<PAGE>
As filed with the Securities & Exchange Commission
----------------
Securities Act File No. 33-55758
---------------
Investment Company Act File No. 811-7366
---------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
Registration Statement Under the Securities Act of 1933 X
-----
Pre-Effective Amendment No.
------- -----
Post-Effective Amendment No. 5 X
------- -----
Registration Statement Under the Investment Company Act of 1940 X
-----
Amendment No. 7 X
-----
THE ANALYTIC SERIES FUND
(Exact Name of Registrant as Specified in Charter)
700 South Flower Street, Suite 2400, Los Angeles, CA 90017
(Address of principal executive offices)
Registrant's Telephone Number: (213) 688-3015
NAME AND ADDRESS OF AGENT FOR SERVICE
COPIES TO:
HARINDRA DE SILVA MICHAEL GLAZER
Analytic-TSA Global Asset Paul, Hastings, Janofsky &
Management, Inc. Walker LLP
700 South Flower Street, Suite 2400 555 South Flower Street
Los Angeles, CA 90017 Los Angeles, CA 90071
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on ________________ pursuant to Rule 485 paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on ________________ pursuant to paragraph (a)(2) of Rule 485
This post-effective amendment designates a new effective date for a
___ previously filed post-effective amendment.
The Registrant has registered an indefinite number of shares of its common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The Registrant's Rule 24f-2 Notice for its most recent
fiscal year was filed on February 27, 1997.
i
<PAGE>
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
N-1A Item No. Item Location in Registration Statement
<S> <C> <C>
1. Cover Page Cover Page - Prospectus
2. Synopsis Fund Expenses; Yield and Total Return
Disclosure
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective and Policies;
Investment Limitations; Investment Risks
5. Management of the Fund Management of the Fund
6. Capital Stock and Other Securities General Information; Dividends, Capital
Gains and Taxes; Shareholder Guide
7. Purchase of Securities Being Offered Highlights; Shareholder Guide - Purchasing
Shares; Shareholder Guide - Exchanging
Shares
8. Redemption or Repurchase Highlights; Shareholder Guide - Redeeming
Shares; Shareholder Guide - Exchanging
Shares
9. Legal Proceedings Not Applicable
</TABLE>
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
N-1A Item No. Item Location in Registration Statement
<S> <C> <C>
10. Cover Page Cover Page - Statement of Additional
Information
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objective and Policies;
Investment Limitations
14. Management of Registrant Management of the Fund
15. Control Persons and Principal Holders of Management of the Fund; Principal
Securities Shareholders
16. Investment Advisory and Other Services Investment Advisory and Other Services
17. Broker Allocation Portfolio Transactions
18. Capital Stock and Other Securities Not Applicable (See Prospectus)
19. Purchase, Redemption, and Pricing of Net Asset Value Per Share; Purchase of
Securities Being Offered Shares; Redemption of Shares
20. Tax Status Investment Objectives - Federal Tax
Treatment of Options and Futures
21. Underwriters Not Applicable
22. Calculation of Performance Data Not Applicable ( See Prospectus.)
23. Financial Statements Financial Statements
</TABLE>
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
ii
<PAGE>
THE ANALYTIC SERIES FUND
700 SOUTH FLOWER STREET, SUITE 2400
LOS ANGELES, CA 90017
(800) 374-2633
INVESTMENT OBJECTIVE AND POLICIES
The Analytic Series Fund, a Delaware business trust (the "Fund"), is a newly
organized, no-load, open-end diversified investment company or "mutual fund"
presently consisting of 3 separate Portfolios, each with a distinct investment
objective. The Portfolios are: the Analytic Short-Term Government Portfolio
("SHORT-TERM GOVERNMENT PORTFOLIO"), the Analytic Master Fixed Income Portfolio
("MASTER FIXED INCOME PORTFOLIO"), and the Analytic Enhanced Equity Portfolio
("ENHANCED EQUITY PORTFOLIO").
The investment objective of the SHORT-TERM GOVERNMENT PORTFOLIO is to provide a
high level of income consistent with both low fluctuations in market value and
low credit risk. At least 80% of the total assets of the Portfolio will be
invested in U.S. government securities and up to 20%, may be invested in
securities of foreign issuers.
The investment objective of the MASTER FIXED INCOME PORTFOLIO is to provide
above-average total returns from a diversified bond portfolio consisting
primarily of domestic government, corporate, and mortgage-related fixed income
securities. Up to 20% of the total assets of the Portfolio may be invested in
securities of foreign issuers.
The investment objective of the ENHANCED EQUITY PORTFOLIO is to provide above-
average total returns from a diversified equity portfolio which consists
primarily of domestic common stocks and related investments such as options and
futures. Up to 20% of the total assets of the Portfolio may be invested in
securities of foreign issuers.
OPENING AN ACCOUNT
Please complete and return the Account Registration. If you need assistance in
completing this form, please call Shareholder Services at (800) 374-2633. There
is no minimum investment for tax deferred retirement accounts; otherwise, the
minimum initial investment is $5,000 invested in any proportion among the
Portfolios. Shares may be purchased at net asset value per share, without a
sales charge, next determined after receipt of a purchase order in good form.
ABOUT THIS PROSPECTUS
This Prospectus sets forth concisely the information you should know about the
Fund before you invest. It should be retained for future reference. A Statement
of Additional Information containing additional information about the Fund has
been filed with the Securities and Exchange Commission. The Statement is
incorporated by reference into this Prospectus and a copy may be obtained
without charge by writing to the Fund or by calling Shareholder Services at
(800) 374-2633.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS AND THE RELATED STATEMENT OF ADDITIONAL INFORMATION
IS MAY 1, 1997
1
<PAGE>
HIGHLIGHTS
THREE SEPARATE PORTFOLIOS
Investors may choose from any of the three Portfolios of the Fund. The
investment characteristics of each Portfolio are summarized in the chart below.
PAGE 5
PORTFOLIO SUMMARY
MAY USE
PORTFOLIO PRIMARY INVESTMENTS OPTIONS MAY USE
AND FOREIGN
FUTURES SECURITIES
------------------------------------------------------------------------------
Short-Term Shorter term U.S. Treasury & U.S. Yes Yes
Government Government agency fixed income
securities, with an average duration
of 1 to 3 years
Master Intermediate and longer term U.S. Yes Yes
Fixed Government, and high grade Income
Income corporate and mortgage-related fixed
income securities
Enhanced Equity Publicly traded common stocks with Yes Yes
average capitalization typical of
medium to large companies
------------------------------------------------------------------------------
RISK CHARACTERISTICS
The securities in the Portfolios are subject to various risks, including
interest rate risk, credit risk, currency risk and equity risk. The following
chart summarizes the Adviser's opinion of the exposure of each Portfolio to
these risks and the expected price fluctuations due to these and other risks,
based on the historical financial characteristics of the various securities.
PAGE 11
RISK SUMMARY
EXPECTED
INTEREST RATE PORTFOLIO
AND CURRENCY PRICE
PORTFOLIO CREDIT RISK EQUITY RISK RISK FLUCTUATIONS
------------------------------------------------------------------------------
Short-Term Low None Low Low to Moderate
Government
Master Fixed High Low to Low Moderate to High
Income Moderate
Enhanced Equity Low High Low High to Very
High
-------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT ADVISER
Analytic-TSA Global Asset Management, Inc. (the "Adviser"), 700 South Flower
Street, Suite 2400, Los Angeles, CA 90017, is the investment adviser of the
Fund. The Adviser is a wholly owned subsidiary of United Asset Management
Corporation, a holding company described under "Management of the Fund" in the
Statement of Additional Information.
PAGE 26
DIVIDEND POLICY
The Short-Term Government and Master Fixed Income Portfolios declare a dividend
each business day based on their respective net investment incomes. These
dividends are paid on the first business day of each month. The Enhanced Equity
Portfolio declares and pays its net investment income on the last business day
of the calendar quarter. All Portfolios distribute net realized capital gains,
if any, annually.
PAGE 28
TAXES
Dividends and capital gains distributions paid by the Fund's Portfolios are
generally subject to federal, state and local income taxes. However, depending
on provisions of your state's tax law, the portion of a Portfolio's income
derived from "full faith and credit" U.S. Treasury obligations may be exempt
from state and local taxes. A sale of shares, whether by outright redemption or
exchange, is a taxable event and may result in a capital gain or loss.
PAGE 29
PURCHASING SHARES
Shares may be purchased by wire, mail, or exchange from another Portfolio in the
Fund, at net asset value per share, without a sales charge, next determined
after receipt of a purchase order in good form. There is no minimum initial or
subsequent purchase of Portfolio shares by tax deferred retirement plans
(including IRA, SEP-IRA and profit sharing and money purchase plans) or Uniform
Gifts to Minors Act accounts. For other investors the minimum is $5,000 for an
initial purchase, in any proportion among the Portfolios, and there is no
minimum for subsequent purchases.
PAGE 33
REDEEMING SHARES
Shares are redeemed without charge and redemptions may be made by telephone,
mail, or exchange to another Portfolio in the Fund.
PAGE 35
SHAREHOLDER SERVICES
The Adviser acts as the transfer agent, dividend disbursing agent, and
shareholder relations servicing agent.
Shareholder inquiries should be addressed to Analytic TSA Global Asset
Management, Inc., Attn: Shareholder Services, 700 South Flower Street, Suite
2400, Los Angeles, CA 90017; telephone (800) 374-2633; or FAX (213) 688-8856.
3
<PAGE>
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of the
Fund is expected to incur for the Fund's 1997 fiscal year.
SHORT-TERM MASTER ENHANCED
GOVERNMENT FIXED INCOME EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------
Sales Load Imposed on Purchases None None None
Sales Load Imposed on Reinvested None None None
Dividends
Redemption Fees None None None
Exchange Fees None None None
SHORT-TERM MASTER ENHANCED
ANNUAL FUND OPERATING EXPENSES GOVERNMENT FIXED INCOME EQUITY
(AFTER EXPENSE REIMBURSEMENT*) PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------
Management Fees 0.00% 0.45% 0.09%
12b-1 Fees None None None
Other Expenses 0.60 0.52 0.91
Total Fund Operating Expenses 0.60% 0.97% 1.00%
(after expense reimbursement)
* After reimbursement of expenses. The Adviser has voluntarily agreed to
reimburse expenses of the Fund, including advisory fees (but excluding interest,
taxes, and extraordinary expenses) that exceed 0.60%, and 1.0% of average daily
net assets for the Short-Term Government, and Enhanced Equity Portfolios,
respectively, for the year ending December 31, 1997. Without such
reimbursement, management fees for the Short-Term Government, and Enhanced
Equity Portfolio would be 0.30%, and 0.60%, respectively, and total expenses are
expected to be 3.28% (this projection was based on asset levels as of the date
of this prospectus) and 1.51%, respectively, for the year ending December 31,
1997. The voluntary expense caps for year ended December 31, 1996 were 0.60%,
0.80% and 1.0% for the Short Term Government, Master Fixed Income and Enhanced
Equity Portfolios, respectively. The information in the Fund Expenses table has
been restated to reflect the current expense caps.
The Master Fixed Income and Enhanced Equity Portfolios have entered into
agreements whereby certain operating expenses of the Portfolio are paid
indirectly by a broker, based upon a percentage of commissions earned by the
broker for execution of portfolio transactions. Gross commission rates for this
broker are consistent with those of other brokers utilized by the Fund. For the
year ended December 31, 1996, expenses paid indirecty by such broker represented
0.06% and 0.13% of average daily net assets of the Master Fixed Income and
Enhanced Equity Portfolios, respectively. With expenses reimbursed by the
Adviser and expenses paid indirectly through brokerage arrangements, total
expenses would have been 0.56%, 0.72% and 0.91% of average daily net assets of
the Short-Term Government, Master Fixed Income and Enhanced Equity Portfolios,
respectively.
EXAMPLE
The following example illustrates the expenses you would pay on a $1,000
investment, assuming (1) a 5% annual rate of return and (2) redemption at the
end of each period.
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ------ ------- ------- --------
SHORT-TERM GOVERMENT $6 $19 $33 $75
MASTER FIXED INCOME 10 31 54 119
ENHANCED EQUITY 10 32 55 122
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial statements in the tables below for each of the four years in
the period ended December 31, 1996, and the one month ended December 31, 1992,
have been audited by Deloitte & Touche LLP, independent auditors. Such
financial statements and the report of Deloitte & Touche LLP thereon are
incorporated by reference in the Statement of Additional Information. Copies of
the Fund's 1996 Annual Report to Shareholders may be obtained, at no charge, by
writing or telephoning the Fund at the address or telephone number appearing on
the cover page of this Prospectus.
SHORT TERM GOVERNMENT PORTFOLIO
One Month
Ended
Year Ended December 31 December 31
-----------------------------------------------------
1996 1995 1994 1993 1992
------- -------- ------- -------- --------
Net asset value, $ 9.98 $ 9.55 $ 10.03 $ 10.03 $ 10.00
------- -------- ------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.62 0.56 0.48 0.53 0.05
Net realized and
unrealized gains (losses)
on investment and foreign
currency transactions (0.10) 0.43 (0.48) 0.00 0.03
------- -------- ------- -------- --------
Total from investment
operations 0.52 0.99 0.00 0.53 0.08
LESS DISTRIBUTIONS
From net investment
income 0.66 0.56 0.48 0.53 0.05
Return of capital 0.01
------- -------- ------- -------- --------
Total distributions 0.67 0.56 0.48 0.53 0.05
------- -------- ------- -------- --------
Net asset value, end of
period $ 9.83 $ 9.98 $ 9.55 $ 10.03 $ 10.03
------- -------- ------- -------- --------
------- -------- ------- -------- --------
TOTAL RETURN 5.28% 10.65% 0.00% 5.37% 9.38%+
------- -------- ------- -------- --------
------- -------- ------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period ($000) $ 1,008 $ 27,880 $ 24,481 $ 26,097 $ 7,619
Ratio of expenses to
average net assets (1) 0.76% 0.82% 0.85% 0.75% 0.77%+
Ratio of net investment
income to average net
assets 5.99% 5.76% 5.37% 4.91% 5.45%+
Portfolio turnover rate 31.48% 10.15% 3.21% 85.69% 0.00%
(1) Gross of Adviser reimbursed expenses. With expense reduction, such ratios
would have been 0.56%, 0.50%, 0.45%, 0.45%, and 0.45%+ for each of the
years in the periods ended December 31, 1996 and for the month ended
December 31, 1992, respectively.
+ Annualized
5
<PAGE>
MASTER FIXED INCOME PORTFOLIO
One Month
Ended
Year Ended December 31 December 31
---------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
Net asset value, beginning
of period $ 10.41 $ 9.50 $ 10.26 $ 10.06 $ 10.00
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.58 0.61 0.64 0.67 0.04
Net gains (losses) on
investments
and options (realized
and unrealized) (0.01) 0.91 (0.75) 0.41 0.06
-------- ------- ------- ------- -------
Total from investment 0.57 1.52 (0.11) 1.08 0.10
operations
LESS DISTRIBUTIONS
From net investment
income 0.58 0.61 0.64 0.67 0.04
From net realized gains 0.12 0.00 0.01 0.21 0.00
In excess of net
realized gains 0.01 0.00 0.00 0.00 0.00
-------- ------- ------- ------- -------
Total distributions 0.71 0.61 0.65 0.88 0.04
-------- ------- ------- ------- -------
Net asset value, end of
period $ 10.27 $ 10.41 $ 9.50 $ 10.26 $ 10.06
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN 5.69% 16.43% (1.04)% 10.94% 13.09%+
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($000) $ 28,926 $24,868 $ 6,155 $ 8,066 $ 9,219
Ratio of expenses to
average net assets (1) 0.97% 1.03% 1.17% 1.04% 1.05%+
Ratio of net investment +
income to average net
assets 5.66% 5.99% 7.16% 6.39% 5.63%
Portfolio turnover rate 21.95% 31.82% 44.30% 105.39% 0.00%
Average commission rate (2) $ 0.0418 $ 0.0277
(1) Gross of Adviser reimbursed expenses and expenses indirectly paid through
brokerage arrangements. With both expense reductions, such ratios would
have been 0.72%, 0.69%, 0.60%, 0.60% and 0.60%+ for each of the years in
the periods ended December 31, 1996 and for the month ended December 31,
1992, respectively.
(2) The formula for calculating the average commission rate is total
commissions paid divided by the total shares purchased and sold. Each
option contract is 100 shares.
+ Annualized
6
<PAGE>
ENHANCED EQUITY PORTFOLIO
One Month
Ended
Year Ended December 31 December 31
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net asset value, beginning $ 12.94 $ 9.83 $ 10.15 $ 10.02 $ 10.00
of period ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.21 0.23 0.28 0.40 0.01
Net realized and
unrealized gains
(losses) on investment
and option transactions 2.74 3.22 (0.32) 0.62 0.02
------- ------- ------- ------- -------
Total from investment 2.95 3.45 (0.04) 1.02 0.03
operations
LESS DISTRIBUTIONS
From net investment
income 0.21 0.23 0.28 0.40 0.01
From net realized gains 3.58 0.11 0.00 0.37 0.00
In excess of net
realized gains 0.01 0.00 0.00 0.00 0.00
Return of capital 0.00 0.00 0.00 0.12 0.00
------- ------- ------- ------- -------
Total distributsions 3.80 0.34 0.28 0.89 0.01
------- ------- ------- ------- -------
Net asset value, end of
period $ 12.09 $ 12.94 $ 9.83 $ 10.15 $ 10.02
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN 22.95% 35.36% (0.37)% 10.07 % 4.08%+
------- ------- ------- ------- -------
------- ------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($000) $ 3,519 $ 2,318 $ 1,511 $ 903 $ 12,823
Ratio of expenses to
average net assets(1) 1.51% 1.33% 1.35% 1.35% 1.07%+
Ratio of net investment 1.53% 2.02% 3.24% 2.16% 1.66%+
income to average
net assets
Portfolio turnover rate 179.47% 10.15% 24.75% 76.34% 25.20%
Average commission
rate(2) $0.0658 $ 0.0431
(1) Gross of Adviser reimbursed expenses and expenses indirectly paid through
brokerage arrangements. With both expense reductions, such ratios would
have been 0.91%, 0.50%, 0.24%, 0.57%, and 0.70%+ for each of the years in
the periods ended December 31, 1996 and for the month ended December 31,
1992, respectively.
(2) The formula for calculating the average commission rate is total commission
paid divided by the total shares purchased and sold. Each option contract
is 100 shares.
+ Annualized
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each Portfolio are listed below. The
objectives are fundamental and may not be changed without shareholder approval.
However, the investment policies, practices, and strategies employed in pursuit
of each Portfolio's objective are not fundamental and may be changed without
shareholder approval. Because there are risks inherent in all securities
investments, there is no assurance that these objectives will be achieved.
SHORT-TERM GOVERNMENT PORTFOLIO
INVESTMENT OBJECTIVE:
The investment objective of the Short-Term Government Portfolio is to provide a
high level of income consistent with both low fluctuations in market value and
low credit risk.
INVESTMENT POLICIES:
The Short-Term Government Portfolio seeks to achieve its investment objective by
investing primarily in U.S. Treasury or U.S. Government agency securities to
minimize credit risk. To minimize fluctuations in market value, the Portfolio is
expected, under normal market conditions, to maintain a dollar weighted average
maturity and weighted average duration between 1 and 3 years. Duration is the
weighted average time to receipt of both principal and interest payments of a
debt security and also a measure of the sensitivity of fixed income related
investments to interest rate changes.
Under normal market conditions, the Short-Term Government Portfolio will invest
at least 80% of its total assets in U.S. Government securities. Subject to
certain additional limitations, the remainder of the Portfolio's assets may be
invested in other high grade debt securities, securities of foreign governments
and supranational organizations considered to be of high grade investment
quality, currency-rate and interest rate-related options and futures, and cash
and cash equivalents. The high grade investment standard for the Fund includes
only those securities with (i) over 1 year original maturity and rated at the
time of purchase a minimum of A by Moody's Investors Service, Inc. ("Moody's")
or Standard & Poor's Corporation ("Standard & Poor's") , (ii) under 1 year
original maturity and rated at the time of purchase a minimum of Prime 1 by
Moody's or A-1 by Standard & Poor's, or (iii) unrated securities determined by
the Adviser at the time of purchase to be equivalent to these ratings. See the
discussion of ratings under "Implementation of Policies" below.
The Portfolio may also invest in repurchase agreements collateralized by U.S.
Government securities. For temporary defensive purposes, the Portfolio may
reduce the average duration to less than 1 year. See "Implementation of
Policies" for a description of these investment practices of the Portfolio and
the additional limitations that may apply to some of the investments described
above.
8
<PAGE>
MASTER FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE:
The investment objective of the Master Fixed Income Portfolio is to provide
above-average total returns from a diversified bond portfolio consisting
primarily of U.S. Government, corporate, and mortgage-related fixed income
securities. For this purpose, "above average" total returns means returns above
the average long-term total returns of other mutual funds with similar
investment policies and risk characteristics.
INVESTMENT POLICIES:
The Master Fixed Income Portfolio seeks to achieve its objective by investing
primarily in U.S. Treasury, U.S. Government, and U.S. dollar denominated high
grade securities, including mortgage-related securities. The weighted average
duration of the Portfolio's fixed income investments is generally expected,
under normal market conditions, to range between 3 and 10 years.
Under normal market conditions, the Master Fixed Income Portfolio will invest at
least 65% of its total assets in U.S. dollar denominated, high grade, fixed
income debt securities. The high grade investment standard for the Fund includes
only those securities with (i) over 1 year original maturity and rated at the
time of purchase a minimum of A by Moody's or Standard & Poor's, (ii) under 1
year original maturity and rated at the time of purchase a minimum of Prime 1 by
Moody's or A-1 by Standard & Poor's, or (iii) unrated securities determined by
the Adviser at the time of purchase to be equivalent to these ratings. See the
discussion of ratings under "Implementation of Policies" below.
Subject to certain additional limitations, under normal market conditions, the
remainder of the Portfolio's assets may be invested in floating rate and other
types of debt securities, high grade non-U.S.-dollar denominated debt
securities, below high grade fixed income securities, convertible securities,
"synthetic convertible" positions, covered call and cash secured put
investments, preferred stock, and the shares of other investment companies which
invest primarily in high grade debt securities. The Portfolio may also invest in
interest and currency rate-related derivative securities. For temporary
defensive purposes, the Portfolio may retain all or part of its assets in high
grade, U.S. dollar denominated debt securities or cash and cash equivalents.
