation B-18
Dividends and Distributions B-18
Performance Information B-19
General Information B-21
Financial Statements B-22
Appendix B-23
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION. Each Fund seeks to achieve its investment objective by
investing all of its assets in a PIC Portfolio. Each Portfolio is a separate
registered investment company with the same investment objective as the Fund.
Since neither Fund will invest in any securities other than shares of a
Portfolio, investors in the Fund will acquire only an indirect interest in the
Portfolio. Each Fund's and Portfolio's investment objective cannot be changed
without shareholder approval.
In addition to selling its shares to a Fund, a Portfolio may sell its
shares to other mutual funds or institutional investors. All investors in a
Portfolio invest on the same terms and conditions and pay a proportionate share
of the Portfolio's expenses. However, other investors in a Portfolio may sell
their shares to the public at prices different from those of a 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 a Portfolio. Information concerning
other holders of interests in a Portfolio is available by calling (800)
618-7643.
The Trustees of the Trust believe that this structure may enable a 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 a Fund's assets in a 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. A Fund's investment in
a Portfolio may be withdrawn by the Trustees at any time if the Board determines
that it is in the best interests of a 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 a Fund in another pooled investment company
or the retaining of an investment advisor to manage the Fund's assets directly.
Whenever a Fund is requested to vote on matters pertaining to a 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.
THE GROWTH FUND. The investment objective of the Growth Fund is to provide
long-term growth of capital. There is no assurance that the Growth Fund will
achieve its objective. The Growth Fund will attempt to achieve its objective by
investing all of its assets in shares of the PIC Growth Portfolio (the "Growth
Portfolio"). The Growth Portfolio is a diversified open-end management
investment company having the same investment objective as the Growth Fund. The
discussion below supplements information contained in the prospectus as to
investment policies of the Growth Fund and the Growth Portfolio. Because the
investment characteristics of the Growth Fund will correspond directly to those
of the Growth Portfolio, the discussion refers to those investments and
techniques employed by the Growth Portfolio.
B-2
<PAGE>
THE SMALL COMPANY GROWTH FUND. The investment objective of the Small
Company Growth Fund is to provide capital appreciation. There is no assurance
that Small Company Growth Fund will achieve its objective. The Small Company
Growth Fund will attempt to achieve its objective by investing all of its assets
in shares of the PIC Small Cap Portfolio (the "Small Cap Portfolio"). The Small
Cap Portfolio is a diversified open-end management investment company having the
same investment objective as the Small Company Growth Fund. The discussion below
supplements information contained in the prospectus as to policies of the Small
Company Growth Fund and the Small Cap Portfolio. Because the investment
characteristics of the Small Company Growth Fund will correspond directly to
those of the Small Cap Portfolio, the discussion refers to those investments and
techniques employed by the Small Cap Portfolio.
SECURITIES AND INVESTMENT PRACTICES
The discussion below supplements information contained in the prospectus as
to investment policies of the Portfolios. 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 a Portfolio achieve its goals.
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 a Portfolio. Some
specific examples of short-term investments are commercial paper, bankers'
acceptances, certificates of deposit and repurchase agreements. A 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 a
Fund or a 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 Funds and the Portfolios 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
B-3
<PAGE>
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 Funds and the Portfolios intend to comply with provisions under such
Code that would allow them immediately to resell the collateral.
OPTIONS ACTIVITIES. The Small Cap 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 Small Cap 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.
The Small Cap 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 Small Cap 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 Small Cap 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.
B-4
<PAGE>
FUTURES CONTRACTS. The Portfolios 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 any of the
Portfolios 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
portfolio position which is intended to be protected, the desired protection may
not be obtained and a 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 a 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 Portfolios may invest in foreign issuers in foreign
markets. In addition, the Portfolios 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
B-5
<PAGE>
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. Neither Portfolio may invest 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 Portfolios may enter into
forward contracts with respect to specific transactions. For example, when a
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 a
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 a 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 a Portfolio to sustain
losses on these contracts and transaction costs. The Portfolios 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
B-6
<PAGE>
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 a
Portfolio will be served.