See "Implementation of Policies" for a description of these investment practices
of the Portfolio and the additional limitations that may apply to some of the
investments described above.
9
<PAGE>
ENHANCED EQUITY PORTFOLIO
INVESTMENT OBJECTIVE:
The investment objective of the Enhanced Equity Portfolio is to provide above-
average total returns from a diversified equity portfolio which consists
primarily of common stocks and related investments such as options and futures.
For this purpose, "above average" total returns means returns above the average
long-term total returns of other mutual funds with similar investment policies
and risk characteristics.
INVESTMENT POLICIES:
The Enhanced Equity Portfolio seeks to achieve its objective by investing
primarily in the publicly traded common stocks of U.S. domiciled corporations
and options and futures that relate to such stocks. While the Portfolio may
invest in stocks of any market capitalization, it is anticipated that the
average capitalization of the Portfolio's stocks will be typical of medium to
large companies (typically $15 billion or higher). A company's market
capitalization is the total stock market value of its outstanding shares.
Under normal market conditions, the Enhanced Equity Portfolio will invest at
least 65% of its total assets in common stocks of U.S. domiciled corporations
and equity-type investments that relate to U.S. domiciled corporations. Equity-
type investments include preferred stock, warrants, and convertible securities.
See "Implementation of Policies" for a description of certain additional
limitations on the percentage of the Portfolio that may be invested in some of
the equity-type investments.
Subject to certain additional limitations, the remainder of the Portfolio's
assets may be invested in foreign equity and equity-type securities, equity
related options and futures contracts, debt securities of investment grade or
below, the shares of other investment companies, and cash or cash equivalents
awaiting investment.
For temporary defensive purposes, the Portfolio may retain all or part of its
assets in high grade, U.S. dollar denominated debt securities or cash and cash
equivalents. See "Implementation of Policies" for a description of these and
other investment practices of the Portfolio and the additional limitations that
may apply to some of the investments described above.
To manage the Portfolio. the Adviser is currently using a proprietary model for
investment in domestic common stocks, based on work pioneered by Professor
Robert A. Haugen. As a result, the Adviser currently intends to invest
primarily in such stocks. See the Statement of Additional Information for
further information regarding the application of this model.
10
<PAGE>
INVESTMENT RISKS
All of the Portfolios are expected to have fluctuations in their net asset
values. However, the Short-Term Government Portfolio is expected to have the
lowest volatility of the three Portfolios and the Enhanced Equity Portfolio is
expected to have the highest.
CERTAIN INVESTMENT RISKS
These fluctuations in value are associated with various risks to which the
securities in the Portfolios are subject. These risks include, but are not
limited to, interest rate risk, credit risk, currency risk, and equity risk.
These risks are described below. In addition, the trading practices of the
Portfolios (such as their use of mortgage-related securities, foreign securities
and options and futures strategies) will expose them to additional risks,
discussed below under "Implementation of Policies" and in the Statement of
Additional Information.
Each Portfolio that holds fixed income securities is subject to varying degrees
of interest rate risk. Interest rate risk is the potential for a decline in bond
prices due to rising interest rates. In general, bond prices vary inversely with
interest rates. When interest rates rise, bond prices generally fall.
Conversely, when interest rates fall, bond prices generally rise. The change in
price depends on several factors, including the bond's maturity date. In
general, bonds with longer maturities are more sensitive to interest rates than
bonds with shorter maturities.
Each Portfolio that holds fixed income securities is also subject to varying
degrees of credit risk. Credit risk is the possibility that a bond issuer will
fail to make timely payments of interest or principal. The credit risk to which
a Portfolio is subject depends on the quality of its investments. Reflecting
their higher risks, lower-quality bonds generally offer higher yields than
higher-quality bonds.
Each Portfolio that holds foreign securities is subject to currency risk.
Currency risk is the potential for changes in value because of changes in the
exchange rate between the currency in which principal and interest on the
security are payable and the U.S. dollar. Currency fluctuations will affect the
value of the Portfolios' shares irrespective of the performance of its
underlying investments.
A Portfolio that holds common stocks and equity-type investments is subject to
equity risk. Equity risk is the potential for price declines. The magnitude of
this risk associated with any particular investment can vary widely depending on
the business and financial condition of the issuer, market conditions in
general, the type of investment, and the extent to which the position may be
hedged.
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SHORT-TERM GOVERNMENT PORTFOLIO
The Short-Term Government Portfolio should be subject to relatively low interest
rate and credit risk, but should have no equity risk. Because of the short-term
average duration of this Portfolio, it is expected to exhibit low to moderate
price fluctuations as interest rates change. The Portfolio's average duration
and maturity should also exhibit low to moderate fluctuations. With respect to
the Portfolio's primary investments, credit risk should be negligible for its
U.S. Treasury securities, and only slightly higher for its U.S. Government
agency obligations (some of which are not explicitly guaranteed by the U.S
Government). Risks associated with the Portfolio's other investments, in
securities of foreign governments, mortgage-related securities, options and
futures contracts, and repurchase agreements, are discussed under
"Implementation of Policies" below.
MASTER FIXED INCOME PORTFOLIO
The Master Fixed Income Portfolio will have a higher degree of both interest
rate risk and credit risk than the Short-Term Government Portfolio. With respect
to its primary investments, the Portfolio is expected to exhibit moderate to
high fluctuations as interest rates change, because it will generally have
significant holdings of both intermediate-term and longer-term bonds. The
Portfolio will also have various credit risks as a result of holding obligations
of high grade securities of non-governmental issuers. It will also have low to
moderate equity risk as a result of its investment in convertible and synthetic
convertible security positions and covered call and cash secured put
investments. Risks associated with the Portfolio's other investments, including
convertible and synthetic convertible positions, covered call and cash secured
put investments, non-investment grade fixed income securities, foreign
securities and interest and currency-related derivative securities, are
discussed under "Implementation of Policies" below. Reflecting these increased
risks, the Portfolio will generally offer higher yields than the Short-Term
Government Portfolio.
ENHANCED EQUITY PORTFOLIO
The Enhanced Equity Portfolio is expected to be subject primarily to equity
risk, and to exhibit high to very high price fluctuations, as is characteristic
of common stocks and equity funds in general. The price fluctuations of this
Portfolio can generally be expected to be greater than either of the other
Portfolios. The Portfolio's use of options, futures contracts, foreign and non-
investment grade debt securities will also expose it to certain additional
risks, discussed under "Implementation of Policies" below.
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WHO SHOULD INVEST
Because of potential fluctuations in the share price of all of the Portfolios in
the Fund, any of the Portfolios may be inappropriate for short-term investors
who require maximum stability of principal. For example, money market funds
attempt to maintain a stable net asset value and will provide more stability of
principal and less risk than the Portfolios. You should base your selection of
a Portfolio (or Portfolios) on your own objectives, risk preferences, and time
horizon. Both the SHORT-TERM GOVERNMENT PORTFOLIO and the MASTER FIXED INCOME
PORTFOLIO are suitable for investors with common stock holdings who are seeking
a complementary fixed income investment to create a more diversified and
balanced investment mix. The ENHANCED EQUITY PORTFOLIO is suitable for long-term
investors seeking the generally higher average total returns that diversified
stock portfolios have provided historically, and who can tolerate substantial
price fluctuations and possible significant loss in value of their investment.
The SHORT-TERM GOVERNMENT PORTFOLIO is designed for investors who are seeking
yields that are more durable and usually higher than those available from money
market funds, and who can tolerate modest fluctuations in the value of their
investment.
The MASTER FIXED INCOME PORTFOLIO is designed for investors seeking total
returns from a broadly diversified bond market investment with high grade credit
quality, and who can tolerate relatively larger fluctuations in price. The
yields from this Portfolio are generally expected to be higher and the income
steadier than from a shorter maturity fund. However, these higher yields and
steadier income levels come with greater fluctuations in total return. BECAUSE
OF THESE RISKS, THE MASTER FIXED INCOME PORTFOLIO IS INTENDED TO BE A LONG TERM
INVESTMENT VEHICLE AND IS NOT DESIGNED TO PROVIDE INVESTORS WITH A MEANS OF
SPECULATING ON SHORT-TERM INTEREST RATE MOVEMENTS.
The ENHANCED EQUITY PORTFOLIO is designed for investors seeking the higher
AVERAGE total returns that diversified equity portfolios have provided over LONG
TERM time horizons. The share price of the Portfolio is expected to be volatile,
and investors should be able to tolerate sudden, sometimes substantial
fluctuations in the value of their investments. Because of the risks inherent in
equity investing and the general wisdom of diversification, investors should
carefully consider what portion of their investment assets should be prudently
allocated to equities. BECAUSE OF THESE RISKS, THE ENHANCED EQUITY PORTFOLIO IS
INTENDED TO BE A LONG TERM INVESTMENT VEHICLE AND IS NOT DESIGNED TO PROVIDE
INVESTORS WITH A MEANS OF SPECULATING ON SHORT-TERM STOCK MARKET MOVEMENTS.
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IMPLEMENTATION OF POLICIES
In addition to the investment policies described above (and subject to certain
restrictions described herein), the Portfolios may invest in some or all of the
following securities and employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of these securities and investment techniques and their
associated risks is contained in the Fund's Statement of Additional Information
SHORT-TERM INVESTMENTS
Each Portfolio may invest in short-term investments in connection with its
options and futures strategies (discussed below) and during periods when, in the
opinion of the Adviser, attractive equity or longer maturity fixed income
investments are temporarily unavailable or other circumstances or market
conditions warrant such investments. Under normal market conditions, and
excluding such short-term investments that are made in connection with options
and futures contracts, no more than 20% of the MASTER FIXED INCOME PORTFOLIO'S
and 20% of the ENHANCED EQUITY PORTFOLIO'S total assets, will be retained in
cash and cash equivalents. As a result of the collateral requirements associated
with options and futures contracts, the percentage of each such Portfolio's
total assets invested in cash and cash equivalents may be as high as 35%. Such
investments may include U.S. Treasury Bills and other U.S. Government and
Government agency obligations with remaining maturities less than one year;
certificates of deposit; banker's acceptances; commercial paper rated at the
time of purchase A-1 by Standard & Poor's or P-1 by Moody's; shares of money
market mutual funds; and corporate, foreign and U.S. government, and
supranational organization debt obligations with remaining maturities less than
one year and with debt ratings by Standard & Poor's, Moody's or other recognized
rating agencies that are determined by the Adviser at the time of purchase to be
equivalent to a cash equivalent rating of A-1/P-1. Such investments may include
securities which offer a variable or floating rate of interest. In addition,
and subject to a 5% limitation, the MASTER FIXED INCOME PORTFOLIO and the
ENHANCED EQUITY PORTFOLIO may also invest in short-term debt securities rated at
the time of purchase A-2/P-2 or equivalent.
GOVERNMENT SECURITIES
Each Portfolio may purchase U.S. Government Securities. U.S. Government
Securities include (1) U.S. Treasury bills (maturity of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities which are supported
by the full faith and credit of the U.S. Treasury (such as Government National
Mortgage Association ("GNMA") Certificates), the right of the issuer to borrow
an amount limited to a specific line of credit from the U.S. Treasury,
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality, or the credit of the instrumentality. Agencies
and instrumentalities include: Federal Land Banks, Farmers Home Administration,
Federal Farm Credit Banks, Federal Home Loan Banks, Federal National Mortgage
Association ("FNMA") , GNMA, Federal Home Loan Mortgage Corporation ("FHLMC"),
Student Loan Marketing Association, Financing Corporation, Tennessee Valley
Authority, Resolution Funding Corporation, Farm Credit Financial Assistance
Corporation, Private Export Funding Corporation, and others.
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FLOATING RATE AND OTHER DEBT SECURITIES
Each Portfolio may invest in securities which offer a variable or floating rate
of interest. Variable rate securities provide for automatic establishment of a
new interest rate at fixed intervals (e.g., daily, monthly or semi-annually).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating-rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, or
some other objective measure. Such obligations are often secured by letters of
credit or other credit support arrangements provided by banks. Such obligations
frequently are not rated by credit rating agencies and, if not so rated, the
Fund may invest in them only if the Adviser determines that, at the time of the
investment, the obligations are of comparable quality to the other obligations
in which a particular Portfolio may invest. The Adviser will consider on an
ongoing basis the creditworthiness of the issuers of such instruments in the
Fund's Portfolios.
Each Portfolio may also from time to time invest in zero-coupon, step-coupon and
pay-in-kind securities. These securities are debt securities that do not make
regular interest payments. Zero-coupon and step-coupon securities are sold at a
deep discount to their face value. Pay-in-kind securities pay interest through
the issuance of additional securities. A Portfolio will not purchase any
security in one of these categories if, as a result of such purchase, more than
5% of its net assets would be invested in such category of securities.
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements for the purpose of managing
its short-term cash. In a repurchase agreement, the seller (a U.S. commercial
bank or recognized U.S. securities dealer) sells securities to the Portfolio and
agrees to repurchase the securities at the Portfolio's cost plus interest within
a specified period (normally one to seven days). In these transactions, which
are the economic equivalents of loans by the Portfolio, the securities purchased
by the Portfolio will at all times have a total value equal to or in excess of
the value of the repurchase obligation.
While repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Portfolio will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with large, well-capitalized banks and certain reputable
broker-dealers. In addition, the Portfolio's repurchase agreements will provide
that the value of the collateral underlying the repurchase agreement will always
be at least equal to the repurchase price, including any accrued interest earned
on the repurchase agreement. In the event of a default or bankruptcy by a
seller, the Portfolio will seek to liquidate such collateral. However, to
liquidate such collateral could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Portfolio could suffer a
loss.
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MORTGAGE-RELATED SECURITIES
Each Portfolio may invest in mortgage-related securities. Mortgage-related
securities are interests in pools of mortgage loans made to U.S. residential
home buyers, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks, and others. Mortgage-related securities not
issued or guaranteed by U.S. government agencies or instrumentalities are not
considered U.S. government securities for purposes of the 80% test for such
securities in the Short-Term Government Portfolio. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations. The interest rates earned on such
securities may be fixed, in the case of pools of fixed-rate mortgages, or
variable, in the case of pools of adjustable-rate mortgages. Each Portfolio may
also invest in debt securities which are secured with collateral consisting of
U.S. mortgage-related securities, such as collateralized mortgage obligations,
and in other types of mortgage-related securities, limited in the aggregate to
5% of each Portfolio's net assets.
An example of a mortgage-related security is a GNMA mortgage-backed certificate.
Although the mortgage loans in the pool underlying the certificate will have
maturities of up to 30 years, the actual average life of a GNMA certificate will
be substantially less because the mortgages may be prepaid prior to maturity.
Prepayment rates vary widely and may be affected by changes in mortgage interest
rates. In periods of falling interest rates, the rate of prepayment on higher
interest rate mortgages increases, thereby shortening the average life of the
GNMA certificate. Conversely, when interest rates are rising, the rate of
prepayment decreases, thereby lengthening the actual average life of the
certificate. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates. Due to the possibility of prepayment and
the need to reinvest prepayments of principal at current rates, GNMA
certificates can be less effective then typical non-callable bonds of similar
maturities at "locking in" higher yields during periods of declining rates,
although they may have comparable risks of decline in value during periods of
rising interest rates. See "Investment Objectives and Policies" in the Statement
of Additional Information.
FOREIGN SECURITIES
Each Portfolio may invest its assets directly in the securities of foreign
issuers and supranational organizations ("foreign securities"), or options and
futures related to foreign securities, subject to the following additional
limitations. Foreign securities may be denominated in U.S. dollars or in a
foreign currency.
The SHORT-TERM GOVERNMENT PORTFOLIO will limit its foreign securities to (i) 20%
of Portfolio total assets, and (ii) high grade debt obligations issued or
guaranteed by foreign governments, agencies, instrumentalities, or their
political subdivisions, or supranational agencies, and judged by the Adviser to
have a credit risk at the time of purchase comparable to a domestic A or better
credit rating.
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The MASTER FIXED INCOME PORTFOLIO and the ENHANCED EQUITY PORTFOLIO will limit
their non-U.S. dollar denominated foreign security investments to 20% of
Portfolio total assets, but have no percentage limitation on the amount invested
in foreign securities which are U.S. dollar denominated, including investments
in foreign securities in domestic markets through depository receipts. Foreign
debt securities that these two Portfolios purchase will generally be high grade
as the MASTER FIXED INCOME PORTFOLIO and the ENHANCED EQUITY PORTFOLIO have
adopted a 5% limitation on non-investment grade securities (See "Non-Investment
Grade Securities").
Foreign debt securities that these two portfolios purchase will generally be
high grade as the MASTER FIXED INCOME PORTFOLIO and the ENHANCED EQUITY
PORTFOLIO have adopted a 5% limitation on below high grade fixed income
securities and a 5% limitation on below high grade convertible securities (See
"Below High Grade Securities"). Foreign investments involve risks which are in
addition to the risks inherent in domestic investments. In many countries, there
is less publicly available information about issuers, including governments,
than is available in the reports and ratings published about issuers in the
United States. In addition, foreign companies are not subject to uniform
accounting, auditing, and financial reporting standards. The value of foreign
investments may rise or fall because of changes in currency exchange rates, and
a Portfolio may incur certain costs in converting securities denominated in
foreign currencies to U.S. dollars. Dividends and interest on foreign securities
may be subject to foreign withholding taxes, which would reduce a Portfolio's
income without providing a tax credit for Portfolio shareholders. Obtaining
judgments, when necessary, in foreign countries may be more difficult and more
expensive than in the United States. Although each Portfolio intends to invest
in securities of foreign governments or issuers located in developed nations
which the Adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscatory taxation, nationalization,
currency blockage, or political or social instability which could affect
investments in those nations. These factors are considered when making foreign
security investments and the Adviser would make such investments when they are
expected to provide higher income or higher total returns to compensate for such
increased risks beyond those of domestic investments.
OPTIONS AND FUTURES STRATEGIES
Each Portfolio may utilize various call option, put option, and financial
futures strategies in pursuit of its objective. Option contracts, futures
contracts, and various other financial contracts are also known as DERIVATIVE
SECURITIES, because their values depend on the values of a more basic UNDERLYING
SECURITY (or perhaps multiple underlying securities), which may be a common
stock, a fixed income or other debt security, a foreign currency exchange rate,
a stock index, or some other financial instrument or index. The SHORT-TERM
GOVERNMENT PORTFOLIO will limit its use of derivative securities to those which
are primarily interest rate or currency exchange rate related.
These techniques will be used to hedge against changes in securities prices,
interest rates, or foreign currency exchange rates on securities held or
intended to be acquired by the Fund, to reduce the volatility of the currency
exposure associated with foreign securities, or as an efficient means of
adjusting exposure to stock or bond markets, and not for speculation.
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A call option on securities gives the purchaser of the option the right (but not
the obligation) to buy from the writer of the option the underlying securities
at the exercise price during the option period. Similarly, a put option on
securities gives the purchaser of the option the right (but not the obligation)
to sell to the writer of the option the underlying securities at the exercise
price during the option period.
A financial futures contract is a commitment by both the buyer and the seller of
the contract to trade the underlying financial instrument at a price and time
agreed upon when the contract is executed. The financial instrument may be a
stock index, bond index, interest rate, foreign currency exchange rate, or other
similar instrument. The contract may include an option held by the seller with
regard to the specific underlying instrument to be delivered from a class of
instruments and the specific day of delivery within a delivery month. Options on
futures contracts are similar to options on securities, with the futures
contract playing the role of the underlying security.
Options on indexes and currencies, and futures on indexes, are similar to
options and futures on securities, with the underlying index or currency playing
the role of the underlying security, and with the difference that at the end of
the option or future period there is generally a cash settlement between buyers
and sellers instead of delivery of the underlying security.
Options may be traded on an exchange (EXCHANGE-TRADED OPTIONS) or may be
customized agreements between the Portfolio and a counter-party, often a
brokerage firm, bank, or other financial institution. These customized
agreements are also known as "over-the-counter" or OTC OPTIONS. Futures
contracts are normally traded as standardized contracts on exchanges. When firm
commitment type agreements similar to futures are traded over-the-counter they
are usually known as FORWARD CONTRACTS. Exchange-traded options and futures
have the additional financial backing of an intermediary known as a clearing
corporation, whereas OTC options and forwards have no such intermediary and are
subject to the credit risk that the counter-party will not fulfill its
obligations under the contract. While each Portfolio, to the extent that it
utilizes derivative securities, intends to primarily utilize exchange-traded
options and futures, it may also utilize OTC options, currency forward
contracts, and other OTC derivative securities. No Portfolio will invest, at the
time of purchase, more than 5% of its net assets in the purchase of OTC options
or invest more than 5% of its net assets in the purchase of forward contracts.
Although options on securities and financial futures by their terms call for
actual delivery and acceptance of securities, in many cases the contracts are
closed out before the expiration date by selling contracts that are owned or by
buying contracts that have been sold or written. Like any security transaction,
this may produce a realized gain or loss to the Portfolio. Open positions are
valued whenever a Portfolio's assets are valued and the Portfolio will have an
unrealized gain or loss depending on the difference between the current value of
the position and the opening value when the position was entered.
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WRITING COVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
The Portfolios will not write UNCOVERED options or utilize written options to
create leverage, but instead will write only COVERED CALLS and COVERED PUTS.
Writing a covered call option on securities or indexes means that the Portfolio
will own at the time of selling the option (1) the underlying security (or
securities convertible into the underlying security without additional
consideration), or (2) a call option on the same security or index with the same
or lesser exercise price, or (3) a call option on the same security or index
with a greater exercise price, with the difference between the exercise prices
maintained as a segregated account containing cash, U.S. government securities
or other liquid high-grade debt securities, or (4) liquid high-grade segregated
debt securities equal to the fluctuating market value of the optioned securities
which is marked-to-the-market daily, or (5) in the case of an index, a portfolio
of securities which correlates with the index.
Writing a covered put option on securities or indexes means that the Portfolio
will, at the time of selling the option (1) enter a short position in the
underlying security or index portfolio, or (2) purchase a put option on the same
security or index with the same or greater exercise price , or (3) purchase a
put option on the same security or index with a lesser exercise price, with the
difference between the exercise prices maintained as liquid high-grade
segregated debt securities, or (4) maintain the entire exercise price as liquid
high-grade segregated debt securities. No Portfolio will write put options if as
a result more than 25% of the Portfolio's assets would be represented by debt
securities segregated for such put options.
The MASTER FIXED INCOME PORTFOLIO will only write an "in-the-money" covered call
option on common stock or an "out-of-the-money" covered put option on common
stock or stock indexes. An in-the-money covered call option is an investment in
which the Portfolio purchases common stock and sells a call option with an
exercise price that is below the market price of the stock at the time of the
option sale. An out-of-the-money covered put option is an investment in which
the Portfolio sells a put option on a common stock or stock index with an
exercise price that is below the market price of the stock or index at the time
of the option sale and maintains the exercise price as high-grade segregated
debt securities.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
Each Portfolio may purchase put and call options on securities or indexes in
pursuit of its objective. The Portfolio may, at the same time, have a long or
COVERED short position in the underlying security or index, and may have written
covered options on the same security or index. Hence, the Portfolio's entire
position in a particular security may be complex, consisting of a number of
different option positions, a possible position in the underlying security, and
a possible segregated debt securities holding.
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CONVERTIBLE SECURITIES, SYNTHETIC CONVERTIBLE INVESTMENTS, CERTAIN COVERED CALL
AND CASH SECURED PUT INVESTMENTS, AND WARRANTS
The MASTER FIXED INCOME PORTFOLIO and the ENHANCED EQUITY PORTFOLIO may invest
in securities which may be exchanged for, converted into, or exercised to
acquire a predetermined number of shares of the issuer's common stock at the
option of the Portfolio during a specified time period (such as convertible
preferred stocks, convertible debentures and warrants). A convertible security
is generally a fixed income security which is senior to common stock in an
issuer's capital structure, but is usually subordinated to similar non-
convertible securities. No more than 5% of a Portfolio's total assets will be
invested in convertible securities rated at the time of purchase lower than A or
equivalent. See "Investment Objective and Policies" in the Statement of
Additional Information and "Securities Ratings" below.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed income security, a convertible security tends to increase in
value when interest rates decline and tends to decrease in value when interest
rates rise. However, the price of a convertible security is also influenced by
the market value of the security's underlying common stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk, investments
in convertible securities and synthetic convertible positions generally entail
less risk than investments in the common stock of the same issuer.
Investments in warrants involve certain risks, including the possible lack of a
liquid market for resale of the warrants, potential price fluctuations as a
result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercise, resulting in a loss of the Portfolio's entire
investment therein).
The MASTER FIXED INCOME PORTFOLIO and the ENHANCED EQUITY PORTFOLIO may each
invest up to 35% of their total assets in convertible securities, synthetic
convertible and certain combinations of covered call and cash secured put
investments. A synthetic convertible investment is a combination investment in
which the Portfolio purchases both (i) high-grade cash equivalents or a high
grade debt obligation of an issuer or U.S. Government securities and (ii) call
options or warrants on the common stock of the same or different issuer with
some or all of the anticipated interest income from the associated debt
obligation that is earned over the holding period of the option or warrant. The
Portfolios may also write an "in-the-money" covered call option on common stock
or an "out-of-the-money" covered put option on common stock or stock indexes.
Convertible securities, synthetic convertible and in-the-money covered calls and
out-of-the-money cash secured puts are not taken into account when determining
whether the Portfolios have met the requirements that 65% of their total assets
be invested in fixed income and equity securities (see "Investment Objectives
and Policies" above).
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While providing a fixed income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar non-
convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has similar
investment characteristics, but may differ with respect to credit quality, time
to maturity, trading characteristics, and other factors. Because the Portfolio
will create synthetic convertible positions only out of high grade fixed income
securities, the credit rating associated with a Portfolio's synthetic
convertible investments is generally expected to be higher than that of the
average convertible security, many of which are rated below high grade. However,
because the options used to create synthetic convertible positions will
generally have expirations between one month and three years of the time of
purchase, the maturity of these positions will generally be shorter than average
for convertible securities. Since the option component of a convertible security
or synthetic convertible position is a wasting asset (in the sense of losing
"time value" as maturity approaches), a synthetic convertible position may lose
such value more rapidly than a convertible security of longer maturity; however,
the gain in option value due to appreciation of the underlying stock may exceed
such time value loss, the market price of the option component generally
reflects these differences in maturities, and the Adviser takes such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Portfolio may extend the maturity by investing in a new option with longer
maturity on the common stock of the same or different issuer. If the Portfolio
does not so extend the maturity of a position, it may continue to hold the
associated fixed income security.
Covered call and cash secured put investments are subject to the risks
associated with common stocks and options described above. While such
investments have a combined volatility similar to that of long-term corporate
bonds, the Adviser believes they provide greater returns than investment in such
bonds.
PURCHASE AND SALE OF FINANCIAL FUTURES, AND OPTIONS ON FINANCIAL FUTURES.
Each Portfolio may purchase or sell financial and other futures contracts and
options on financial and other futures contracts in pursuit of its objective.
Futures contracts and their related options may be purchased or sold for various
reasons: to hedge portfolio securities against adverse fluctuations, to adjust
the level of market exposure of a portfolio, to facilitate trading, to reduce
transactions costs, and/or to seek higher investment returns when a futures or
option contract is attractively priced relative to a typical Portfolio
investment in the underlying security or index or securities highly correlated
to the underlying index. As with all of the investment strategies that a
Portfolio may employ, there can be no assurance that any such strategy will
achieve its objective.
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A Portfolio's futures and related options transactions will be conducted within
the following limitations:
(i) When a Portfolio sells a futures contract, the value of that contract will
not exceed the total market value of the portfolio securities being hedged;
(ii) A Portfolio will write only COVERED call and put options on futures;
(iii) When a Portfolio purchases a futures contract it will maintain the market
value of the contract in liquid high-grade segregated debt securities as
described above.
(iv) A Portfolio will not enter into futures and options on futures contracts
which would cause the aggregate sum of the initial margins for such contracts
and related option premiums to exceed 5% of the Portfolio's net assets;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in computing such 5%.
CERTAIN RISK FACTORS ASSOCIATED WITH HEDGING STRATEGIES
When a Portfolio utilizes futures or options to hedge the price fluctuations of
securities it may own or want to purchase, the Portfolio is exposed to the risk
of imperfect correlation between the futures or options and the securities being
hedged. That is, the prices of the securities being hedged may not move in the
same amount, or even in the same direction, as the hedging instrument. The
Adviser will attempt to minimize this risk by investing only in those contracts
whose behavior is expected to resemble the Portfolio securities being hedged.
However, if the Adviser's judgment about the general direction of interest
rates, market value, volatility, and other economic factors is incorrect, the
Portfolio would have been better off without the use of such hedging techniques.
In addition, there is the risk of a possible lack of a liquid secondary market
and the resultant inability to close a futures or option position prior to its
maturity or expiration date. If the Adviser determines that the ability to close
such a position early is important to its investment strategy, it will only
enter such positions on an exchange with a secondary market that it judges to be
appropriately active.
COVERED SHORT SALES
To hedge against market risks, each Portfolio may make covered short sales of
securities in pursuit of its objective. A covered short sale is a sale of
borrowed securities in which the Portfolio will (1) own at the time of selling
the securities, the underlying security (or securities convertible into the
underlying security without additional consideration), or (2) own a call option
on the same security with the difference between the exercise price and any
margin required to be deposited in connection with the short sale at the broker
maintained as liquid high-grade segregated debt securities. Total segregated
collateral for short sales will not exceed 10% of a Portfolio's net assets at
any one time.
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In order to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code, a Portfolio must derive less than 30% of its gross income
from the sale of securities it has held for less than three months (the "three
month gain rule"). The three month gain rule may limit a Portfolio's ability to
sell a portfolio security short, or to terminate its short position, at a time
when the Adviser believes it would be advantageous to do so. A Portfolio will
not enter into a short sale or purchase and deliver new securities to terminate
its short position if such action would cause it to violate the three month gain
rules, which would result in the taxation of Portfolio income at the Portfolio
level.
BELOW HIGH GRADE SECURITIES
The SHORT-TERM GOVERNMENT PORTFOLIO may not purchase securities rated below A
("high grade" securities) and will sell securities whose ratings are downgraded
to below high grade. The MASTER FIXED INCOME PORTFOLIO and the ENHANCED EQUITY
PORTFOLIO may each invest up to 5% of net assets in fixed income securities and
up to 5% of net assets in convertible securities rated lower than the high grade
investment standard employed by the Fund (i.e., rated BBB or lower). The MASTER
FIXED INCOME PORTFOLIO and the ENHANCED EQUITY PORTFOLIO will not necessarily
sell particular securities whose ratings are downgraded to below A, but will
sell sufficient amounts from the two classes of (i) below high grade fixed
income securities or (ii) below high grade convertible securities to bring the
total percentage of such securities to 5% or less in each class. Ratings of
securities by rating agencies such as S & P and Moody's evaluate the safety of
principal and interest payments, not the market value risk associated with
changes in interest rates. Credit rating agencies may fail to timely change
such ratings to reflect subsequent events. A debt security may be assigned a
lower rating or cease to be rated after its purchase by the Fund. For
additional descriptions of the risks of these investments and the various
rating grades, see the Statement of Additional Information "Appendix-Description
of Bond Ratings".
INVESTMENTS IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each of the Portfolios may purchase the securities of other investment
companies. The SHORT-TERM GOVERNMENT PORTFOLIO may invest up to 20% of its total
assets in such securities and the MASTER FIXED INCOME PORTFOLIO and ENHANCED
EQUITY PORTFOLIO may each invest up to 35% of their respective total assets in
such securities. However, no Portfolio may own voting stock of any one such
investment company in an amount which, when aggregated with such stock owned by
all affiliated persons of the Fund (as defined in the 1940 Act) exceeds 3% of
the total outstanding voting stock of such investment company.
Such transactions may in some cases raise a Portfolio's transaction costs
relative to a direct investment in the same securities, but in some cases a
Portfolio may benefit from being able to acquire a diversified investment in one
purchase that could not be made economically in a direct fashion. As other
investment companies pay management fees to their investment advisers,
shareholders of a Portfolio which purchases such securities will bear the
proportionate share of such fees as well as the management fees paid by the
Portfolio. In addition, the 1940 Act provides that no investment company in
which the Fund invests is obligated to redeem shares of such company owned by
the Fund in an amount exceeding 1% of such company's outstanding shares during
any period of less than thirty days.
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Investments in the securities of other investment companies by each Portfolio
are intended to (i) provide an investment vehicle for each Portfolio's cash
reserves that the Portfolio does not want to commit to riskier investments, (ii)
facilitate each Portfolio's investment strategies in which high-grade collateral
is required, or (iii) facilitate each Portfolio's investment strategies by
acquiring investments in portfolios of securities more diversified or with
specialized characteristics that could not be efficiently acquired directly. The
SHORT-TERM GOVERNMENT PORTFOLIO will limit its purchases of the securities of
other investment companies to those that invest primarily in the same securities
that the Short-Term Government Portfolio may invest in directly.
LENDING OF SECURITIES
Each Portfolio may lend its investment securities to qualified institutional
investors for the purpose of realizing income. Loans of securities by the
Portfolio will be collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned securities at all
times during which the securities are loaned by marking to market daily, and
such loans will not exceed one-third of the total value of the Portfolio's
securities. Such loans involve risks of delay in receiving additional collateral
or in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially. However, such securities
lending will be made only when, in the Adviser's judgment, the income to be
earned from the loans justifies the attendant risks. Loans are subject to
termination at the option of the Fund or the borrower.
DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis and
sell securities on a delayed delivery basis. These transactions involve a
commitment by the Fund to purchase or sell securities for a predetermined price
or yield, with payment and delivery taking place more than seven days in the
future, or after a period longer than the customary settlement period for that
type of security. When delayed delivery purchases are outstanding, the Fund will
set aside and maintain until the settlement date cash, U.S. Government
securities or liquid high grade debt obligations in an amount sufficient to meet
the purchase price. When purchasing a security on a delayed delivery basis, the
Fund assumes the rights and risks of ownership of the security, including the
risk of price and yield fluctuations, and takes such fluctuations into account
when determining its net asset value, but does not accrue income on the security
until delivery. When the Fund sells a security on a delayed delivery basis, it
does not participate in future gains or losses with respect to the security. If
the other party to a delayed delivery transaction fails to deliver or pay for
the security, the Fund could miss a favorable price or yield opportunity or
could suffer a loss. A Portfolio will not invest more than 25% of its total
assets in when-issued and delayed delivery transactions.
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PORTFOLIO TURNOVER
A Portfolio will not attempt to achieve, nor will it be limited to, a
predetermined rate of portfolio turnover. Turnover rate is the lesser of
purchases or sales of portfolio securities for a year, excluding all securities
with maturities of one year or less, divided by the monthly average value of
such securities. The turnover rates of the ENHANCED EQUITY PORTFOLIO and the
MASTER FIXED INCOME PORTFOLIO ARE not expected to exceed 150%. The turnover of
the SHORT-TERM GOVERNMENT PORTFOLIO may be higher due to the short-term
maturities of the securities purchased, but is not expected to exceed 300%. For
the years ended December 31, 1996 and 1995, the portfolio turnover rates were
31.48% and 10.15% for the Short-Term Government Portfolio, 21.95% and 31.82% for
the Master Fixed Income Portfolio, and 179.47% and 10.15% for the Enhanced
Equity Portfolio. While higher portfolio turnover (100% or more) can involve
correspondingly greater brokerage commissions and other transaction costs than
lower turnover, and such commissions and costs must be borne by the Portfolio
and its shareholders, the brokerage commissions associated with the SHORT-TERM
GOVERNMENT PORTFOLIO are expected to be substantially less than the other
Portfolios as a percentage of assets, as short-term fixed income securities
generally trade on a net basis or with a relatively small commission as a
percentage of the value of the security. High portfolio turnover may also
result in the realization of substantial net short-term capital gains, and any
distributions resulting from such gains will be ordinary income for federal
income tax purposes. It is the Adviser's opinion that such turnover is not
expected to affect the SHORT-TERM GOVERNMENT PORTFOLIO'S status as a regulated
investment company for federal tax purposes. See "Dividends, Distributions and
Taxes."
BORROWING
Each Portfolio may borrow money from banks up to a limit of 15% of the market
value of its assets, but only for temporary or emergency purposes. The Portfolio
would borrow money only to meet redemption requests prior to the settlement of
securities already sold or in the process of being sold by the Portfolio. To the
extent that a Portfolio borrows money prior to selling securities, the Portfolio
may be leveraged; at such times, the Portfolio may appreciate or depreciate in
value more rapidly than if it did not borrow. A Portfolio will repay any money
borrowed in excess of 5% of the market value of its total assets prior to
purchasing securities.
INVESTMENT LIMITATIONS
Each of the Portfolios has adopted certain additional limitations designed to
reduce its exposure to specific situations. These limitations are fundamental
policies that cannot be changed without the approval of the holders of a
majority of the Portfolio's outstanding shares, as defined in the Investment
Company Act of 1940. See "Investment Limitations" in the Statement of Additional
Information.
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MANAGEMENT OF THE FUND
The Officers of the Fund manage its day to day operations and are responsible to
Fund's Board of Trustees.
INVESTMENT ADVISER
Analytic_TSA Global Asset Management, Inc., 700 South Flower Street, Suite 2400,
Los Angeles, CA 90017, is the Adviser of the Fund. The Adviser is a wholly
owned subsidiary of United Asset Management Corporation, a holding company
described under "Management of the Fund" in the Statement of Additional
Information.
The Adviser was founded in 1970 as Analytic Investment Management, Inc. one of
the first independent investment counsel firms specializing in the creation and
continuous management of optioned equity and optioned debt portfolios for
fiduciaries and other long term investors. It is one of the oldest and largest
independent investment management firms in this specialized area. In January
1996, the Adviser acquired and merged with TSA Capital Management which
emphasizes U.S. and global tactical asset allocation, currency management,
quantitative equity and fixed income management, as well as option yield curve
strategies. The Adviser serves, among others, pension and profit-sharing plans,
endowments, foundations, corporate investment portfolios, mutual savings banks,
and insurance companies, for which it manages in excess of $1,000,000,000. It
has also managed another registered investment company since 1978.
Pursuant to an Investment Advisory Agreement with the Fund, the Adviser, subject
to the control and direction of the Fund's Officers and Board of Trustees,
manages the Portfolios of the Fund in accordance with each Portfolio's stated
investment objective and policies, makes investment decisions for the Fund, and
administers the operations of the Fund. Pursuant to separate agreements, the
Adviser also acts as the Fund's transfer agent, dividend disbursing agent, and
shareholder relations servicing agent, and provides accounting and daily pricing
services to the Fund.
SHORT-TERM GOVERNMENT AND MASTER FIXED INCOME PORTFOLIOS
Scott Barker, Greg McMurran and Bob Bannon have been the portfolio managers
for the Short-Term Government and Master Fixed Income Portfolios since
November 1996. Mr. Barker has been a member of the portfolio management and
research team for the Adviser since August 1995. He concurrently serves as a
research analyst with Analysis Group with which he as been associated since
October 1993. Previously, he was with Xontech, Inc. for six years as a
scientific analyst. Mr. McMurran is the Chief Investment Officer of the
Adviser and has been with the firm since October of 1976 as a portfolio
manager. Mr. Bannon is a managing director of the Adviser specializing in
the fixed income area. He initially joined the firm in January 1996 when TSA
Capital Management was merged with the Adviser. He was formerly a managing
director with TSA since April 1995. Previously, he served as a senior bond
strategist with IDEA for four years. They are subject to the supervision of
the Adviser's investment management committee.
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ENHANCED EQUITY PORTFOLIO
Dennis M. Bein, Harindra de Silva and Charles L. Dobson have been the portfolio
managers for the Enhanced Equity Portfolio since November 1996. Mr. Bien has
been a member of the portfolio management and research team for the Adviser
since August 1995. He concurrently serves as a senior associate for Analysis
Group, Inc. with which he has been associated with since August 1990. Dr. de
Silva is the President of the Fund and of the Analytic Optioned Equity Fund and
serves as a managing director of the Adviser, which he joined in May of 1995.
He concurrently serves as a principal of Analysis Group, which he joined in
March 1986. Mr. Dobson is the Executive Vice President of the Fund and Analytic
Optioned Fund and has been a portfolio manager of the Adviser since 1978. They
are subject to the supervision of the Adviser's investment management committee.
MANAGEMENT AND SERVICE FEES
As compensation for furnishing investment advisory, management, and other
services, and costs and expenses assumed, pursuant to the Investment Management
Agreement each Portfolio of the Fund pays the Adviser an annual fee based on the
average daily net assets of that Portfolio. These annual fee schedules are:
Short-Term Government 0.30%
Master Fixed Income 0.45%
Enhanced Equity 0.60%
The Adviser also acts as the Fund's transfer agent, dividend disbursing agent,
and shareholder relations servicing agent for which each Portfolio pays fees
based on the number of accounts and net assets. Each Portfolio also pays the
Adviser a fee based on its net assets to calculate its daily share price and
maintain its general accounting records.
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EXPENSES
In addition to management and service fees, each Portfolio pays all costs and
expenses of its operations, including fees of Trustees not affiliated with the
Adviser, membership dues of trade associations, custodian, legal and accounting
fees, interest charges, brokerage commissions, federal and state taxes,
prospectuses and shareholder reports, expenses of shareholder meetings, and
costs of registration and qualification of the shares of the Portfolio under
various federal and state laws and maintaining and updating such registrations
and qualifications on a current basis. Any shared expense of the Portfolios is
generally apportioned to each Portfolio based on its relative total assets
within the Fund unless some other expense allocation method is determined by the
Board of Trustees to be more appropriate.
The Adviser has voluntarily agreed to reimburse annual Portfolio expenses
including advisory fees (but excluding interest, taxes, and extraordinary
expenses) that exceed 0.60% and 1.0% of average daily net assets for the Short-
Term Government and Enhanced Equity Portfolios respectively until
December 31, 1997. During 1996, the ratios of operating expenses to average net
assets in the Short-Term Government Portfolio, Master Fixed Income Portfolio,
and Enhanced Equity Portfolio, before expense reimbursements, were 0.76%, 0.97%
and 1.51%, respectively. In calculating Portfolio expenses for purposes of such
reimbursement, any commission reimbursement from broker-dealers will not be
applied. After December 31, 1997, the Adviser may voluntarily waive all or a
portion of its management fee and/or absorb certain expenses of a Portfolio.
Any such waiver or absorption will have the effect of lowering the overall
expense ratio for a Portfolio and increasing the overall total return and yield
to investors at the time any such amounts were waived and/or absorbed.
BROKERAGE
Under the terms of the Investment Advisory Agreement, the Adviser is authorized
to employ broker-dealers to execute orders for the purchase and sale of
portfolio securities and for other portfolio transactions who in its best
judgment can provide "best execution". In determining the abilities of the
broker-dealer to provide execution of a particular portfolio transaction, the
Adviser will consider all relevant factors including the execution capabilities
required by the transaction or transactions; the ability and willingness of the
broker-dealer to facilitate each transaction by participation therein for its
own account; the familiarity with sources from or to whom particular securities
might be purchased or sold; the quality and continuity of service rendered by
the broker-dealer with regard to a Portfolio's other transactions; and any other
factors relevant to the selection of a broker-dealer for a particular and
related transactions of a Portfolio. Provided that best execution is obtained,
the Adviser may consider sales of the Portfolios' shares and the provision of
research services to the Adviser as factors in the selection of broker-dealers
to execute portfolio transactions.
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In addition, the Fund may enter into agreements whereby a portion of the
commissions earned by a broker-dealer on the transactions placed with a broker-
dealer will be reimbursed to the Portfolios by the payment of all or a portion
of the Portfolios' custodian fee or other Portfolio expense. Such indirect
payment of expenses, if any, will be in addition to any expense reimbursement by
the Adviser. The Fund has entered into such agreements and with respect to the
Master Fixed Income and Enhanced Equity Portfolios, payment of expenses
aggregated $15,140 and $3,920, respectively, for the year ended December 31,
1996.
Fixed income securities are traded primarily in the over-the-counter market.
They are generally traded on a net basis and do not normally involve either
brokerage commission or transfer taxes. The cost of executing such portfolio
transactions will primarily consist of dealer spreads and underwriting
commissions. The Fund will always attempt to deal with dealers where better
prices and execution are available. Securities may also be purchased directly
from the issuer.