At or before the maturity date of a forward contract that requires a
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, a
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 a 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 a 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.
SEGREGATED ACCOUNTS. When a 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 a 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 a 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 a 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.
B-7
<PAGE>
INVESTMENT RESTRICTIONS
The Trust (on behalf of the Funds) and the Portfolios 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 a
Fund or a 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 a Fund or a 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 a Fund or a
Portfolio. Except with respect to borrowing, changes in values of assets of a
particular Fund or Portfolio will not cause a violation of the investment
restrictions so long as percentage restrictions are observed by such Fund or
Portfolio at the time it purchases any security.
As a matter of fundamental policy, the Portfolios are diversified; i.e., as
to 75% of the value of a Portfolio's 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 Funds invest all of their assets in shares
of the Portfolios. Each Fund's and each Portfolio's investment objective is
fundamental.
In addition, neither Fund or Portfolio may:
1. Issue senior securities, borrow money or pledge its assets, except that
a Fund or a 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), 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 Small Cap 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 a 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 either of the Funds may invest more than 25%
of their assets in shares of a Portfolio;
B-8
<PAGE>
7. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although either 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
either 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 Funds and the Portfolios and except for repurchase
agreements); or
11. Make investments for the purpose of exercising control or management.
The Portfolios observe the following restrictions as a matter of operating
but not fundamental policy.
Neither 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).
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 Portfolios each have a Board of Trustees which have comparable
responsibilities, including approving agreements with the Advisor. The day to
day operations of the Trust and the Portfolios are delegated to their officers,
subject to their investment objectives and policies and to general supervision
by their Boards of Trustees.
B-9
<PAGE>
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)
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
B-10
<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.
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.
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 Portfolios
under the 1940 Act.
B-11
<PAGE>
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>
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Growth Fund as of January 31, 2000:
Milbank Tweed Hadley & McCloy
Partners Retirement Plan - 7.20%
Brooklyn, NY 11245
Vanguard Fiduciary Trust Co., Trustee - 30.90%
Valley Forge, PA 19482
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Small Company Growth Fund as of January 31, 2000:
Strafe & Co. - 14.07%
Westerville, OH 43086
Charles Schwab & Co., Inc.
Special Custody Acct. - 10.86%
San Francisco, CA 94102
George E. Handtmann III and
Janet L. Handtmann, Trustees - 5.49%
Carpenteria, CA 930133
UMBSC & Co. FBO
Interstate Brands Corp
Aggressive Growth Acct. - 27.07%
Kansas City, MO 64141
B-12
<PAGE>
UMBSC & Co.
FBO Interstate Brands Unit
Elect-Mod Grt - 11.68%
Kansas City, MO 64141
Atlantic Trust Company,
Nominee Account - 18.23%
Boston, MA 12210
As of January 31, 2000, shares of the Funds 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 Portfolios.
Subject to the supervision of the Boards of Trustees of the Portfolios,
investment management and services will be provided to the Portfolios by the
Advisor, pursuant to separate Investment Advisory Agreements (the "Advisory
Agreements"). Under the Advisory Agreements, the Advisor will provide a
continuous investment program for the Portfolios 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 Portfolios 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
Portfolios and the legal obligations with respect to which the Trust or the
Portfolios 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
B-13
<PAGE>
the Advisor entered into new Advisory Agreements having the same terms as the
previous Advisory Agreements with the Portfolios. The term "Advisor" also refers
to the Advisor's predecessor.
For its services, the Advisor receives a fee from the Growth and Small Cap
Portfolios at an annual rate of 0.80% of their average daily net assets.
For the fiscal year ended October 31, 1999, the Growth Portfolio paid the
Advisor fees of $1,329,942, net of a waiver of $7,147. For the same period, the
Small Cap Portfolio paid the Advisor fees of $1,789,614, net of a waiver of
$3,878.