THE SHARE PRICE OF EACH PORTFOLIO
The share price or "net asset value" per share of each Portfolio is computed
once daily at 4:30 P.M. Eastern Time, after the close of trading of the New York
Stock Exchange and the various option exchanges, or such other time as is
determined by or under the direction of the Board of Trustees, on each day in
which there is a sufficient degree of trading in the securities that might
materially affect the Portfolio's net asset value. The Portfolios will not be
priced on days when the New York Stock Exchange is closed. In addition, the
Short-Term Government and Master Fixed Income Portfolios will not be priced on
days when the bond market is closed, such as certain bank holidays, even though
the New York Stock Exchange may be open. The share price is calculated by
dividing the total value of the Portfolio's assets, less total liabilities, by
the total outstanding shares of the Portfolio. Expenses and interest on
portfolio securities are accrued daily.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair market value as determined in good faith under procedures
established by the Board of Trustees. Bonds and fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed by the Board to reflect fair market value. See "Portfolio Valuation"
in the Statement of Additional Information.
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DIVIDENDS, CAPITAL GAINS AND TAXES
DISTRIBUTIONS
Dividends consisting of net investment income are declared and payable to
shareholders of record daily by both the Short-Term Government and Master Fixed
Income Portfolios. Such dividends are paid on the first business day of each
month. Dividends consisting of net investment income of the Enhanced Equity
Portfolio are declared and payable to shareholders of record on the last
business day of each calendar quarter. For the purpose of calculating such
dividends, net investment income consists of income accrued on portfolio assets,
less accrued expenses. In addition, net realized capital gains of all
Portfolios, if any, are distributed annually.
The Fund's dividend and capital gains distributions may be reinvested in
additional shares or received in cash. See "SELECTING A DISTRIBUTION OPTION".
TAX STATUS OF THE FUND
Each Portfolio of the Fund intends to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so that it will not be
liable for federal income taxes on amounts distributed to shareholders as
dividends and capital gains.
However, the Code contains a number of complex tests relating to qualification
which a Portfolio might not meet in any particular year. For example, if a
Portfolio derives 30% or more of its gross income from the sale of securities
held for less than 3 months, it may fail to qualify. If a Portfolio did not so
qualify, it would be treated for tax purposes as an ordinary corporation and
receive no tax deduction for payments made to shareholders.
TAXATION OF SHAREHOLDERS
Distributions paid by each of the Portfolios from net investment income are
taxable to shareholders as ordinary income, whether received in cash or
reinvested in additional shares. Long-term capital gains distributions are
taxable to shareholders as long-term capital gains, regardless of how long such
shareholders have held their shares.
Any capital gain distribution paid by the Fund has the effect of reducing the
net asset value per share on the reinvestment date by the amount of the
distribution. Therefore, a capital gain distribution paid shortly after a
purchase of shares by a shareholder would represent, in substance, a partial
return of capital to the shareholder (to the extent it is paid on the shares so
purchased), even though it would be subject to income taxes as discussed above.
Accordingly, prior to purchasing shares, a shareholder should carefully consider
the impact of dividends or capital gains distributions which are expected to be
or have been announced.
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For corporate investors, dividends paid by the Short-Term Government Portfolio
will generally not qualify for the dividends received deduction, a minimal
amount of dividends paid by the Master Fixed Income Portfolio will qualify for
the deduction, and some fraction of dividends by the Enhanced Equity Portfolio
will qualify for such deduction. The Fund will notify its shareholders annually
of the tax status of its dividends and capital gain distributions.
The sale of shares of the Fund is a taxable event and may result in a capital
gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between Portfolios of the Fund.
Dividend distributions, capital gains distributions, and capital gains or losses
from redemptions and exchanges may be subject to state and local taxes.
However, depending on provisions of your state's tax law, the portion of a
Portfolio's income derived from "full faith and credit" U.S. Treasury and agency
obligations may be exempt from state and local taxes. The Fund will indicate
each year the portion of a Portfolio's income, if any, that may qualify for this
exemption.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemption proceeds paid to shareholders who have not
complied with IRS taxpayer identification regulations. Such withholding
requirement may be avoided by certifying on the Account Registration your proper
Social Security or Tax Identification Number and further certifying that you are
not subject to backup withholding. Dividends, capital gains distributions, and
redemption proceeds paid to foreign shareholders will generally be subject to
withholding at the rate of 30% (or lower treaty rate). You should consult your
own tax adviser regarding specific questions about federal, state, or local
taxation.
GENERAL INFORMATION
The Fund is a Delaware business trust organized on November 18, 1992. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of beneficial interest. The Board of Trustees has the power to designate one or
more classes ("Portfolios") of shares of beneficial interest and to classify or
reclassify any unissued shares with respect to such classes. Presently the Fund
is offering shares of the three Portfolios described above.
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SHARES OF BENEFICIAL INTEREST
The shares of each Portfolio, when issued, are fully paid and non-assessable,
are redeemable at the option of the holder, are fully transferable and have no
conversion or pre-emptive rights. Shares are also redeemable at the option of
the Fund under certain circumstances (see "Redeeming Shares"). Each share of a
Portfolio is equal as to earnings, expenses and assets of the Portfolio and, in
the event of liquidation of the Portfolio, is entitled to an equal portion of
all of the Portfolio's net assets. Shareholders of the Fund are entitled to one
vote for each full share held and fractional votes for fractional shares held,
and will vote in the aggregate and not by Portfolio except as otherwise required
by law or when the Board of Trustees determines that a matter to be voted upon
affects only the interest of the shareholders of a particular Portfolio. Voting
rights are not cumulative, so that the holders of more than 50% of the shares
voting in any election of Trustees can, if they so choose, elect all of the
Trustees. While the Fund is not required, and does not intend, to hold annual
meetings of shareholders, such meetings may be called by the Trustees at their
discretion, or upon demand by the holders of 10% or more of the outstanding
shares of any Portfolio for the purpose of electing or removing Trustees.
As of March 31, 1997, Trust Company of Knoxville held of record more than 25% of
the Master Fixed Income Portfolio's outstanding shares, and may be deemed
controlling persons of the Fund under the 1940 Act.
SHARE CERTIFICATES
All shares (including reinvested dividends and capital gain distributions) are
issued or redeemed in full and fractional shares rounded to the fourth decimal
place. No share certificates will be issued. Instead, an account will be
established for each shareholder and all shares purchased will be held in book-
entry form by the Fund.
SHAREHOLDER SERVICES
Shareholder inquiries should be addressed to Analytic-TSA Global Asset
Management, Inc. , Attn: Shareholder Services, 700 South Flower Street, Suite
2400, Los Angeles, CA 90017; telephone (800) 374-2633; or FAX (213)688-8856.
CONFIRMATION AND STATEMENTS
Whenever a transaction takes place in an account, a confirmation statement will
be sent to the shareholder of such transaction. This confirmation statement
will include complete details of all transactions for the calendar year to date.
For purposes of confirming dividend and/or capital gain distributions,
shareholders of the Short-Term Government and Master Fixed Income Portfolios may
expect statements at least monthly, and shareholders of the Enhanced Equity
Portfolio may expect statements at least quarterly.
FINANCIAL STATEMENTS
The Fund will send to shareholders of each of the Portfolios an unaudited semi-
annual financial statement. The annual financial statements of the Fund will be
audited by Deloitte & Touche LLP, independent public accountants.
CUSTODIAN
The Fund's custodian is The Union Bank of California, N.A., 475 Sansome Street,
San Francisco, California 94111.
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ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the Securities and
Exchange Commission under the Securities Act of 1933. Copies of the
Registration Statement may be obtained at a reasonable charge from the
Commission or may be examined, without charge, at the office of the Commission
in Washington, D.C.
YIELD, TOTAL RETURN, AND OTHER CALCULATIONS
From time to time the Fund may advertise the "yield", "total return", and
"average annual total return" of one or more of the Portfolios. Yield and return
calculations are based on historical results, do not take into account any
federal or state income taxes which may be payable, and are not intended to
indicate future performance.
The "30-day yield" of a Portfolio is calculated by dividing net investment
income per share earned during a thirty-day period by the net asset value per
share on the last day of the period. Net investment income includes interest and
dividend income earned on the Portfolio's securities after subtracting all
expenses that have been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over thirty days is
compounded monthly for six months and then annualized. Methods used to calculate
advertised yields are standardized for all stock and bond mutual funds.
"Total return" and "average annual total return" are more comprehensive measures
of the Portfolio's historical performance than the "30-day yield". Total return
measures both net investment income and the effect of realized and unrealized
appreciation or depreciation of the Portfolio on a hypothetical shareholder,
assuming reinvestment of all distributions into new Portfolio shares.
Specifically, the total return for a stated period is calculated by assuming a
hypothetical investment in a Portfolio at the beginning of a period; then,
assuming reinvestment of all distributions into new Portfolio shares, the total
return is calculated as the percentage change in the total dollar value of the
investment over the period in question. Average annual total return expresses
this same total return as an annualized rate which, if compounded annually over
the same period, would result in the same total return.
These standardized performance measures present historical returns. In addition,
the Fund may present non-standardized measures which relate to the returns and
risk or variability of the returns of a Portfolio, including "standard
deviation of returns", "beta", "alpha", and "duration". These measures are not
standardized, as they involve choices regarding the length of historical
measurement periods, the frequency of such measurements, the choice of market
benchmarks, and other factors which are beyond the scope of current SEC
performance standards. Hence, these measures may not be directly comparable
among different funds or different measurers of the same funds. These risk
measurements are also based on historical results and are not intended to be an
indication of future performance.
The Fund may also include comparative performance information in advertising or
marketing shares.
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SHAREHOLDER GUIDE
OPENING AN ACCOUNT
To open a new account, either by mail or by wire, complete and return a signed
Account Registration. Please indicate the Portfolio(s) you have chosen and the
respective amount(s) to be invested.
MINIMUM INVESTMENTS
There is no minimum initial or subsequent purchase of Portfolio shares by tax
deferred retirement plans (including IRA, SEP-IRA and profit sharing and money
purchase plans) or Uniform Gifts to Minors Act accounts. For other investors
the initial minimum purchase is $5,000 invested in any proportion among the
Portfolios and there is no minimum for subsequent purchases.
PURCHASING SHARES
Shares of the Portfolios are purchased directly from the Fund with no sales
charge or commission at the net asset value per share next computed after an
order and payment are received by the Fund. Any order received after 1:00 P.M.
Pacific Time will be processed at the next day's closing net asset value.
Broker-dealers who place orders for the purchase of shares of any Portfolio on
behalf of their customers may charge the customers for that service.
The Fund reserves the right to reject any purchase order or to suspend or modify
the continuous offering of its shares.
BY MAIL
FOR INITIAL INVESTMENTS, COMPLETE AND SIGN AN ACCOUNT REGISTRATION FORM. FOR
SUBSEQUENT INVESTMENTS, COMPLETE A MAIL REMITTANCE FORM.
The simplest way to make initial purchases of Portfolio shares is to mail a
completed and signed Account Registration together with a check made payable to
THE ANALYTIC SERIES FUND (REFERENCE PORTFOLIO NAME). For subsequent purchases,
complete the Mail Remittance Form (located on a statement) and return it with a
check made payable to THE ANALYTIC SERIES FUND (REFERENCE PORTFOLIO NAME).
Overnight mail service is suggested. Shares will be purchased at the net asset
value per share next determined after an order and payment are received by the
Fund.
34
<PAGE>
BY WIRE
TELEPHONE SHAREHOLDER SERVICES AT (800) 374-2633 BEFORE WIRING FUNDS.
Before wiring funds, you must telephone Shareholder Services at (800) 374-2633
with the sending bank's name, date and amount being wired to insure proper
investment. There is no charge by the Fund for wire purchases.
Federal funds wiring instructions are:
The Union Bank of California, N.A.
ABA #122000496 for San Francisco Trust Account #001-094166
The Analytic Series Fund - (NAME OF PORTFOLIO)
For further credit to: (THE ACCOUNT REGISTRATION AND ACCOUNT #)
Please be sure your bank includes the name of the Portfolio and your account's
registration name and, in the case of subsequent investments, the account number
assigned by the Fund.
NOTE: Federal funds wire purchase orders will be accepted only when the Fund
and Custodian Bank are open for business.
FOR INITIAL PURCHASES ONLY: No purchases will be processed until a completed and
signed Account Registration has been received.
BY EXCHANGE
You may open an account for a new Portfolio or purchase additional shares in any
Portfolio by making an exchange from an existing Portfolio account or from an
existing account in the Analytic Optioned Equity Fund. You may not open an
account by exchange unless you have completed an account application.
If you open an account by exchange, the new account will have identical
registration and special instructions (such as Distribution Option, Telephone
Redemption Instructions, Telephone Exchange Privileges, and duplicate
confirmation/statements) as the existing account.
For further information concerning exchanges, see "EXCHANGING SHARES".
SELECTING A DISTRIBUTION OPTION
You must select one of the three distribution options by indicating so on the
Account Registration:
AUTOMATIC REINVESTMENT OPTION - Both dividends and capital gains distributions
will be reinvested in additional Portfolio shares. This option will be selected
for you automatically unless you specify one of the other options.
CASH DIVIDEND OPTION - Your dividends will be paid in cash and your capital
gains distributions will be reinvested in additional Portfolio shares.
ALL CASH OPTION - Dividends and capital gains distributions will be paid in
cash.
To change your option, written instructions with signature(s) guaranteed must be
received by Shareholder Services 5 business days prior to the effective date of
the change. For further information concerning signature guarantees, see
"SIGNATURE GUARANTEES".
35
<PAGE>
REDEEMING SHARES
Shares are redeemed without charge at the net asset value per share next
computed after instructions and required documents are received in proper form.
Any instructions received after 1:00 P.M. Pacific Time will be processed at the
next day's net asset value. See the discussions below, under "By Telephone",
"By Mail" and "By Exchange" for information regarding the required documents.
To be in "proper form" the documents must be complete and executed by all
required parties.
Any redemption may be more or less than your cost, depending on the market value
of the securities held by the Portfolio. Payment will be made as promptly as
possible but in no event later than 3 business days from the day the redemption
request is received. See "Redemption of Shares" in the Statement of Additional
Information for certain restrictions that may apply.
BY TELEPHONE
Provided that Telephone Redemption Privileges have been established (by
completing the "Telephone Redemption Privileges" portion of the Account
Registration or by subsequent written instructions with signature(s)
guaranteed), a shareholder may redeem all or part of his shares by calling
Shareholder Services at (800) 374-2633.
No request for telephone redemption will be accepted except where redemption
proceeds are to be remitted to a bank account that has been predesignated in
writing. The redemption proceeds will be wired by the Fund without charge to
the bank designated in the instructions. Any changes to the telephone
redemption instructions must be in writing with signature(s) guaranteed.
The Fund's transfer agent will employ procedures designed to provide reasonable
assurance that instructions communicated by telephone are genuine and, if it
does not do so, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures employed by the transfer agent include
requiring the following information at the time of the telephone call:
Account number;
Registration of account; and
Social Security Number or Tax I.D.
NOTE: Neither the Fund nor the transfer agent is responsible for unauthorized
telephone redemptions by a person reasonably believed to be a shareholder unless
the transfer agent has received written notice canceling the telephone
redemption authorization. The Fund may change or discontinue the telephone
redemption privilege without notice. For your protection, the Fund and its
agents reserve the right to record all calls.
The Fund reserves the right to refuse a telephone redemption if it believes it
is advisable to do so. Telephone redemptions may be difficult to implement
during periods of drastic economic or market changes, which may result in an
unusually high volume of telephone calls. If a shareholder is unable to reach
Shareholder Services by telephone, shares may be redeemed in writing as
described below.
36
<PAGE>
BY MAIL
A shareholder may redeem all or part of his shares by written request to
Shareholder Services. The written request must be endorsed by the registered
owner(s) exactly as the account is registered, including any special capacity of
the registered owner(s). Where the owner(s) have not arranged with the Fund for
redemption proceeds to be remitted to a predesignated bank account, the Fund
requires that the signature(s) be guaranteed. Fiduciaries, corporations, and
other entities may also be required to furnish supporting documents.
BY EXCHANGE
Shares may be redeemed by making an exchange into another Analytic Series Fund
Portfolio or for shares of the Analytic Optioned Equity Fund. For more
information, see "EXCHANGING SHARES".
DELAYED PAYMENT
In the event that the Fund is requested to redeem shares for which it has not
received good payment (e.g., cash or cashier's check on a U.S. bank), it may
delay the mailing of a redemption check until such time as it is determined that
good payment has been collected for the purchase of such shares. In addition,
the Fund reserves the right to delay the mailing of a redemption check where the
shares to be redeemed have been purchased by check within 15 days prior to the
date the redemption request is received, unless the Fund has been advised that
the check used for investment has been cleared for payment by the shareholder's
bank. However, such delay will not be longer than 15 days after the purchase
date.
The Fund may suspend the redemption right or postpone payment at times when the
New York Stock Exchange is closed or under certain other circumstances permitted
by the Securities and Exchange Commission.
PAYMENT-IN-KIND
The Fund has made an election with the Securities and Exchange Commission to pay
in cash all redemptions requested by any shareholder of record limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the net assets of
the Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Commission. Redemptions in excess of the
above limits may be paid in whole or in part in readily marketable investment
securities or in cash, as the Trustees may deem advisable. However, payment
will be made wholly in cash unless the Trustees believe that economic or market
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities, such
securities will be valued as set forth under "The Share Price of Each Portfolio"
and a redeeming shareholder will normally incur brokerage expenses if the
shareholder converts these securities to cash.
37
<PAGE>
BACKUP WITHHOLDING
The Fund is required to withhold 31% of redemptions paid to shareholders who
have not complied with IRS taxpayer identification regulations. You may avoid
this withholding requirement by certifying on the Account Registration your
proper Social Security or Taxpayer Identification Number and by further
certifying that you are not subject to backup withholding.
SIGNATURE GUARANTEES
To protect the shareholder's account and the Fund from fraud, signature
guarantees are required for certain redemptions. The purpose of signature
guarantees is to verify the identity of the party who has authorized the
redemption. A guarantor must be a commercial bank or trust company; a broker or
dealer, municipal securities broker or dealer, or government securities broker
or dealer; a credit union; a national securities exchange, registered securities
association or clearing agency; or a savings association. Signature guarantees
are required for:
any redemption request for an account where the owner(s) have not arranged with
the Fund for redemption proceeds to be remitted to a predesignated bank account;
transfers or exchanges between accounts which are not identically registered;
the addition of, or change in the address and wiring instruction for, financial
institutions designated to receive redemptions sent directly into a
shareholder's account; and
redemptions involving disputed or deceased shareholder accounts.
The Fund reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution.
MINIMUM ACCOUNT BALANCE REQUIREMENT
With the exception of qualified retirement plan accounts, the Fund may liquidate
any shareholder's account whenever, due to redemptions, the value of the account
falls below the minimum account balance of $1,000 and the shareholder fails to
purchase sufficient shares to bring the value of the account to $1,000 within 90
days after receiving written notice sent by the Fund.
EXCHANGING SHARES
Should your investment goals change, you may exchange your shares between the
Portfolios in the Fund or for shares of the Analytic Optioned Equity Fund.
Exchanges are processed at the net asset value per share next computed after the
receipt of instructions in proper form. Any instruction received after 1:00
P.M. Pacific Time will be processed at the next day's net asset value.
BY TELEPHONE
Provided that Telephone Exchange Privileges have been established (by completing
the "Telephone Exchange Privileges" portion of the Account Registration or by
subsequent written instructions with signature(s) guaranteed), a shareholder may
exchange all or part of his shares by calling Shareholder Services at (800) 374-
2633.
38
<PAGE>
The Fund's transfer agent will employ procedures designed to provide reasonable
assurance that instructions communicated by telephone are genuine and, if it
does not do so, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures employed by the transfer agent include
requiring the following information at the time of the telephone call:
Account number;
Registration of account; and
Social Security Number or Tax I.D.
NOTE: Neither the Fund nor the transfer agent is responsible for unauthorized
telephone exchanges by a person reasonably believed to be a shareholder unless
the transfer agent has received written notice canceling the telephone exchange
authorization. The Fund may change or discontinue the telephone exchange
privilege without notice. For your protection, the Fund and its agents reserve
the right to record all calls.
The Fund reserves the right to refuse a telephone exchange if it believes it is
advisable to do so. Telephone exchanges may be difficult to implement during
periods of drastic economic or market changes, which may result in an unusually
high volume of telephone calls. If a shareholder is unable to reach Shareholder
Services by telephone, shares may be exchanged in writing as described below.
BY MAIL
A shareholder may exchange all or part of his shares by written request to
Shareholder Services. The written request must be endorsed by the owner(s)
exactly as the account is registered, including any special capacity of the
registered owner(s). The Fund requires that the signature(s) be guaranteed.
IMPORTANT EXCHANGE INFORMATION
Before you make an exchange you should consider the following:
Please read the prospectus of the Fund or of Analytic Optioned Equity Fund
before making an exchange.
An exchange is treated as a redemption and a purchase and any gain or loss on
the transaction is taxable.
Recently purchased shares may not be exchanged until payment for the purchase
has been collected. The Fund reserves the right to defer honoring exchange
requests where shares to be exchanged have been purchased by check within 15
days prior to the date of the exchange request, unless the Fund has been advised
that such check has been cleared for payment by the shareholder's bank.
Exchanges are accepted only if the registrations of the accounts are identical.
39
<PAGE>
The redemption and purchase price of shares redeemed by exchange is the net
asset value per share of the respective Portfolios next computed after the Fund
receives instructions in proper form.
No exchange can be made unless the shares to be purchased have been registered
in the state of the purchaser.
EXCHANGE PRIVILEGE LIMITATIONS
The Fund's exchange privilege is not intended to afford shareholders a way to
speculate on short-term market movements. Accordingly, in order to prevent
excessive use of the Exchange Privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the Fund may establish a
policy of limiting excessive exchange activity.
WITHDRAWAL PLAN
A shareholder may establish a Withdrawal Plan under which the shareholder
receives a check monthly, quarterly, or annually in a predetermined amount of
not less than $100. All income dividends and any realized gain distributions
attributable to the account will be reinvested at net asset value on the payment
dates, as with other shareholder accounts, and shares of the Portfolio(s) will
be redeemed from the account in order to make the required withdrawal payment.
If a date is not specified by the shareholder, then monthly distributions under
the Withdrawal Plan will be processed on the first business day of the month,
quarterly distributions will be processed on the last business day of the
calendar quarter, and annual distributions will be processed on the last
business day of the calendar year. The shareholder may change or terminate his
Withdrawal Plan instructions by notifying the Fund in writing at least 5
business days prior to the effective date of the change.
IMPORTANT WITHDRAWAL PLAN INFORMATION
Withdrawal payments should not be considered dividends, yield, or income on an
investment, since portions of each payment may consist of a return of capital.
Depending upon the size and frequency of payments and fluctuations in value of
the Fund's shares redeemed, redemptions for the purpose of making Withdrawal
Plan disbursements may reduce or even exhaust a shareholder's account.
40
<PAGE>
THE ANALYTIC SERIES FUND
INVESTMENT ADVISER
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICES AGENT
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
CUSTODIAN
The Union Bank of California, N.A.
Mutual Fund Services Dept., Trust Group
475 Sansome Street, 11th Floor
San Francisco, CA 94111
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90071
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, CA 90017
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR THE ADVISER. THIS PROSPECTUS DOES NOT
CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
41
<PAGE>
THE ANALYTIC SERIES FUND
700 SOUTH FLOWER STREET, SUITE 2400
LOS ANGELES, CA 90017
(800) 374-2633
FAX: (213)688-8856
PROSPECTUS DATED MAY 1, 1997
A NO-LOAD OPEN-END FUND WITH NO SALES CHARGE OR REDEMPTION FEE
TABLE OF CONTENTS
Page Page
------------------------------------------------------------------------------
Highlights 2 Dividends, Capital Gains and Taxes 28
Fund Expenses 4 General Information 30
Financial Highlights 5 Yield, Total Return, and Other
Calculations 31
Investment Objective and Policies 8
Investment Risks 12 SHAREHOLDER GUIDE 37
Who Should Invest 13 Opening an Account 37
Implementation of Policies 14 Purchasing Shares 37
Management of Fund 26 Redeeming Shares 39
Investment Adviser 26 Exchanging Shares 41
The Share Price of Each Portfolio 28 Withdrawal Plan 43
42
<PAGE>
PART B
THE ANALYTIC SERIES FUND
700 South Flower Street. Suite 2400
Los Angeles, CA 90017
(800) 374-2633
FAX (213) 688-8856
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 1997
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Fund's current Prospectus dated May 1, 1997. To obtain
this Prospectus without charge, please write or call Shareholder Services at the
address or telephone number above.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS PAGE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund 2
- --------------------------------------------------------------------------------
Investment Objective and Policies 2
- --------------------------------------------------------------------------------
Investment Limitations 18
- --------------------------------------------------------------------------------
Purchase of Shares 22
- --------------------------------------------------------------------------------
Redemption of Shares 22
- --------------------------------------------------------------------------------
Management of the Fund 22
- --------------------------------------------------------------------------------
Principal Shareholders 24
- --------------------------------------------------------------------------------
Investment Advisory and Other Services 25
- --------------------------------------------------------------------------------
Portfolio Transactions 26
- --------------------------------------------------------------------------------
Taxation 27
- --------------------------------------------------------------------------------
Yield, Total Return, and Other Performance Statistics 31
- --------------------------------------------------------------------------------
Additional Information 35
- --------------------------------------------------------------------------------
Appendix-Description of Bond Ratings 36
- --------------------------------------------------------------------------------
B-1
<PAGE>
THE FUND
INVESTMENT OBJECTIVE AND POLICIES
CERTAIN INVESTMENT RISKS
All of the Portfolios are expected to have fluctuations in their net asset
values. However, the Short-Term Government Portfolio is expected to have the
lowest such volatility and the Enhanced Equity Portfolio is expected to have the
highest volatility of the three Portfolios.
To illustrate the historical volatility associated with i) short-term bonds,
ii) a diversified bond portfolio, and iii) a diversified common stock portfolio,
the following table sets forth the extremes for annualized total returns as well
as the average annual total return for three indexes representing these sectors
of the market:
ONE TO THREE YEAR MATURITY U.S. TREASURY NOTES (1979-1996)
(Merrill Lynch 1 to 3 Year Treasury Index)
One Year Five Years Ten Years
-------- ---------- ---------
Best 21.2% 14.3% 11.4%
Worst 0.6 6.7 7.7
Average 9.5 9.8 9.6
U.S. GOVERNMENT AND CORPORATE BONDS (1973-1996)
(Lehman Brothers Government/Corporate Bond Index)
One Year Five Years Ten Years
-------- ---------- ---------
Best 31.1% 18.0% 13.7%
Worst -3.5 3.3 7.5
Average 9.3 9.8 10.5
U.S. COMMON STOCKS (1926-1996)
(Standard & Poor's 500 Composite Stock Index)
One Year Five Years Ten Years
-------- ---------- ---------
Best 54.0% 23.9% 20.1%
Worst -43.3 -12.5 -0.9
Average 12.7 10.4 10.8
The total returns shown should not be taken as an indication of future
performance of any Portfolio, but merely as an illustration of the variability
associated with different market sectors. The fluctuations in the total returns
of the above indexes are associated with various risks to which the Portfolios
in the Fund are also exposed, although to different degrees. These risks
include but are not limited to: i) interest rate risk, ii) credit risk, and
iii) equity risk.
Interest rate risk is the potential for a decline in bond prices due to rising
interest rates. In general, bond prices vary inversely with interest rates. When
interest rates rise, bond prices generally fall. Conversely, when interest rates
fall, bond prices generally rise. The change in price depends on several
factors, including the bond's maturity date. In general, bonds with longer
maturities are more sensitive to interest rates than bonds with shorter
maturities. Another name for interest rate risk is DURATION RISK.
B-2
<PAGE>
As an illustration of interest rate risk, the table below shows the effect of a
sudden 2% change in interest rates on two bonds of varying maturities:
Percent Change in the Price of a Par Bond Yielding 6%
2% Increase In 2% Decrease In
Stated Maturity Interest Rates Interest Rates
------------------------- -------------- --------------
Short-Term (2 years) -4% +4%
Intermediate-Term (10 years) -13% +16%
The chart is intended to provide you with guidelines for determining the degree
of interest rate risk you may be willing to assume. The yield and price changes
shown should not be taken as representative of a Portfolio's current or future
yield or expected changes in a Portfolio's share price.
In addition to interest rate risk, each Portfolio that holds fixed income
securities is subject to varying degrees of credit risk. Credit risk, also known
as default risk, is the possibility that a bond issuer will fail to make timely
payments of interest or principal to a Portfolio. The credit risk of a Portfolio
depends on the quality of its investments. Reflecting their higher risks,
lower-quality bonds generally offer higher yields (all other factors being
equal).
When a Portfolio holds mortgage-backed securities, it is also subject to
prepayment risk. Prepayment risk is the possibility that, as interest rates
fall, homeowners are more likely to refinance their home mortgages. When these
mortgages are refinanced, the principal on securities backed by these mortgages
is "prepaid" earlier than expected. If the Portfolio has paid a premium for
such securities, it will incur a loss, and the premium will be amortized over a
shorter period than anticipated at the time of purchase, thus reducing the
effective yield on the securities. If the Portfolio that holds these securities
wants to reinvest the unanticipated principal in new fixed income securities,
it will generally be at lower interest rates. This reduces the interest income
of the Portfolio. In addition, when interest rates fall, the market prices of
the mortgage-backed securities will not rise as much as comparable Treasury
securities, as bond market investors anticipate the increase in mortgage
prepayments.
A risk similar to prepayment risk, but generally associated with corporate
obligations, is call risk. Call provisions, common in many corporate bonds that
may be held by the Portfolio, allow bond issuers to redeem bonds prior to
maturity. When interest rates are falling, bond issuers often exercise call
provisions, paying off bonds that carry high stated interest rates and often
issuing new bonds at lower rates. For the Portfolio, the result would be that
bonds with high interest rates are "called", the amortization period for any
purchase premiums would be shorter than expected and the bonds must be replaced
with lower yielding instruments. In these circumstances, the income of the
Portfolio would decline.
Equity risk is the potential for price declines associated generally with common
stocks and equity-type investments. The magnitude of this risk associated with
any particular investment position can vary widely depending on a number of
factors, including the business of the issuer, market conditions in general, the
particular type of security, and the possibility that the position may be HEDGED
with other securities. The portion of equity risk that is particular to the
securities of a given issuer and uncorrelated to common stocks in general is
expected to be reduced by the diversification strategies of a Portfolio.
However, even well diversified common stock portfolios have significant total
equity risk, as illustrated by the table regarding "U.S. Common Stocks" above.
B-3
<PAGE>
Interest rate risk and credit risk for the SHORT-TERM GOVERNMENT PORTFOLIO
should be modest. Because of the short-term average weighted duration of this
Portfolio, it is expected to exhibit low to moderate price fluctuations as
interest rates change. Credit risk should be negligible for the Portfolio's
holding of US. Treasury securities. In relative terms, credit risk will be
slightly higher for the Portfolio's holding of US. Government agency
obligations. Even though they carry top (AAA) credit ratings from S & P or
Moody's, some agency obligations are not explicitly guaranteed by the U.S.
Government and so are perceived as somewhat riskier than comparable Treasury
securities. The Portfolio may also, to a limited extent, invest in the
securities of foreign governments. The Portfolio expects that these investments
will generally carry AAA and AA ratings from S & P or Moody's at the time of
purchase, although they may also be rated A or, if unrated, be determined by the
Adviser to be equivalent to such ratings. Accordingly, the Portfolio's holdings
of foreign securities exposes the Portfolio to more credit risk than if it
exclusively invested in U.S. Government securities. The Portfolio may also hold
mortgage-backed securities such as GNMA securities, which are backed by the full
faith and credit of the U.S. Government, but which expose the Portfolio to
prepayment risk.
The MASTER FIXED INCOME PORTFOLIO has a higher degree of both interest rate risk
and credit risk than the SHORT-TERM GOVERNMENT PORTFOLIO. This Portfolio is
expected to exhibit moderate to high price fluctuations as interest rates
change, because the Portfolio will generally have significant holdings of both
intermediate-term and longer term bonds. The Portfolio will have various credit
risks through its holding of high grade (A or higher) obligations. When the
Portfolio makes a purchase of a debt security with a given quality rating, there
is the risk that the rating will be subsequently downgraded to either a lower
investment grade or a rating below high grade. Such a down-grading or its
anticipation is almost always accompanied by a drop in the market price of the
bond. In addition, even though a particular debt security may have a relatively
high quality rating from a rating agency, the issuer may still default on its
obligations to the Portfolio. This Portfolio is expected to normally have
significant holdings in mortgage-backed securities, which exposes it to
prepayment risk. It also is subject to call risk.
Reflecting these increased interest rate, credit, prepayment, and call risks,
the MASTER FIXED INCOME PORTFOLIO will generally offer higher yields than the
SHORT-TERM GOVERNMENT PORTFOLIO. However, it is sometimes the case in the bond
market that shorter maturity bonds offer higher yields than longer maturity
bonds. This is known as an INVERTED YIELD CURVE environment. In such an
environment, it is possible that the Short-Term Government Portfolio may have,
for example, a higher 30-day yield than the Master Fixed Income Portfolio. No
matter what the yield curve environment, yields are not a comprehensive measure
of a Portfolio's performance nor a guide to expected future performance. More
comprehensive measures of a Portfolio's historical performance are its average
annual total return and its variability of total return.
The SHORT-TERM GOVERNMENT PORTFOLIO should have no equity risk, as the Portfolio
does not intend to acquire any investments with equity-type characteristics. The
MASTER FIXED INCOME PORTFOLIO is expected to have low to moderate equity risk
through its use of convertible and synthetic convertible security positions and
its use of covered call and cash secured put investments. Convertible bonds are
hybrid securities that generally pay a fixed rate of interest but also may be
converted into a fixed amount of the common stock of the issuer; this
"conversion value" gives the security some equity risk. A synthetic convertible
investment is a combination investment in which the Portfolio purchases both (i)
high-grade cash equivalents, high grade debt obligations of an issuer or U.S.
Government securities and (ii) call options or warrants on the common stock of
the same or different issuer with some or all of the anticipated interest income
from the debt obligation that will be earned over the holding period of the
option or warrant. Since convertible securities often have credit ratings that
are below high grade, the Portfolio's use of synthetic convertible positions may
enable the Portfolio to receive both interest income and some equity exposure
without the typical credit risk of many convertible bonds or notes. See
"Convertible Securities, Synthetic Convertible Positions and Warrants". In
pursuit of its investment objective, the Portfolio may also invest in covered
call and cash secured put investments. Covered call and cash secured put
investments are equity positions hedged with options which are expected, on
average, to have similar average volatility over time to longer maturity
corporate or convertible bonds. The Portfolio will make such investments when it
expects to receive a higher total return than generally available from longer
term corporate bonds. Similarly to convertible bonds, these positions have both
equity and fixed income characteristics and expose the Portfolio to equity risk.
However, the Portfolio considers such risks when making such investments and
evaluates them in relation to their expected return and the objectives of the
Portfolio.
B-4
<PAGE>
The ENHANCED EQUITY PORTFOLIO is expected to be subject primarily to equity risk
and exhibit HIGH TO VERY HIGH price fluctuations as is characteristic of common
stocks and equity funds in general. The price fluctuations of this Portfolio can
generally be expected to be greater than either the Short-Term Government
Portfolio or the Master Fixed Income Portfolio. The Portfolio's use of options,
futures, and foreign securities may also expose the Portfolio to certain risks
in addition to those normally associated with a domestic common stock portfolio.
DURATION
The discussion in the Prospectus of the investment policies of the Short-Term
Government and Master Fixed Income Portfolios refer to the Portfolios' duration.
Duration is the weighted average life of a Portfolio's debt instruments measured
on a present value basis; it is generally superior to average weighted maturity
as a measure of a Portfolio's potential volatility due to changes in interest
rates.
Unlike a Portfolio's average weighted maturity, which takes into account only
the stated maturity date of the Portfolio's debt instruments, duration
represents a weighted average of both interest and principal payments,
discounted by the current yield-to-maturity of the securities. For example, a
four-year, zero-coupon bond, which pays interest only upon maturity (along with
principal), has both a maturity and duration of 4 years. However, a four-year
bond priced at par with an 8% coupon has a maturity of 4 years but a duration of
3.6 years (at an 8% yield), reflecting the bond's earlier payment of interest.
In general, a bond with a longer duration will fluctuate more in price than a
bond with a shorter duration. Also, for small changes in interest rates,
duration serves to approximate the resulting change in a bond's price. For
example, a sudden 1% change in interest rates will cause roughly a 4% move in
the price of a zero-coupon bond with a 4 year duration, whereas an 8% coupon
bond (with a 3.6 year duration) will change by approximately 3.6%.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interest in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential mortgage loans, net of any fees paid
to the issuer or guarantor of such securities. Additional payments are caused
by repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
GNMA) are described as "modified pass-through." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not
the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is the
Government National Mortgage Association. GNMA is a wholly owned United State
Government corporation within the department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of mortgages insured
by the Federal Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders and
subject to general regulation by the Secretary of Housing
B-5
<PAGE>
and Urban Development. FNMA purchases conventional residential mortgages not
insured or guaranteed by any government agency from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. FHLMC is a government-sponsored corporation created to
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may, in addition, be the originators or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because they lack direct
or indirect government or agency guarantees of payment. However, timely payment
of interest and principal of these pools may be supported by various forms of
insurance or guarantees, including individual loan, pool insurance and letters
of credit, issued by governmental entities, private insurers, and mortgage
poolers. Such insurance and guarantees and the creditworthiness of the issuers
thereof will be considered in determining whether a mortgage-related security
meets the Fund's high grade investment quality standards. However, there can be
no assurance that private insurers or guarantors will meet their obligations.
In addition, the Fund may buy mortgage-related securities without insurance or
guarantees if through an examination of the loan experience and practices of the
originator/servicers and poolers the Adviser determines that the securities meet
the Fund's quality standards.
Although the underlying mortgage loans in a pool may have maturities of up to 30
years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
Although the market for mortgage pass-through securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. The Fund will not purchase mortgage-related securities
or any other assets which are illiquid if, as a result, the Fund would exceed
its policy limitation on illiquid securities. (See "Investment Limitations".)
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related securities are
interests in pools of mortgage loans made to residential home buyers domiciled
in a foreign country. These include mortgage loans made by trust and mortgage
loan companies, credit unions, chartered banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related, and private organizations (e.g., Canada Mortgage and Housing
Corporation and First Australian National Mortgage Acceptance Corporation
Limited). The mechanics of these mortgage-related securities are generally the
same as those issued in the United States. However, foreign mortgage markets
may differ materially from the U.S. mortgage market with respect to matters such
as the sizes of loan pools, prepayment experience, and maturities of loans. In
addition, foreign mortgage-related securities are subject to special currency
and other risks (see "Foreign Securities"). A Portfolio will not purchase any
foreign mortgage-related securities if as a result of such purchase more than 5%
of its net assets would be invested in such category of securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS'). A domestic or foreign CMO is a
hybrid between a mortgage-backed bond and a mortgage pass-through security.
Like a bond, interest and prepaid principal is paid, in most cases,
semi-annually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
B-6
<PAGE>
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. A Portfolio will not purchase any CMOs if as a result of such
purchase more than 5% of its net assets would be invested in such category of
securities.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities include
securities of U.S. or foreign issuers that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans on a real
property. These other mortgage-related securities may be equity or debt
securities issued by governmental agencies or instrumentalities or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, home builders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities. A Portfolio will not
purchase any other mortgage-related securities if as a result of such purchase
more than 5% of its net assets would be invested in such category of securities.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
Each Portfolio may from time to time invest in zero-coupon, step-coupon, and
pay-in-kind securities. These securities are debt securities that do not make
regular interest payments. Because such securities do not pay current income,
the price of these securities can be volatile when interest rates fluctuate (see
the discussion on "Duration" above). While these securities do not pay current
cash income, federal income tax law requires the holders of taxable zero-coupon,
step-coupon, and certain pay-in-kind securities to report as interest each year
the portion of the original discount (or deemed discount) on such securities
accruing that year. In order to qualify as a "regulated investment company"
under the Code, a Portfolio may be required to distribute a portion of such
discount, which would then become part of a shareholder's taxable income. A
Portfolio will not purchase any zero-coupon, step-coupon, or pay-in-kind
securities if as a result of such purchase more than 5% of its net assets would
be invested in such category of securities.
SECURITIES OF SUPRANATIONAL ORGANIZATIONS
Each Portfolio may invest in the debt obligations of supranational institutions,
which may be either U.S. dollar denominated or denominated in a foreign
currency. There are currently 14 supranational organizations, which may be
divided into two groups: (i) 12 multilateral lending institutions ("MLIs"), and
(ii) two other supranationals -- the European Coal and Steel Community and the
European Economic Community. The 14 supranationals are the largest group of
borrowers in the world. All supranationals are currently rated at least AA or
equivalent by at least one recognized rating agency, with most rated AAA. The
MLIs consist of five development finance institutions, six European multilateral
financing organizations, and Intelsat supported satellite system operations. The
MLIs are not the direct obligations of any one country, but are
sovereign-supported financial institutions whose creditworthiness depend upon
the member countries' willingness and ability to support their obligations and
their own financial strength and expertise. Continued support of a
supranational organization by its government members is subject to a variety of
political, economic and other factors. The voting power of each member country
within a particular supranational closely follows the financial obligations of
that country. MLIs include the African Development Bank, Asian Development Bank,
Council of Europe Resettlement Fund, European Bank for Reconstruction and
Development, European Investment Bank, Eurofima, Eutelsat, Intelsat,
Inter-American Development Bank, International Finance Corporation, Nordic
Investment Bank, and The World Bank.
B-7
<PAGE>
OPTIONS AND FUTURES CONTRACTS
The Fund may purchase and sell ("write") both put options and call options on
securities, securities indices and foreign currencies, enter into interest rate,
foreign currency and index futures contracts, and purchase and sell options on
such futures contracts ("futures options") for various reasons: to hedge
portfolio securities against adverse fluctuations, to adjust the level of market
exposure of a portfolio, to facilitate trading, to reduce transactions costs,
and/or to seek higher investment returns when a futures or option contract is
attractively priced relative to a typical Portfolio investment in the underlying
security or index or securities highly correlated to the underlying index, and
not for speculation. The Fund may purchase and sell foreign currency options
for purposes of increasing exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one country to another. If other types of
options, futures contracts, or futures options are traded in the future, the
Fund may also use those instruments, provided the Board of Trustees determines
that their use is consistent with the Fund's investment objectives, and their
use is consistent with restrictions applicable to options and futures contracts
currently eligible for use by the Fund.
OPTIONS ON SECURITIES OR INDICES. The Fund may purchase and write options on
securities and indices. An index is a statistical measure designed to reflect
specified facets of a particular financial or securities market, a specific
group of financial instruments or securities, or certain economic indicators
such as the Merrill Lynch 1 to 3 Year Global Government Bond Index, the JP
Morgan Global Government Bond Index, and the Lehman Brothers
Government/Corporate Index.
An option on a security (or an index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (in the case of "American Style"
options) or at the expiration of the option (in the case of the "European Style"
options). The writer of a call or put option on a security is obligated upon
exercise of the option to deliver the underlying security upon payment of the
exercise price or to pay the exercise price upon delivery of the underlying
security, as the case may be. The writer of an option on an index is obligated
upon exercise of the option to pay the difference between the cash value of the
index and the exercise price multiplied by a specified multiplier for the index
option, such difference always being positive.
The Fund will write call options and put options only if they are "covered" as
defined in the Prospectus. If an option written by the Fund expires
unexercised, the Fund realizes a capital gain equal to the premium received at
the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund generally realizes a capital loss equal to the premium
paid, with the exception that certain losses on put options purchased may be
deferred for tax accounting purposes. See "Taxation - Hedging Transactions".
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (i.e., of the
same type, with respect to the same underlying security or index, and with the
same exercise price and expiration date). The Fund will realize a capital gain
from a closing purchase transaction if the cost of the closing option is less
than the premium received from writing the option; if it is more, the Fund will
realize a capital loss. If the premium received from a closing sale transaction
is more than the premium paid to purchase the option, the Fund will realize a
capital gain; if it is less, the Fund will realize a capital loss. The
principal factors affecting the market value of a put or a call option include
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until the
expiration date.
The market value of a put or call option purchased by the Fund is an asset of
the Fund. The premium received for an option written by the Fund is recorded as
an asset and the associated liability is subsequently marked to market daily.
The value of an option purchased or written is marked to market daily and is
valued at the closing price on the exchange on which it is traded or, if not
traded on an exchange or no closing price is available, at the mean between the
last bid and asked prices.
B-8
<PAGE>
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDICES. Several risks are
associated with transactions in options on securities and indices. For example,
significant differences between the securities and options markets could result
in an imperfect correlation between those markets, causing a given transaction
not to achieve its objectives. A decision as to whether, when and how to use
options involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected events.