During the fiscal years ended October 31, 1998 and1997, the Advisor earned
fees pursuant to the Advisory Agreements as follows: from the Growth Portfolio,
$1,045,893 and $838,058, respectively; and from the Small Cap Portfolio,
$1,418,731 and $1,525,768, respectively. However, the Advisor has agreed to
limit the aggregate expenses of the Growth and Small Cap Portfolios to 1.00% of
average net assets. As a result, the Advisor paid expenses of the Growth
Portfolio that exceeded these expense limits in the amounts of $22,176 and
$48,003 during the fiscal years ended October 31, 1998 and 1997, respectively.
The Advisor paid expenses of the Small Cap Portfolio that exceeded these expense
limits in the amounts of $24,920 and $24,879 during the fiscal years ended
October 31, 1998 and 1997, respectively.
Under the Advisory Agreements, the Advisor will not be liable to the
Portfolios for any error of judgment by the Advisor or any loss sustained by the
Portfolios 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 Agreements will remain in effect for two years from their
execution. Thereafter, if not terminated, each 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 Agreements are terminable by vote of the Board of Trustees or
by the holders of a majority of the outstanding voting securities of the
Portfolios at any time without penalty, on 60 days written notice to the
Advisor. The Advisory Agreements also may be terminated by the Advisor on 60
days written notice to the Portfolios. The Advisory Agreements terminate
automatically upon their assignment (as defined in the 1940 Act).
The Advisor also provides certain administrative services to the Trust
pursuant to Administration Agreements, 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
B-14
<PAGE>
of 0.20% of the average net assets of each series of the Trust. During the
fiscal years ended October 31, 1999, 1998 and 1997, the Advisor earned fees
pursuant to the Administration Agreements from the Growth Fund (formerly the
Institutional Growth Fund) of $322,505, $255,010 and $207,782, respectively.
During the fiscal years ended October 31, 1999, 1998 and 1997, the Advisor
earned fees of $59,237, $70,124 and $45,245, respectively from the Small Company
Growth Fund. However, the Advisor has agreed to limit the aggregate expenses of
the Growth Fund to 1.25% of its average daily net assets and the expenses of the
Small Company Growth Fund to 1.45% of its average daily net assets. As a result,
the Advisor waived all or a portion of its fee and/or reimbursed expenses of the
Growth Fund that exceeded these expense limits in the amounts of $184,616,
$178,773 and $110,144 during the fiscal years ended October 31, 1999, 1998 and
1997, respectively. In addition, the Advisor waived all or a portion of its fee
and/or reimbursed expenses of the Small Company Growth Fund that exceeded these
expense limits in the amounts of $19,741, $15,053 and $35,623 during the fiscal
years ended October 31, 1999, 1998 and 1997, respectively.
The Advisor reserves the right to be reimbursed for any waiver of its fees
or expenses paid on behalf of the Funds if, within three subsequent years, a
Fund's expenses are less than the limit agreed to by the Advisor.
THE ADMINISTRATOR
The Funds and the Portfolios each pay a monthly administration fee to
Investment Company Administration, LLC for managing some of their business
affairs. Each Portfolio pays an annual administration fee of 0.10% of its
average net assets, subject to an annual minimum of $45,000. Each Fund pays an
annual fee of $15,000.
During each of the three years ended October 31, 1999, 1998 and 1997, the
Growth Fund and the Small Company Growth Fund each paid the Administrator fees
in the amount of $15,000.
During the fiscal years ended October 31, 1999, 1998 and 1997, the Growth
Portfolio paid the Administrator fees in the amounts of $167,136, $130,737 and
$103,757, respectively. During the fiscal years ended October 31, 1999, 1998 and
1997, the Small Company Growth Portfolio paid the Administrator fees in the
amounts of $224,187, $177,341 and $190,721, respectively.