There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. If the Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit. If the Fund were unable to close out a covered
call option that it had written on a security, it would not be able to sell the
underlying security unless the option expired without exercise. As the writer
of a covered call option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price of
the call.
If trading were suspended in an option purchased by the Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
FOREIGN CURRENCY OPTIONS. The Fund may buy or sell put and call options on
foreign currencies. A put or call option on a foreign currency gives the
purchaser of the option the right to sell or purchase a foreign currency at the
exercise price until the option expires. The Fund will use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
a call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price or an in-the-money strike price. Currency options
traded on U.S. or other exchanges may be subject to position limits which may
limit the ability of the Fund to reduce foreign currency risk using such
options.
COMBINATIONS OF OPTIONS. The Fund may employ certain combinations of put and
call options. A "straddle" involves the purchase of a put and call option on
the same security with the same exercise prices and expiration dates. A
"strangle" involves the purchase of a put option and a call option on the same
security with the same expiration dates but different exercise prices. A
"collar" involves the purchase of a put option and the sale of a call option on
the same security with the same expiration dates but different exercise prices.
A "spread" involves the sale of an option and the purchase of the same type of
option (put or call) on the same security with the same or different expiration
dates and different exercise prices. The Fund may, at the same time it employs
certain combination of options, also have a position in the underlying security,
and a holding of segregated collateral as part of its "coverage" of short
options. Hence, the Fund's entire position related to a particular security,
index, foreign currency, or future may be complex; however, the Fund will always
be in a covered position with respect to options sold by the Fund.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may use interest
rate, foreign currency or index futures contracts. An interest rate or foreign
currency contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or foreign
currency at a specified price and time. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of a certain specified securities, no physical delivery of
these securities is made.
B-9
<PAGE>
A public market exists in futures contracts covering several indices as well as
a number of financial instruments and foreign currencies, including U.S.
Treasury bonds, U.S. Treasury notes, GNMA Certificates, three-month U.S.
Treasury bills, 90-day commercial paper, bank certificates of deposit,
Eurodollar certificates of deposit, the Australian dollar, the Canadian dollar,
the British pound, the German mark, the Japanese yen, the Swiss franc, and
certain multinational currencies such as the European Currency Unit ("ECU").
Other futures contracts are likely to be developed and traded in the future.
The Fund intends to enter primarily into futures contracts which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system. However, the Fund
may also enter into currency forward contracts, which are not exchange-traded
(see "Foreign Currency Transactions").
The Fund may also purchase and write call and put options on futures contracts.
Futures options possess many of the same characteristics as options on
securities and indices. A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short position (put)
in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true.
As long as required by regulatory authorities, the Fund will use futures
contracts and futures options for hedging purposes and not for speculation. For
example, the Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's securities or the price of the securities which the Fund intends to
purchase. The Fund's hedging activities may include sales of futures contracts
as an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge
its exposure more effectively and at a lower cost by using futures contracts and
futures options.
When a purchase or sale of a futures contract is made by the Fund, the Fund is
required to deposit with its Custodian (or futures commission merchant, if
legally permitted) a specified amount of cash or U.S. Government securities
("initial margin"). The margin required for a futures contract is set by the
exchange on which the contract is traded and may be modified during the term of
the contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by a Fund but is instead
a settlement between the Fund and the futures commission merchant of the amount
one would owe the other if the futures contract expired. In computing daily net
asset value, the Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(contracts traded on the same exchange, on the same underlying security or
index, and with the same delivery month). If an offsetting purchase price is
less than the original sale price, the Fund realizes a capital gain; if it is
more, the Fund realizes a capital loss. Conversely, if an offsetting sale price
is more than the original purchase price, the Fund realizes a capital gain; if
it is less, the Fund realizes a capital loss. The transaction costs must also
be included in these calculations.
B-10
<PAGE>
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. The Fund will not enter into
a futures contract or futures option contract if, immediately thereafter, the
aggregate initial margin deposits relating to such positions plus premiums paid
by it for open futures option positions, less the amount by which any such
options are "in-the-money", would exceed 5% of the Fund's total assets. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its Custodian
(and mark to market on a daily basis) cash, U.S. Government securities, or other
highly liquid debt securities that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, the Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
or higher than the price of the contract held by the Fund.
When selling a futures contract, the Fund will maintain with its Custodian (and
mark to market on a daily basis) liquid assets, that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with characteristics
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's Custodian).
When selling a call option on a futures contract, the Fund will maintain with
its Custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option. Alternatively,
the Fund may cover its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract (or, in the case of an
index futures contract, a portfolio with characteristics substantially similar
to that of the index on which the futures contract is based), or by holding a
separate call option permitting the fund to purchase the same futures contract
at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain with its
Custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that equal the purchase price
of the futures contract, less any margin on deposit. Alternatively, the Fund
may cover the position either by entering into a short position in the same
futures contract, or by owning a separate put option permitting it to sell the
same futures contract so long as the strike price of the purchased put option is
the same or higher than the strike price of the put option sold by the Fund.
In order to comply with currently applicable regulations of the Commodity
Futures Trading Commission ("CFTC") for exemption from the definition of a
"commodity pool", the Fund is limited in its futures trading activities to (i)
positions which constitute "bona fide hedging" positions within the meaning and
intent of applicable CFTC rules, and (ii) other positions for the establishment
of which the aggregate initial margin and premiums (less the amount by which any
such options are "in-the-money") do not exceed 5% of the investment company's
net assets.
B-11
<PAGE>
The requirements for qualification as a regulated investment company also may
limit the extent to which the Fund may enter into futures, futures options or
forward contracts. See "Taxation".
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation, depending on circumstances such as
variations in speculative market demand for futures and futures options relative
to the demand for securities, technical influences in futures trading and
futures options, and differences between the financial instruments being hedged
and the instruments underlying the standard contracts available for trading in
such respects as interest rate levels, maturities, and creditworthiness of
issuers. A decision as to whether, when and how to hedge involves the exercise
of skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during
particular trading days and therefore does not limit potential losses, because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a futures contract or a futures option position, in
which event the Fund would remain obligated to meet margin requirements until
the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
OTC OR DEALER OPTIONS. The Fund may engage in transactions involving OTC options
on securities, currencies, or indices as well as exchange-traded options.
Certain risks are specific to OTC options. While the Fund would look to a
clearing corporation to exercise exchange-traded options, if the Fund were to
purchase an OTC option it would rely on the counter-party (typically a broker,
bank, or other financial institution) from whom it purchased the option to
perform if the option were exercised. Failure by the counter-party to do so
would result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
B-12
<PAGE>
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund may generally be able to realize the
value of a OTC option it has purchased only by exercising or reselling the
option to the counter-party who issued it. Similarly, when the Fund writes a
OTC option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
counter-party to whom the Fund originally wrote the option. While the Fund will
seek to enter into OTC options only with counter-parties who will agree to and
are expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a OTC option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered OTC call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency
of the counter-party, the Fund may be unable to liquidate a OTC option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement
may impair the Fund's ability to sell portfolio securities at a time when such
sale might be advantageous.
The Staff of the SEC has taken the position that purchased OTC options and the
assets used to secure written OTC options are illiquid securities. The Fund may
treat the cover used for written OTC options as liquid if the counter-party
agrees that the Fund may repurchase the OTC option it has written for a maximum
price to be calculated by a predetermined formula. In such cases, the OTC
option would be considered illiquid only to the extent the maximum purchase
price under the formula exceeds the intrinsic value of the option. Accordingly,
the Fund will treat OTC options as subject to the Fund's limitation on
unmarketable securities. If the SEC changes its position on the liquidity of
OTC options, the Fund will change its treatment of such instruments accordingly.
FOREIGN CURRENCY TRANSACTIONS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may sell a forward contract, for
example, when it purchases a foreign security denominated in a foreign currency,
in an attempt to remove the effect of exchange rate changes on the value of the
position. Such exchange rate changes, had their effect not been removed, may
have been either favorable or unfavorable to the Fund. Removing or partially
removing the effect of such currency rate changes does not remove other sources
of price variation in a security, due to the type of security and its exposure
to various risks.
Precise matching of the amount of forward currency contracts and the value of
the Fund's securities denominated in such currencies will not generally be
possible, since 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.
Prediction of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
The Fund will not enter into such forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the longer term investment decision made with regard to
overall diversification strategies. However, the Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determined that the best interests of the Fund will be served by doing so.
At the maturity of a forward contract, the Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
B-13
<PAGE>
It may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund 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 the foreign currency the Fund is
obligated to deliver.
If the Fund retains a portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between the
date the Fund enters into a forward contract for the sale of a foreign currency
and the date it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, the Fund will suffer a loss to the
extent the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Fund's dealings in forward foreign currency exchange contracts will be
limited to the transactions described above. Use of forward currency contracts
to hedge against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, they also tend to limit any potential gain which might
results from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. Foreign exchange dealers do not charge a fee for conversion, but
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
COVERED SHORT SALES
As discussed in the Prospectus, the Fund may make covered short sales of
securities to hedge against market risks. Generally, the Fund expects to make
such sales in connection with the Fund's option and futures strategies. For
example, the Fund may engage in option spreads in which it is both the purchaser
and the covered writer of the same type of option (puts or calls) on the same
underlying security with the options having different exercise prices and/or
expiration dates. When the Fund enters into such a spread involving two put
options, it is sometimes advantageous to enter into a "synthetic put" position
instead of purchasing the put option which is the long side of the spread. A
synthetic put position is created by a short sale of the underlying security
which is hedged or covered by long position in a call option with the same terms
as the put option being synthesized.
The Fund may also make short sales which are covered or hedged by securities
convertible or exchangeable into an equal number of shares of the securities
sold short or by holdings of the same security (known as "short sales against
the box"). Short sales against the box may be made for the purpose of receiving
a portion of the interest earned by the executing broker from the proceeds of
such a sale and/or to defer the realization of gain or loss for Federal income
tax purposes. The Fund will segregate in a special account with its Custodian or
broker an equal amount of the securities sold short or securities convertible
into or exchangeable for such securities. The extent to which the Fund may make
such short sales may be limited by the Code's requirements for qualification as
a regulated investment company. (See "Taxation").
B-14
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CONVERTIBLE SECURITIES, SYNTHETIC CONVERTIBLE POSITIONS, AND WARRANTS
The Master Fixed Income Portfolio and the Enhanced Equity Portfolio may invest
in securities which may be exchanged for, converted into or exercised to acquire
a predetermined number of shares of common stock of the same or a different
issuer at the option of the Portfolio during a specified time period. Such
securities include convertible securities (i.e., convertible preferred stock and
convertible debentures) and warrants. A convertible security is generally a
fixed income security which is senior to common stock in an issuer's capital
structure, but is usually subordinated to similar non-convertible securities.
In addition, the Portfolio may create a synthetic convertible position in which
the Portfolio purchases both (i) high-grade cash equivalents or a high grade
non-convertible fixed income security of an issuer (or U.S. Government
securities) and (ii) call options or warrants on the common stock of the same or
different issuer with some or all of the anticipated interest from the debt
obligation that will be earned over the holding period of the option or warrant.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., its value upon conversion into its underlying common
stock). As a fixed income security, a convertible security tends to increase in
value when interest rates decline and tends to decrease in value when interest
rates rise. However, the price of a convertible security tends to increase as
the market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying stock declines. While no securities
investment is without some risk, investments in convertible securities and
synthetic convertible positions generally entail less risk than investments in
common stock of the same issuer.
Investments in warrants involve certain risks, including the possible lack of a
liquid market for resale of the warrants, potential price fluctuations as a
result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercise, resulting in a loss of the Portfolio's entire
investment therein).
ILLIQUID SECURITIES
Under the Fund's investment restrictions, the Fund may not invest more than 15%
of the value of its net assets in securities that at the time of purchase have
legal or contractual restrictions on resale or are otherwise illiquid. See
"Investment Limitations". The Investment Adviser will monitor the amount of
illiquid securities in each Portfolio to ensure compliance with the Fund's
investment limitations. In the absence of a readily available market for such
securities, the restrictions on resale may cause such securities to be
considered illiquid.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public
offering of securities.
B-15
<PAGE>
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities, and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Act, the Company's Board of
Trustees may determine that such securities are not illiquid securities,
notwithstanding their legal or contractual restrictions on resale. In all other
cases, however, securities subject to restrictions on resale will be deemed
illiquid.
INVESTMENT GRADE BONDS
See the Appendix for a description of securities ratings. The "high grade"
investment standard which the Fund uses only includes the highest three
categories for debt over one year maturity (A or better) and A-1 or equivalent
for short term maturities. The rating agencies themselves generally define
investment grade to include the top four categories for debt over one year
maturity. Subsequent to its purchase by a Portfolio, a security may be assigned
a lower rating or cease to be rated. In addition to considering ratings
assigned by the rating services in connection with its selection of investments
for the Portfolios, the Adviser will consider, among other things, information
concerning the financial history and conditions of the issuer and its revenue
and expense prospects.
Debt obligations in the BBB or equivalent category have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with respect to higher grade bonds.
Debt obligations that are below investment grade are likely to be subject to
greater market fluctuation and to greater risk of loss of income and principal
due to default than investments of higher rated fixed income securities. Such
high-yielding securities generally tend to reflect short-term corporate and
market developments to a greater extent than higher rated securities, which
react more to fluctuations in the general level of interest rates. The Adviser
seeks to reduce risk to the investor by diversification, credit analysis and
attention to current developments in trends of both the economy and financial
market. However, while diversification reduces the effect on the Portfolios of
any single investment, it does not reduce the overall risk of investing in lower
rated securities. In no event will the Portfolios invest in any security rated
below CCC or equivalent at the time of purchase.
LENDING OF PORTFOLIOS SECURITIES
For the purpose or realizing income, each Portfolio may lend securities with a
value of up to 30% of its total assets to broker-dealers, institutional
investors or other persons. The Fund will have the right to call each loan and
obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within a longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. Loans will only be made to persons deemed
by the Adviser to be of good standing in accordance with standards approved by
the Board of Trustees and will not be made unless, in the judgment of the
Adviser, the consideration to be earned from such loans would justify the risk.
B-16
<PAGE>
BORROWING
The Fund may borrow for temporary, extraordinary or emergency purposes, or for
the clearance of transactions. The Investment Company Act of 1940 (the "1940
Act") requires the Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the 300% asset coverage should decline as a result
of market fluctuations or other reasons, the Fund may be required to sell some
of its portfolio holdings within three days to reduce the debt and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. As a matter of operating policy,
the Fund will not borrow in excess of 15% of its total assets (see "Investment
Limitations"). To avoid the potential leveraging effects of the Fund's
borrowings, investments will not be made while borrowings are in excess of 5% of
the Fund's total assets. Money borrowed will be subject to interest costs which
may or may not be recovered by appreciation of the securities purchased. The
Fund also may be required to maintain minimum average balances in connection
with any such borrowing or to pay a commitment or other fee to maintain a line
of credit, either of which would increase the cost of borrowing over the stated
interest rate.
FOREIGN SECURITIES
There are special risks in investing in foreign securities in addition to those
relating to investments in U.S. securities.
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include restrictions on
foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment of these
trading partners of protectionist trade legislation could have a significant
adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. The Fund will invest in securities denominated in foreign
currencies. Accordingly, a change in the value of any such currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Such changes will also affect
the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
MARKET CHARACTERISTICS. The Fund may invest in foreign bonds, stocks or other
debt or equity-related securities. While the foreign stocks or equity-related
securities may be exchange traded, the Fund expects that most foreign debt
securities in which the Fund invests will be purchased in over-the-counter
markets or on bond exchanges located in the countries in which the principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign stock or bond markets may be more volatile than
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets, and the Fund's portfolio securities
may be less liquid and more volatile than U.S. securities. Moreover, settlement
practices for transactions in foreign markets may differ from those in United
States markets, and may include delays beyond periods customary in the United
States.
B-17
<PAGE>
Transactions in options on securities, futures contracts, futures options,
currency contracts and options on currencies may not be regulated as effectively
on foreign exchanges as similar transaction in the United States, and may not
involve clearing mechanisms and related guarantees. The value of such positions
also could be adversely affected by the imposition of different exercise terms
and procedures and margin requirements than in the United States.
The value of the Fund's portfolio positions may also be adversely impacted by
delays in the Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction for U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Fund. (See "Other Taxation").
INVESTMENT LIMITATIONS
The Fund has adopted the investment restrictions described below. Fundamental
policies of the Fund may not be changed without the approval of the lesser of
(1) 67% of the Portfolio's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or by
proxy or (2) more than 50% of the Portfolio's outstanding shares. Operating
policies are subject to change by the Board of Trustees without shareholder
approval. Any investment restriction which involves a maximum percentage of
securities or assets will not be considered to be violated unless an excess
occurs immediately after, and is caused by, an acquisition of securities of
assets of, or borrowings by, the Fund.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, a Portfolio may not:
(1) INDUSTRY CONCENTRATION. Purchase securities of issuers conducting their
principal business activities in the same industry if, immediately after the
purchase and as a result thereof, the value of the Portfolio's investments in
that industry would constitute 25% or more of its total assets, provided that:
(i) this limitation does not apply to obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities; (ii) utility companies
will be divided according to their services (for example, gas, gas transmission,
electric, electric and gas, and telephone will each be considered a separate
industry); and (iii) financial service companies will be classified according to
the end users of their services (for example, automobile finance, bank finance,
and diversified finance will be considered as separate industries). For
purposes of this policy, the Adviser classifies companies into approximately
forty industries based on their primary business and financial characteristics.
(2) OIL, GAS, REAL ESTATE. Invest directly in real estate, oil, gas, or other
mineral exploration or development programs; however, this limitation will not
prevent the purchase of securities of companies engaged in such activities or
secured by interests in such activities.
(3) LOANS. Make loans, except that the Portfolio may (i) purchase money market
securities and enter into repurchase agreements, (ii) acquire bonds, debentures,
notes and other debt securities, and (iii) lend portfolio securities in an
amount not to exceed 30% of its total assets.
(4) MARGIN. Purchase securities on margin, except that the Portfolio may (i)
use short-term credit necessary for clearance of purchases of portfolio
securities, and (ii) make margin deposits in connection with futures contracts
and options on futures contracts.
B-18
<PAGE>
(5) SINGLE ISSUER DIVERSIFICATION. With respect to 75% of its total assets,
purchase securities of issuer (except securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result, more than
5% of the value of its assets would be invested in the securities of any single
issuer or it would own more than 10% of the voting securities of any issuer.
(6) UNDERWRITING. Underwrite securities issued by other persons, except to the
extent that the Portfolio may be deemed to be an underwriter within the meaning
of the Securities Act in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
(7) BORROWING. Borrow money, except as a temporary measure for extraordinary
or emergency purposes or for the clearance of transactions, and then only in
amounts not exceeding 15% of its total assets valued at market (for this
purpose, delayed delivery transactions covered by segregated accounts are not
considered to be borrowings).
OPERATING POLICIES
As a matter of operating policy, a Portfolio may not:
(1) COMMODITIES. Purchase or sell commodities or commodity contracts, except
that a Portfolio may (i) enter into financial and currency futures contracts and
options on such futures contracts, (ii) enter into forward foreign currency
exchange contracts (the Fund does not consider such contracts to be
commodities), and (iii) invest in instruments which have the characteristics of
both futures contracts and securities.
(2) ILLIQUID SECURITIES. Purchase a security if, as a result of such purchase,
more than 15% of the value of the Portfolio's net assets would be invested in
illiquid securities or other securities that are not readily marketable,
including repurchase agreements which do not provide for payment within seven
days.
(3) INVESTMENT COMPANIES. Purchase securities of open-end or closed-end
investment companies except in compliance with the 1940 Act.
(4) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or
retain the securities of any issuer if, to the knowledge of the Trust's
management, any officers and Trustees of the Trust and of the Adviser who own
beneficially more than 0.5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities.
(5) UNSEASONED ISSUERS. Purchase securities (other than obligations issued or
guaranteed by the U.S. Government or any foreign government, their agencies or
instrumentalities) if, as a result, more than 5% of the value of the Portfolio's
net assets would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years (for this purpose, the
period of operation of any issuer will include the period of operation of any
predecessor or unconditional guarantor of such issuer).
STATE UNDERTAKINGS
In order to permit the sale of shares of the Fund in certain states, the Board
of Trustees may adopt investment policies more restrictive than those described
above. Should the trustees determine that any such more restrictive policy is
no longer in the best interests of the Fund or its shareholders, the Trustees
may revoke such policy and the Fund may cease offering shares of the Fund in the
state involved. Moreover, if the state involved no longer requires any such
restrictive policy, the trustees may revoke it.
The Fund has undertaken to the Texas State Securities Board and the Arizona
Corporation Commission that it will limit its investments in warrants to no more
than 5% of a Portfolio's net assets and, of this 5%, no more than 2% will be
invested in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange; provided, however, that for the purposes of this
limitation, warrants acquired in units or attached to other securities will be
deemed to be without value. The Fund intends to comply with this undertaking
for so long as the shares of the Fund are registered for sale in the States of
Texas or Arizona.
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<PAGE>
INVESTMENT STRATEGY OF ENHANCED EQUITY PORTFOLIO
Since 1996, the Adviser has been using a proprietary model with more than 50
factors based on work pioneered by Professor Robert A. Haugen to manage the
Enhanced Equity Portfolio. Using this model, the Adviser constructs a portfolio
of stocks that it believes has the following attractive characteristics: high
return on equity and earnings growth; high cash flow to price ratio and earnings
to price ratio; positive price momentum over the last six to twelve months; low
"beta" and return volatility; and high trading volume and low bid/ask price
spreads.
Such a portfolio of stocks cannot be constructed by simply "screening" an equity
data base for individual issues each of which meets all of the desired
characteristics. For example, companies with high profitability generally do
not have low valuations. The Adviser believes that the statistical modeling
process developed by Professor Haugen enables it to assemble a portfolio of
securities that in the aggregate has the desired characteristics (a portfolio
with an overall profile that Professor Haugen has called the profile of a "super
stock").
The Adviser believes that this approach, which has been discussed in leading
academic journals, has significant ability to identify portfolios of attractive
stocks. The Adviser believes that its disciplined multi-factor approach will
result in more consistent value added over a market cycle than traditional
strategies which focus on a single style or factor (e.g. value, growth, small
cap, or earnings momentum). However, because there are risks inherent in all
securities investments, there is no assurance that the Enhanced Equity
Portfolio's investment objective will be achieved.
Using factors from each of the five categories described above, the Adviser
determines the relative attractiveness (expected return) of each security from a
universe of approximately 1,100 of the largest publicly traded domestic equity
securities. Once these relative expected returns are calculated, a portfolio is
constructed from the entire universe with the following constraints and
objectives:
Targeted Return -- Expected portfolio return is typically targeted as 3%
higher than the annual return on the stocks comprising the Standard &
Poor's 500 Stock Price Index (the "S&P 500").
Industry Weightings -- Typically, industry sector weightings are
constrained to closely match those of the S&P 500, deviating no more than
1% above or below the S&P 500 weightings.
Size -- Average market capitalization is typically targeted to be greater
than $15 billion.
Growth -- Using specific accounting-related variables, such as return on
equity, the portfolio is constrained to have higher earnings growth than
the average growth of securities in the universe.
Value -- Using specific accounting-related variables, such as the ratio of
cash flow to price, the portfolio is constrained to be of higher value than
securities in the universe (i.e., its cash flow and earnings are priced
relatively cheaply by the market).
Maximum Issuer Weighting -- The market value of the stock of any issuer,
when added to the portfolio, is constrained to be no greater than 3% of the
aggregate market value of the portfolio. The weighting of the stock of an
issuer may increase due to the relative performance of the stock during the
period in which it is held, but under no circumstances will the weighting
of any stock exceed 5% of the aggregate market value of the portfolio.
Liquidity -- The size of the Portfolio's position in each security is
evaluated relative to the total outstanding shares of the issuer, the
market "float" and the trading volume to ensure that all positions remain
liquid and that the Adviser's periodic rebalancing of the portfolio does
not significantly impact the price of the security.
Number of Stocks -- The number of stocks held by the Portfolio will
typically range between 60 and 90.
The Adviser seeks to control overall portfolio risk by using a mathematical
model designed to minimize portfolio risk relative to that of the overall stock
market. The Adviser uses an [optimizer] to ensure that it accurately takes
B-20
<PAGE>
into account the relationship among industries, sectors, and individual
securities in order to capture maximum diversification benefits given its
expected return target.
The Adviser monitors the stocks held by the Portfolio on a real-time basis using
its proprietary portfolio management system. All holdings are monitored for new
developments in terms of news events (such as lawsuits or takeover bids) as well
as significant changes in fundamental factors. Expected returns are updated
monthly and are used to reoptimize the portfolio. The Adviser enters into
portfolio trades only when it believes the incremental return more than exceeds
the associated transaction costs. The targeted annual portfolio turnover ranges
from 100-120%.
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PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, and (ii) to reduce or waive the minimum for initial and
subsequent investments where certain economies can be achieved in sales of the
Portfolio's shares. In addition to cash, the Fund may accept securities as
payment for shares in any Portfolio at the applicable net asset value per share.
The Fund will only consider accepting securities which: (1) meet the investment
objective and policies of the Portfolio accepting the securities; (2) will be
acquired for investment and not for resale; (3) are liquid securities and not
restricted as to transfer either by law or market liquidity; and (4) have a
readily ascertainable value.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the rules of the Commission as a
result of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
MANAGEMENT OF THE FUND
The officers of the Fund manage its day to day operations and are responsible to
the Fund's Board of Trustees. The following is a list of Trustees and officers
of the Fund and their principal occupations during the past five years. The
mailing address of the Trustees and officers of the Fund is 700 South Flower
Street, Suite 2400, Los Angeles, CA 90017. (* indicates a director who is an
interested person of the Fund, as defined under the Investment Company Act of
1940.)
MICHAEL F. KOEHN* CHAIRMAN OF THE BOARD OF TRUSTEES.
President and Chief Executive Officer of the Adviser, Director of Analytic
Optioned Equity Fund and President of Analysis Group, Inc., a consulting firm
providing economic and financial consulting services. He earned a Ph.D. in
Finance at the Wharton School, University of Pennsylvania.
MICHAEL D. BUTLER TRUSTEE.
Director of Analytic Optioned Equity Fund. Professor emeritus of Social
Sciences, former Dean of Undergraduate Studies at the University of California
at Irvine and former member of the Society of Fellows, Harvard University.
ROBERTSON WHITTEMORE - TRUSTEE.
Director of Analytic Optioned Equity Fund, Inc.; and Partner, Encore of La
Jolla, retail clothing store. Former real estate broker; attorney, President of
La Jolla Town Council, trustee of Combined Arts and Education Council of San
Diego, and Executive Director of the San Diego Community Foundation. He earned
his B.A. from Yale University, and his J.D. and M.B.A. from the University of
California at Berkeley.
HARINDRA DE SILVA, PH.D., CFA - PRESIDENT.
Managing Director of the Adviser and President of Analytic Optioned Equity Fund,
Inc. He holds a B.S. from the University of Manchester at Manchester England, a
M.B.A. from Simon School at Rochester New York and he earned his Ph.D. in
Finance from the University of California at Irvine. He concurrently serves as
a principal of Analysis Group, Inc., which he joined in 1986.
CHARLES L. DOBSON - EXECUTIVE VICE PRESIDENT AND SECRETARY.
Director, Secretary and Portfolio Manager of the Adviser and Executive Vice
President and Secretary of Analytic Optioned Equity Fund, Inc.. He holds a B.A.
in Economics and M.S. in Administration from the University of California,
Irvine.
B-22
<PAGE>
GREGORY M. MC MURRAN - TREASURER.
Chief Investment Officer of the Adviser and Treasurer of the Analytic Optioned
Equity Fund, Inc. He has been with the Adviser as a Portfolio Manager since
October 1976. He holds a B.A. in economics from the University of California
at Irvine and a M.A. in economics from California State University at
Fullerton.
MARIE NASTASI ARLT - SENIOR VICE PRESIDENT.
Chief Operating Officer of the Adviser and Senior Vice President of Analytic
Optioned Equity Fund, Inc. She holds a B.A. from California State University,
Fullerton. She concurrently serves as Vice President of Analytic-TSA Investors,
Inc. Formerly she served as Managing Director and Executve Vice President of
TSA Capital Management.
ANGELO A. CALVELLO -- SENIOR VICE PRESIDENT
Director of Business Developement of the Adviser and Senior Vice President of
Analytic Optioned Equity Fund, Inc. He earned a B.A., M.A. and Ph.D. in
Philosophy from DePaul University at Chicago, Illinois. Formerly, he served as
Executive Vice President at Credit Agricole Futures and Vice President of The
Chicago Mercantile Exchange.
Officers and directors of the Fund who are affiliates of the Adviser receive no
fee or salary from the Fund. Each director who is not an affiliate of the
Adviser receives an annual fee of $2,000 plus $1,000 per meeting attended and
reimbursement for expenses. For the fiscal year ended December 31, 1996, total
compensation received by the three directors who are not affiliates of the
Adviser is as follows:
<TABLE>
<CAPTION>
Aggregate Pension/Retirement Total Compensation
Compensation from Benefits Accrued as Estimated From Analytic Optioned
The Analytic Series Part of Fund Annual Benefits Equity Fund and The
Name Fund Expenses from Retirement Analytic Series Fund
--------------- ------------------- ------------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Michael D. Butler $5,000 None None $10,000
Robertson Whittemore $5,060 None None $10,120
Robert E. Villagrana $3,020 None None $ 6,040
</TABLE>
B-23
<PAGE>
PRINCIPAL SHAREHOLDERS
The following tables show, as of March 31, 1997 the beneficial ownership of each
Portfolio's common stock by all officers and Trustees of the Fund (as a group)
and the record ownership of shares by each person known to the Fund to be a
record owner of more than 5% of the issued and outstanding common stock of a
Portfolio. Except for shares held by officers and Trustees, the Fund has no
information regarding beneficial ownership of such shares.
SHORT-TERM GOVERNMENT PORTFOLIO (TOTAL SHARES OUTSTANDING 58,462)
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Tucker Anthony, Inc. 5843 9.99%
FAO Nursing Pension
4 Landmark Square
Stamford, CT 06901
Tucker Anthony, Inc. 4283 7.33%
FAO Zion's Hills
4 Landmark Square
Stamford, CT 06901
Tucker Anthony, Inc. 3903 6.68%
FAO R. Borzilleri
4 Landmark Square
Stamford, CT 06901
All Officers and Trustees of the Fund as a group 16,470 28.17%
MASTER FIXED INCOME PORTFOLIO (TOTAL SHARES OUTSTANDING 2,461,428)
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Trust Company of Knoxville 2,640,593 90.67%
620 Market Street, Suite 300
One Centre Square
Knoxville, TN 37902
All Officers and Trustees of the Fund as a group 37,756 1.30%
ENHANCED EQUITY PORTFOLIO (TOTAL SHARES OUTSTANDING 226,795)
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Vahid D. Khorramshahi 13,068 5.76%
2756 Tern Circle
Costa Mesa, CA 92626
All Officers and Trustees of the Fund as a group 110,341 48.65%
B-24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
Analytic Investment Management, Inc. acquired and merged with TSA Capital
Management Corporation January 31, 1996, and became Analytic-TSA Global Asset
Management, Inc. Analytic-TSA Global Asset Management, Inc. (the "Adviser") is
the investment adviser of the Fund pursuant to an Investment Advisory Agreement
between the Fund and the Adviser, dated November 23, 1992 (the "Advisory
Agreement"). The Advisory Agreement was approved by the Board of Trustees,
including the unanimous vote of the Fund's Trustees who are not parties to the
agreement or "interested persons" of the Fund on April 2, 1997 at a meeting
called for the purpose of voting on such approval.
The Adviser is a wholly owned subsidiary of United Asset Management Corporation
("UAMC"). UAMC was organized in 1980 by its President and principal
stockholder, Norton H. Reamer, for the purpose of acquiring firms engaged in the
institutional investment management business.
The officers and directors of the Advisor are:
Roger G. Clarke Chariman of the Board
Michael F. Koehn Member of the Board, President and Chief
Executive Officer
Gregory M. McMurran Chief Investment Officer
Robert Bannon Managing Director
Harindra de Silva Managing Director
Charles L. Dobson Secretary, Director and Portfolio Manager
Marie Nastasi Arlt Chief Operating Officer
Angelo A. Calvello Director - Business Development
THE INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Fund, the Adviser,
subject to the control and direction of the Fund's Officers and Board of
Trustees, manages the Portfolios of the Fund in accordance with each Portfolio's
stated investment objective and policies, and makes investment decisions for the
Fund. Pursuant to separate agreements, the Adviser also acts as the Fund's
transfer agent, dividend disbursing agent, and shareholder relations servicing
agent, and provides accounting and daily pricing services to the Fund. At its
expense, the Adviser provides the office space and all necessary office
facilities, equipment, and personnel for providing these services to the Fund.
As compensation for furnishing investment advisory, management and other
services, and expenses assumed, pursuant to the Investment Management Agreement,
the Short-Term Government, Master Fixed Income, and Enhanced Equity Portfolios
pay the Adviser an annual fee equal to 0.30%, 0.45% and 0.60% of average daily
net assets, respectively. For the year ended December 31, 1996 the Adviser
voluntarily agreed to reimburse expenses that exceeded 0.60%, 0.80%, and 1.00%
of average daily net assets for the Short-Term Government, Master Fixed Income,
and Enhanced Equity Portfolios, respectively. For the year ended December 31,
1995, the Adviser voluntarily agreed to reimburse expenses that exceeded 0.50%,
0.70%, and 0.80% of average daily net assets for the Short-Term Government,
Master Fixed Income, and Enhanced Equity Portfolios, respectively. After such
reimbursements, for the year ended December 31, 1996, the Short-Term Government
Portfolio paid $36,314, the Master Fixed Income Portfolio paid $70,152, and the
Enhanced Equity Portfolio paid $3,860 advisory fees. For the year ended
December 31, 1995, the Master Fixed Income Portfolio paid $9,100, and the
Short-Term Government and Enhanced Equity Portfolios paid no advisory fees.
B-25
<PAGE>
The Adviser has agreed that if in any fiscal year the expenses borne by the Fund
exceed the applicable expense limitations imposed by the securities regulations
of any state in which shares of such Fund are registered or qualified for sale
to the public, it will reimburse the Fund for any excess to the extent required
by such regulations. Unless otherwise required by law such reimbursement would
be accrued and paid on the same basis that the advisory fees are accrued and
paid by the Fund. To the Trust's knowledge, the only state expense limitation
in effect on the date of this Statement of Additional information is that of
California, which requires the Adviser to reimburse the Fund for advisory fees
to the extent that certain expenses exceed 2-1/2% of average annual net assets
up to $30,000,000, 2% of the next $70 million of average net assets, and 1-1/2%
of average net assets in excess of $100,000,000.
Under the Management Agreement, any liability of the Adviser to the Fund and its
shareholders is limited to situations involving its own willful misfeasance, bad
faith, gross negligence or reckless disregard of its duties and obligations
under the Advisory Agreement.
The Management Agreement may not be assigned by the Adviser and will terminate
automatically upon assignment. It may be terminated without penalty with
respect to any Portfolio upon 60-days' written notice by either party or by a
vote of a majority of the Portfolio's outstanding voting securities (as defined
in the 1940 Act). The Management Agreement may be amended with respect to any
Portfolio by a vote of a majority of the Trustees of the Fund, including a
majority of the disinterested trustees, cast in person at a meeting called for
that purpose, subject to approval by the vote of a majority of the Portfolio's
outstanding voting securities.
Pursuant to a Fund Accounting Agreement with the Fund, the Adviser maintains
certain books and records for the Portfolios, provides pricing information with
respect to Portfolio investments, calculates daily net asset value per share for
the Portfolios, and performs certain other accounting services. As compensation
for such services, the Adviser receives an annual fee equal to 0.05% of each
Portfolio's average daily net assets, plus reimbursement of reasonable
out-of-pocket expenses.
Pursuant to a Transfer Agency Agreement with the Fund, the Adviser provides
transfer agency services for the Portfolios, including processing of purchase
and redemption orders and confirmations, maintenance of shareholder account
information, and preparation and filing of reports to the Internal Revenue
Service, Commission and state securities authorities. As compensation for such
services, the Adviser receives an annual base fee equal to 0.16% of each
Portfolio's average daily net assets up to $100 million, 0.14% of average daily
net assets in excess of $100 million up to $200 million, and 0.12% of average
daily net assets in excess of $200 million. The Adviser also receives a fee of
$1.50 per shareholder account per month, plus reimbursement of reasonable
out-of-pocket expenses.
Each such Agreement is terminable by either party with respect to any Portfolio
upon 60 days notice. Under each such Agreement, any liability of the Adviser to
the Fund and its shareholders is limited to situations involving its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties and
obligations under the Agreement.
PORTFOLIO TRANSACTIONS
Provided that best execution is obtained, the Adviser may consider sales of the
Portfolios' shares and the provision of research services to the Adviser as
factors in the selection of broker-dealers to execute portfolio transactions,
and may enter into agreements whereby a portion of the commissions earned by a
broker-dealer on the transactions placed with a broker-dealer will be reimbursed
to the Portfolios by the payment of all or a portion of the Portfolios'
expenses, including custodian fees. Research services furnished by brokers
through which a Portfolio affects portfolio transactions may be used by the
adviser servicing all of its accounts. Similarly, research services furnished
by brokers through which the adviser's other accounts affect portfolio
transactions may be used in servicing a Portfolio. During the years ended
December 31, 1996 and 1995, the aggregate commissions paid were $0 by the
Short-Term Government Portfolio, $27,017 and $8,587 by the Master Fixed Income
Portfolio and $24,710 and $2,360 by the Enhanced Equity Portfolio. None of
these amounts were directed to brokers because of research services provided to
the Adviser.
B-26
<PAGE>
If a Portfolio effects a closing transaction with respect to an option purchased
or written by it, normally such transaction will be executed by the same
broker-dealer who executed the opening purchase or sale of the option, except
where the Portfolio utilizes a clearing agent. Likewise, if an option written
or purchased by a Portfolio is exercised, normally the sale or purchase of the
underlying securities will be executed by the same broker-dealer or clearing
agent who executed the opening purchase or sale of the option.
The Adviser currently manages separate accounts aggregating in excess of
$1,000,000,000 which employ investment strategies similar to those used by the
Portfolios. At times, investment decisions may be made to purchase or sell the
same investment security for a Portfolio and one or more of the other clients
advised by the Adviser. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security or option, the transactions
will be allocated as to amount and price in a manner considered equitable to
each and so that each receives, to the extent practicable, the average price or
premium for such transaction. There may be circumstances in which such
simultaneous transactions would be disadvantageous to a Portfolio with respect
to price and availability of securities. In other cases, however, it is
believed that transactions would be advantageous to a Portfolio.
PORTFOLIO VALUATION
Each Portfolio's share price or net asset value per share is calculated by
dividing the total value of the Portfolio's assets, less total liabilities, by
the total outstanding shares of the Portfolio. Portfolio securities which are
traded on a national securities exchange are valued at the last sale price or if
there is no recent last sale, at the mean between the current bid and asked
prices. All other securities not so traded are valued at the mean between the
last current bid and asked prices if market quotations are available. Futures
contracts are valued daily at the official settlement price of the exchange on
which they are traded. Other securities and assets are valued at fair value in
accordance with methods determined in good faith by the Fund's Board of
Trustees.
TAXATION
Each Portfolio has elected to be treated and intends to qualify annually as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), and will be treated as a corporate entity for such purposes. To
qualify as a regulated investment company, a Portfolio must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including gains from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Qualifying Income Test"); (b) derive in each taxable year less than 30% of its
gross income from the sale or other disposition of certain assets held less than
three months, namely (1) stocks or securities, (2) options, futures, or forward
contracts (other than those on foreign currencies), and (3) foreign currencies
(or options, futures, and forward contracts on foreign currencies) not directly
related to its business of investing in stocks or securities; (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of the Portfolio's assets is represented by cash, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Portfolio's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies (the
"Diversification Test")); and (d) distribute at least 90% of its investment
company taxable income (which includes dividends, interest and net short-term
capital gains in excess of any net long-term capital losses) each taxable year.
The Treasury Department is authorized to promulgate regulations under which
gains from foreign currencies (and options, futures, and forward contracts on
foreign currency) would constitute qualifying income for purposes of the
Qualifying Income Test only if such gains are directly relating to investing in
stocks or securities. To date, such regulations have not been issued.
B-27
<PAGE>
As a regulated investment company, a Portfolio will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and any capital loss carryovers from prior years) designated by
the Fund as capital gain dividends, if any, that it distributes to shareholders.
The Short Term Government Portfolio and the Master Fixed Income Portfolio intend
to distribute to their shareholders substantially all of their investment
company taxable income monthly and any net capital gains annually. The Enhanced
Equity Portfolio intends to distribute to its shareholders substantially all of
its investment company taxable income quarterly and any net capital gains
annually. In addition, amounts not distributed by a Portfolio on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a Portfolio must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income and net capital gain (not taking into account any capital gains
or losses as an exception) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (and adjusted for certain ordinary
losses) for the twelve month period ending on December 31 of the calendar year,
and (3) all ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by a Portfolio in December of
that year to shareholders of record on a date in such a month and paid by a
Portfolio during January of the following year. Such distributions will be
taxable to shareholders (other than those not subject to federal income tax) in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To avoid application of
the excise tax, the Portfolios intend to make their distributions in accordance
with the calendar year distribution requirement.
DISTRIBUTIONS
Dividends paid out of a Portfolio's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions received by
tax-exempt shareholders will not be subject to federal income tax to the extent
permitted under the applicable tax exemption.
For corporate investors, dividends paid by the Short Term Government Portfolio
will generally not qualify for the dividends received deduction, a minimal
amount of dividends paid by the Master Fixed Income Portfolio will qualify for
the deduction, and some fraction of dividends by the Enhanced Equity Portfolio
will qualify for such deduction. Distributions of net capital gains, if any,
are taxable as long-term capital gains, regardless of how long the shareholder
has held a Portfolio's shares and are not eligible for the dividends received
deduction. The tax treatment of dividends and distributions will be the same
whether a shareholder reinvests them in additional shares or elects to receive
them in cash.
HEDGING TRANSACTIONS
Many of the options, futures contracts and forward contracts used by the
Portfolios are "Section 1256 contracts". Any gains or losses on Section 1256
contracts are generally considered 60% long-term and 40% short-term capital
gains or losses ("60/40") although certain foreign currency gains and losses
from such contracts may be treated as ordinary in character. Also, Section 1256
contracts held by a Portfolio at the end of each taxable year (and, for purposes
of the 4% excise tax, on certain other dates as prescribed under the Code) are
"marked to market" with the results that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is treated as
ordinary or 60/40 gain or loss, depending on the circumstances.
Generally, the hedging transactions and certain other transactions in options,
futures and forward contracts undertaken by the Portfolios, may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Portfolio. In addition, losses
realized by a Portfolio on position that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Portfolios are not entirely clear. The transactions
may increase the amount of short-term capital gain realized by a Portfolio which
is taxed as ordinary income when distributed to shareholders.
B-28
<PAGE>
A Portfolio may make one or more of the elections available under the Code which
are applicable to straddles. If a Portfolio makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
The 30% limit on gains from the disposition of certain options, futures, and
forward contracts held less than three months and the qualifying income and
diversification requirements applicable to a Portfolio's assets may limit the
extent to which a Portfolio will be able to engage in transaction in options,
futures contracts or forward contracts.
SALES OF SHARES
Upon disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. Any loss realized on a disposition
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized by a shareholder on
a disposition of shares held by the shareholder for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received by the shareholder with respect to such shares.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31% of all
taxable distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the Internal revenue Service that they are subject
to backup withholding. Corporate shareholders and certain other shareholders
specified in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal tax liability.
OTHER TAXATION
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Portfolio accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Portfolio actually collects such receivables or pays such
liabilities generally are treated as ordinary income or loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts and options, gains
or losses attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Portfolio's investment company taxable income to be
distributed to its shareholders as ordinary income.
B-29
<PAGE>
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Adviser intends to manage the Fund with the intention
of minimizing foreign taxation in cases where it is deemed prudent to do so. If
more than 50% of the value of a Portfolio's total assets at the close of its
taxable year consists of securities of foreign corporation, a Portfolio will be
eligible to elect to "pass-through" to the Portfolio's shareholders the amount
of foreign income and similar taxes paid by the Portfolio. If this election is
made, a shareholder generally subject to tax will be required to include in
gross income (in addition to taxable dividends actually received) his pro rata
share of the foreign income taxes paid by the Portfolio, and may be entitled
either to deduct (as an itemized deduction) his or her pro rate share of foreign
taxes in computing his taxable income or to use it (subject to limitations) as a
foreign tax credit against his or her U.S. federal income tax liability. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the close of
the Fund's taxable year whether the foreign taxes paid by the Portfolio will
"pass-through" for that year. The Fund does not currently expect to be eligible
for such "pass-through" election under current operating policies and
limitations on holdings of foreign securities.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his or her total foreign
source taxable income. For this purpose, if the pass-through election is made,
the source of the Fund's income will flow through to shareholders of the Fund.