CUSTODIAN AND AUDITORS
The Trust's custodian, Provident National Bank, 200 Stevens Drive, Lester,
PA 19113 is responsible for holding the Funds' assets. Provident Financial
Processing Corporation, 400 Bellevue Parkway, Wilmington, DE 19809, acts as each
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 Funds' tax returns.
B-15
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreements state that in connection with its duties to arrange
for the purchase and the sale of securities held by the Portfolios by placing
purchase and sale orders for the Portfolios, 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 Agreements to consider the reliability, integrity and financial
condition of the broker. The Advisor also is authorized by the Advisory
Agreements to consider whether the broker provides research or statistical
information to the Portfolios and/or other accounts of the Advisor. The Advisor
may select brokers who sell shares of the Portfolios or the Funds which invest
in the Portfolios.
The Advisory Agreements state 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 Agreements provide 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 Agreements;
(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 Growth Portfolio was $110,376. During the fiscal year ended October 31,
1997, the amount of brokerage commissions paid by the Small Cap Portfolio was
$218,087. During the fiscal year ended October 31, 1998, the Growth Portfolio
paid $165,841 in brokerage commissions. Of that amount, $1,050 was paid in
brokerage commissions to brokers who furnished research services. During the
fiscal year ended October 31, 1998, the Small Cap Portfolio paid $208,083 in
brokerage commissions. Of that amount, $9,449 was paid in brokerage commissions
to brokers who furnished research services. During the fiscal year ended October
31, 1999, the Growth Portfolio paid $214,042 in brokerage commissions, of which
$17,604 was paid 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 Portfolios in the valuation of the Portfolios'
investments. The research which the Advisor receives for the Portfolios'
brokerage commissions, whether or not useful to the Portfolios, 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 Portfolios.
B-16
<PAGE>
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 Portfolios 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 Funds 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 a 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." Growth Portfolio's portfolio turnover rate for the fiscal years
ended October 31, 1999 and 1998 was 80.34% and 81.06%, respectively. Small Cap
Portfolio's portfolio turnover rate for the fiscal years ended October 31, 1999
and 1998 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 Small Cap
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 each 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 Portfolios' 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. Each Portfolio's net asset value is calculated
separately.
The net asset value per share is computed by dividing the value of the
securities held by each 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.
B-17
<PAGE>
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 Funds will each be taxed as separate entities under the Internal
Revenue Code (the "Code"), and each 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 Funds qualify, the Funds (but not their shareholders) will
be relieved of federal income tax one their 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 Funds must distribute
annually to shareholders at least 90% of their investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) at least 90%of each 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 each 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 each 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.
Each 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 a 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 a 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.
B-18
<PAGE>
Dividends declared by a 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 a Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year in which
the record date falls.
Each 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. Each 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 a 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.
The Funds' average annual total return for the periods ending October 31,
1999 are as follows*:
Growth Fund Small Company Growth Fund
----------- -------------------------
One Year 31.08% 58.20%
Five Years 22.45% N/A
Since Inception** 17.16% 7.74%
- ----------
* 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.
** The inception dates for the Funds are as follows: Growth Fund I-July 31,
1992; Small Company Growth Fund I-June 28, 1996.
B-19
<PAGE>
YIELD
Annualized yield quotations used in a 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), a 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 a
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.
OTHER INFORMATION
Performance data of a 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 a Fund will
fluctuate, and an investor's redemption proceeds may be more or less than the
original investment amount. In advertising and promotional materials a Fund may
compare its performance with data published by Lipper Analytical Services, Inc.
("Lipper") or CDA Investment Technologies, Inc. ("CDA"). A 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 a 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.
B-20
<PAGE>
GENERAL INFORMATION
Each Fund 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 a Fund. Each share represents an interest
in a 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 a
particular Fund are allocated fairly among the Funds by the Trustees, generally
on the basis of the relative net assets of each Fund.
Each 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
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.
B-21
<PAGE>
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 Funds for the fiscal year ended
October 31, 1999 are 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-22
<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-23
<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-24