With respect to such election, gains from the sale of securities will be treated
as derived from U.S. sources and certain currency fluctuation gains, including
fluctuation gains from foreign currency denominated debt securities, receivables
and payable will be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income, and to certain other types of income. Shareholders may be
unable to claim a credit for the full amount of their proportionate share of the
foreign taxes paid by the Fund. The foreign tax credit is modified for purposes
of the Federal alternate minimum tax and can be used to offset only 90% of the
alternative minimum tax imposed on corporations and individuals and foreign
taxes generally are not deductible in computing alternative minimum taxable
income.
Some of the debt securities (with a fixed maturity date of more than one year
from the date of issuance) that may be acquired by a Portfolio may be treated as
debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt security
matures. A portion of the OID includible in income with respect to certain
high-yield corporate debt securities may be treated as a dividend for Federal
income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one year
form the date of issuance) that may be acquired by a Portfolio in the secondary
market may be treated as having market discount. Generally, any gain recognized
on the disposition of, and any partial payment of principal on, a debt security
having market discount issued after July 18, 1984 is treated as ordinary income
to the extent the gain, or principal payment, does not exceed the "accrued
market discount" on such debt security. Market discount generally accrues in
equal daily installments. The Fund may make one or more of the elections
applicable to debt securities having market discount, which could affect the
character and timing of recognition of income.
Some of the debt securities (with a fixed maturity date of one year or less from
the date of issuance) that may be acquired by a Portfolio may be treated as
having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, a Portfolio will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. A Portfolio may make one or more of the elections applicable
to debt securities having acquisition discount, or OID, which could affect the
character and timing of recognition of income.
The Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includible in income,
even though cash representing such income may not have been received by the
Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
B-30
<PAGE>
Distributions also may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Under the laws of various
states, distributions of investment company taxable income generally are taxable
to shareholders even though all or a substantial portion of such distributions
may be derived from interest on certain Federal obligations which, if the
interest were received directly by a resident of such state, would be exempt
form such state's income tax ("qualifying Federal obligations"). However, some
states may exempt all or a portion of such distributions from income tax to the
extent the shareholder is able to establish that the distribution is derived
from qualifying Federal obligations. Moreover, for state income tax purposes,
interest on some Federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on FNMA Certificates
and GNMA Certificates). The Fund will provide information annually to
shareholders indicating the amount and percentage of the Fund's dividend
distribution which is attributable to interest on Federal obligations, and will
indicate to the extent possible from what types of Federal obligations such
dividends are derived. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
YIELD, TOTAL RETURN, AND OTHER PERFORMANCE STATISTICS
PERFORMANCE
As noted in each Prospectus, each Portfolio may from time to time quote various
standardized performance figures to illustrate the Portfolios' past performance.
They may occasionally cite statistics to reflect volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the Securities and Exchange Commission ("SEC"). These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Portfolios be
accompanied by certain standardized performance information computed as required
by the SEC. Current yield and average annual compounded total return quotations
used by the Portfolios are based on the new standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the Portfolios to compute or express performance follows.
TOTAL RETURN
The average annual total return is determined by finding the average annual
compounded rates of return over 1, 5, and 10-year periods (to the extent
applicable) that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes all income dividends and
capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each 1, 5, and 10-year period and
the deduction of all applicable charges and fees.
The average annual total return is calculated according to the Securities and
Exchange Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5, or 10-year periods at the end of the 1, 5, or
10-year periods (or fractional portion thereof)
The Portfolios may quote total rates of return in addition to their average
annual total returns. Such quotations are computed in the same manner as each
Portfolio's average annual compounded rate, except that such quotations will be
based on each Fund's actual return for a specified period as opposed to its
average return over 1, 5, and 10-year periods (or fractional portion thereof).
B-31
<PAGE>
The total returns for each Portfolio for the various periods have been:
<TABLE>
<CAPTION>
Short Term Government Master Fixed Income Enhanced Equity
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
1 year
1/1/96 - 12/31/96 5.28% 5.69% 22.95%
From public inception
7/1/93 - 12/31/96 5.02% 6.88% 17.01%
</TABLE>
YIELD
Current yield reflects the income per share earned by a Portfolio's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the share price on the last day of the
period and annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of a Portfolio during the base period. Yield
is calculated according to the formula:
a-b 6
Yield = 2[(----- + 1) - 1]
cd
where
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the share price on the last day of the period
The 30-day yield for the Short-Term Government and Master Fixed Income
Portfolios at March 31, 1996 is 5.08% and 5.18%, respectively.
CURRENT DISTRIBUTION RATE
Yield which is calculated according to a formula prescribed by the SEC is not
indicative of the amounts which were or will be paid to a Portfolio's
shareholders. Amounts paid to shareholders are reflected in the quoted "current
distribution rate." The current distribution rate is computed by dividing the
total amount of dividends per share paid by a portfolio during the past twelve
months by a current maximum offering price. Under certain circumstances, such
as when there has been a change in the amount of dividend payout, or a
fundamental change in investment policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends during the past twelve months. The current distribution
rate differs from the current yield computation because it may include
distributions to shareholders from sources other than portfolio security
dividends and interest, such as short-term capital gains and is calculated over
a different period of time.
VOLATILITY
Occasionally statistics may be used to specify a Portfolio's volatility or risk.
Measures of volatility or risk are generally used to compare a Portfolio's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a Portfolio relative to the total
market as represented by the Standard & Poor's 500 Stock Index. A beta of more
than 1.00 indicates volatility greater than the market, and a beta of less than
1.00 indicates volatility less than the market. Sometimes beta may be
calculated relative to a different market index. Another measure of volatility
or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
B-32
<PAGE>
One measure of performance that adjusts for risk is alpha. Alpha is a measure
of the difference between a Portfolio's performance and a market index portfolio
with the same beta.
Sales literature referring to the use of a Portfolio as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which is it presumed no federal income tax applies.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
COMPARISONS
To help investors better evaluate how an investment in the Portfolios might
satisfy their investment objective, advertisements and other materials regarding
the Portfolios may discuss various measures of a Portfolio's performance as
reported by various financial publications. Materials may also compare
performance (as calculated above) to performance as reported by other
investments, indices, and averages. The following publications, indices, and
averages, among others, may be used:
a) The Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average),
and 20 transportation company stocks. Comparisons of performance assume
reinvestment of dividends.
b) Standard and Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available. Comparisons
of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry, and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Financial publications: The Wall Street Journal and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
h) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in the
price of goods and services, in major expenditure groups.
i) Stocks, Bonds Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
j) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
k) Historical data supplied by the research departments of First Boston
Corporation, The J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers, Smith Barney Shearson and Bloomberg L.P.
B-33
<PAGE>
l) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and five financial institutions. The S & P 100 Stock
Index is a smaller more flexible index for options trading.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to a Portfolio, that the averages are generally unmanaged. In
addition there can be no assurance that a Portfolio will continue this
performance as compared to such other averages.
B-34
<PAGE>
ADDITIONAL INFORMATION
THE CUSTODIAN
The Fund's Custodian is The Union Bank of California, N.A., Trust Department,
475 Sansome Street, 11th Floor, San Francisco, California 94111. Pursuant to
the terms of the Custodian Agreement, the Fund will forward to the Custodian the
proceeds of each purchase of Portfolio shares. The Custodian will hold such
proceeds and make disbursements therefrom in accordance with the terms of the
Custodian Agreement. It will retain possession of the securities purchased with
such proceeds and maintain appropriate records with respect to receipt and
disbursements of money, receipt and release of securities, and all other
transactions of the Custodian with respect to the securities and other assets of
each Portfolio.
TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT
The Fund's Transfer, Dividend Disbursing and Shareholder Servicing Agent is
Analytic-TSA Global Asset Management, Inc. (see "Investment Advisory and Other
Services").
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 1000 Wilshire Boulevard, Los Angeles, CA 90017, serves as
independent auditors to the Fund. The services provided by the firm include the
audit of the financial statements of the Fund and services related to other
filings made with the Securities and Exchange Commission.
LEGAL COUNSEL
The Fund's legal counsel is Paul, Hastings, Janofsky & Walker LLP, 555 South
Flower Street, Los Angeles, California 90071.
FINANCIAL STATEMENTS
The financial statements in the Fund's 1996 Annual Report to Shareholders are
incorporated in this Statement of Additional Information by reference. Such
financial statements have been audited by the Fund's independent auditors,
Deloitte & Touche LLP, whose report thereon also appears in such Annual Report
and is incorporated herein by reference. Such financial statements have been
incorporated hereby in reliance upon such reports given upon their authority as
experts in accounting and auditing. Copies of the Fund's 1996 Annual Report to
Shareholders may be obtained at no charge by writing or telephoning the Fund at
the address or number on the front page of this Statement of Additional
Information.
B-35
<PAGE>
APPENDIX - DESCRIPTION OF BOND RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate rating is a current assessment of the credit
worthiness of an obligor with respect to a specific obligation. This assessment
may take into consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. Standard &
Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations.
1. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Bonds have the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
AA Bonds have a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.
A Bonds have a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB Bonds are regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for bonds in this
category than in higher rated categories.
BB, B, CCC, CC and C Bonds are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the least degree of
speculation and C the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. A C rating
is typically applied to debt subordinated to senior debt which is assigned an
actual or implied CCC rating. It may also be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
B-36
<PAGE>
MOODY'S BOND RATINGS
Aaa Bonds are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edged". Interest
payments are protected by a large or by an exceptionally stable margin and
principal as 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 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.
A Bonds 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 some time in the future.
Baa Bonds 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 length of time. Such
Bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes Bonds in
this class.
B Bonds generally lack characteristics of desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa Bonds are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
The Fitch Bond Rating provides a guide to investors in determining the
investment risk associated with a particular security. The rating represents
its assessment of the issuer's ability the obligations of a specific debt issue.
Fitch bond ratings are not recommendations to buy, sell or hold securities since
they incorporate no information on market price or yield relative to other debt
instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and of
any guarantor, as well as the political and economic environment that might
affect the future financial strength and credit quality of the issuer.
Bonds which have the same rating are of similar but not necessarily identical
high grade investment quality since the limited number of rating categories
cannot fully reflect small differences in the degree of risk. Moreover, the
character of the risk factor varies from industry to industry and between
corporate, health care and municipal obligations.
In assessing credit risk, Fitch Investors Service relies on current information
furnished by the issuer and/or guarantor and other sources which it considers
reliable. Fitch does not perform an audit of the financial statements used in
assigning a rating.
B-37
<PAGE>
Ratings may be changed, withdrawn, or suspended at any time to reflect changes
in the financial condition of the issuer, the status of the issue relative to
other debt of the issuer, or any other circumstance that Fitch considers to have
a material effect on the credit of the obligor.
AAA rated bonds are considered to be investment grade and of the highest
credit quality. The obligor has an extraordinary ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA rated bonds are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal,
while very strong, is somewhat less than for AAA rated securities or
more subject to possible change over the term of the issue.
A rated bonds are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB rated bonds are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to weaken this
ability than bonds with higher ratings.
BB rated bonds are considered speculative and of low investment grade.
The obligor's ability to pay interest and repay principal is not
strong and is considered likely to be affected over time by adverse
economic changes.
B rated bonds are considered highly speculative. Bonds in this class
are lightly protected as to the obligor's ability to pay interest over
the life of the issue and repay principal when due.
CCC rated bonds may have certain identifiable characteristics which, if
not remedied, could lead to the possibility of default in either
principal or interest payments.
DUFF & PHELPS, INC. LONG-TERM RATINGS
These ratings represent a summary opinion of the issuer's long-term fundamental
quality. Rating determination is based on qualitative and quantitative factors
which may vary according to the basic economic and financial characteristics of
each industry and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as competition,
government action, regulation, technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The projected viability of the
obligor at the trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the security, (e.g., first
mortgage bonds, subordinated debt, preferred stock, etc.). The extent of rating
dispersion among the various classes of securities is determined by several
factors including relative weightings of the different security classes in the
capital structure, the overall credit strength of the issuer, and the nature of
covenant protection. Review of indenture restrictions is important to the
analysis of a company's operating and financial constraints.
B-38
<PAGE>
The Credit Rating Committee formally reviews all ratings once per quarter (more
frequently, if necessary).
Rating
Scale Definition
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk modest,
AA but may vary slightly from time to time because of economic
AA- conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
- --------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
B-39
<PAGE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The categories are as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues within this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 Designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are designated A-1+.
A-2 Designation indicates that the capacity for timely payment is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Designation indicates a satisfactory capacity for timely payment. Issues
with this designation, however, are somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues are regarded as having only an adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
C Issues have a doubtful capacity for payment.
MOODY'S COMMERCIAL PAPER RATINGS
Moody's rates commercial paper as either Prime, which contains three categories,
or Not Prime. The commercial paper ratings are as follows:
P-1 Issuers (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations, normally evidenced by the
following characteristics: (i) leading market positions in well established
industries, (ii) high rates of return on funds employed, (iii) conservative
capitalization structures with moderate reliance on debt and ample asset
protection, (iv) broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and (v) well established access to a range
of financial markets and assured sources of alternate liquidity.
P-2 Issuers (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations, normally evidenced by many of
the characteristics of a P-1 rating, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
P-3 Issuers (or related supporting institutions) have an acceptable capacity for
repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers (or related supporting institutions) do not fall within any of
the Prime rating categories.
B-40
<PAGE>
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and investment notes. Although the
credit analysis is similar to Fitch's bond rating analysis, the short-term
rating places greater emphasis on the existence of liquidity necessary to meet
the issuer's obligations in a timely manner. Fitch's short-term ratings are as
follows:
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated Fitch-1+.
Fitch-2 (Good Credit Quality) Issues carrying this rating have a
satisfactory degree of assurance for timely payment but the
margin of safety is not as great as the two higher
categories.
Fitch-3 (Fair Credit Quality) Issues carrying his rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse
change is likely to cause these securities to be rated below
investment grade.
Fitch-S (Weak Credit Quality) Issues carrying this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near term adverse
changes in financial and economic conditions.
DUFF & PHELPS, INC. SHORT-TERM RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations
with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds, including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligors reliance on short-term funds on an ongoing basis.
A. Category 1: High Grade
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity
factors are strong and supported by good
fundamental protection factors. Risk factors are
very small.
B. Category 2: Good Grade
B-41
<PAGE>
Duff 2 Good certainty of timely payment. Liquidity
factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total
financing requirements, access to capital markets
is good. Risk factors are small.
C. Category 3: Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection
factors qualify issue as investment grade. Risk
factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D. Category 4: Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in
debt service. Operating factors and market access
may be subject to a high degree of variation.
B-42
<PAGE>
PART C
OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(1) The following information is included in Part A - Prospectus:
Financial Highlights
(2) The following information is included in Part B - Statement of
Additional Information:
Registrant's Statements of Assets and Liabilities including
Schedules of Portfolio Investments, Statements of Changes in Net
Assets, Statements of Operations, related notes, and Independent
Auditors' Report are included as part of Registrant's Annual
Report to Shareholders for the period ended December 31, 1996,
incorporated by reference in Part B.
(b) Exhibits
1.1 Certificate of Trust of Registrant -- filed as Exhibit 1.1 to the
Form N-1A Registration Statement of registrant on December 15,
1992 (the "Registration Statement") and incorporated herein by
reference,
1.2 Amendment to Certificate of Trust of Registrant - filed as
Exhibit 1.2 to Pre-Effective Amendment No. 1 to the Form N-1A
Registration Statement of the registrant on April 23, 1993
("Pre-Effective Amendment No. 1") and incorporated herein by
reference.
1.3 Amended and Restated Declaration of Trust of Registrant - filed
as Exhibit 1.3 to Pre-Effective Amendment No. 1 and incorporated
herein by reference.
1.4 Amendment of Amended and Restated Declaration of Trust of
Registrant.
2 Bylaws of Registrant -- filed as Exhibit 2 to the Registration
Statement and incorporated herein by reference.
3 None
4 None
5 Investment Management Agreement between Registrant and Analytic
Investment Management, Inc. dated November 30, 1992 -- filed as
Exhibit 5 to the Registration Statement and incorporated herein
by reference.
5.1 Amendment to Investment Management Agreement between Registrant
and Analytic Investment Management, Inc. dated March 18, 1993 -
filed as Exhibit 5.1 to Pre-Effective Amendment No. 1 and
incorporated herein by reference.
6 None
7 None
8 Custodian Agreement between Registrant and The Bank of
California, N.A., dated December 1, 1992 -- filed as Exhibit 8 to
the Registration Statement and incorporated herein by reference.
9.1 Transfer Agent Agreement between Registrant and Analytic
Investment Management, Inc. dated November 30. 1992 -- filed as
Exhibit 9.1 to the Registration Statement and incorporated herein
by reference.
9.2 Fund Accounting Agreement between Registrant and Analytic
Investment Management, Inc. dated November 30, 1992 -- filed as
Exhibit 9.2 to the Registration Statement and incorporated herein
by reference.
10 Opinion and Consent of Counsel - included as part of Registrant's
Form 24f-2 Notice filed February 27,1997 and incorporated herein
by reference.
11 Consent of Independent Auditors
C-1
<PAGE>
12 Not applicable.
13 Investment Representations of Initial Investor - filed as Exhibit
13 to Pre-Effective Amendment No. 1 and incorporated herein by
reference.
14 Analytic Individual Retirement Account Disclosure Statement and
Application to Participate -- filed as Exhibit 14 to
Post-Effective Amendment No. 1 to the Form N-1A Registration
Statement of Registrant on February 15, 1994, and incorporated
herein by reference.
15 None.
16 Schedule of Computation of Performance and Yield Quotations in
Registration Statement -- filed as Exhibit 16 to Post Effective
Amendment No. 2 to the Form N-1A Registration Statement of
Registrant on April 29, 1994 and incorporated herein by
reference.
17 None.
18 None.
19 Financial Statements - filed pursuant to Rule 303 of Regulation
S-T.
27 Financial data schedule.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
By reason of its common Board of Directors and investment adviser,
Analytic Optioned Equity Fund, Inc., a California corporation which is
registered as a diversified, open-end management investment company
under the 1940 Act, may be deemed to be under common control with the
Registrant. In addition, at March 31, 1997, Trust Company of
Knoxville, a Tennessee trust company, owns 82.58% of the Registrant's
shares and may be deemed to be controlling persons of the Registrant
under the 1940 Act.
ITEM 26: NUMBER OF HOLDERS OF SECURITIES
Number of Record
Holders As of
Portfolio Title of Class March 31, 1997
---------------------------------------------------------------------------
Short-Term Government Shares of Beneficial Interest 51
Master Fixed Income Shares of Beneficial Interest 61
Enhanced Equity Shares of Beneficial Interest 101
ITEM 27. INDEMNIFICATION
Section 5.2 of Registrant's Declaration of Trust provides for
indemnification of Registrant's trustees and officers against
liabilities incurred by them in connection with the defense or
disposition of any action or proceeding in which they may be involved
or with which they may be threatened, while in office or thereafter,
by reason of being or having been in such office, except with respect
to matters as to which it has been determined that they acted with
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office ("Disabling
Conduct").
Section 7 of Registrant's Investment Management Agreement, Section 9
of Registrant's Transfer Agency Agreement, and Section 7 of
Registrant's Fund Accounting Agreement, limits the liability of
Registrant's Adviser in connection with performing its obligations
under the Agreements, except with respect to matters involving their
Disabling Conduct.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
C-2
<PAGE>
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
During the two years ended December 31, 1996, Analytic-TSA Global
Asset Management, Inc. (the "Adviser") has engaged only in the
business of acting as investment adviser to fiduciaires and other
long-term investors. It also acts as adviser to Analytic Optioned
Equity Fund, Inc., an open-end, diversified registered investment
company. During such period, the other substantial business,
professions, vocations or employments of the directors or officers of
the Adviser have been as follows:
<TABLE>
<CAPTION>
Name Office Other Employment
<S> <C> <C>
Roger G. Clarke Chairman of the Board of President of Analytic-TSA Investors
Directors (wholly owned subsidiary of Adviser) and
Director of Investment Securities of the
Church of Jesus Christ of Latter Day
Saints, since January 1996. Formerly,
Managing Director, President, Chief
Executive Officer and Chief Investment
Officer of TSA Capital Management
Michael F. Koehn Member of the Board of Co-founder and President of Analysis
Directors, President and Chief Group, Inc.; Director of Analytic Optioned
Executive Officer Equity Fund; Trustee of The Analytic
Series Fund.
Gregory M. McMurran Chief Investment Officer Treasurer of Analytic Optioned Equity Fund
and The Analytic Series Fund
Harindra de Silva Managing Director President of Analytic Optioned Equity Fund
and The Anaytic Series Fund. President of
AG Risk Management and Principal of
Analysis Group
Robert J. Bannon Managing Director Portfolio Manager of Analytic-TSA
Investors (wholly owned subsidiary of
Adviser) since March, 1996. Formerly,
Senior Vice President and Senior
Investment Strategist of TSA Capital
Management (4/95 to 1/96); Senior Bond
Strategist of I.D.E.A. (5/92 to 4/95)
Charles L. Dobson Director, Secretary and Portfolio Executive Vice President and Secretary of
Manager Analytic Optioned Equity Fund and The
Analytic Series Fund.
Marie Nastasi Arlt Chief Operating Officer Senior Vice President of Analytic Optioned
Equity Fund and The Analytic Series Fund.
Secretary, Treasurer, Principal and Vice
President of Analytic-TSA Investors
(wholly owned subsidiary of Adviser) since
January, 1996. Formerly, Executive Vice
President, Managing Director, Principal,
Treasurer and Secretary of TSA Capital
Management.
Angelo A. Calvello Director -- Business Senior Vice President of Analytic Optioned
Development Equity Fund and The Analytic Series Fund.
Formerly, Executive Vice President at
Credit Agricole Futures and Vice President
of The Chicago Mercantile Exchange.
</TABLE>
The business address of such persons is700 South Flower Street, Suite 2400, Los
Angeles, CA 90017
C-3
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
Not applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder will be maintained at the offices of the
Registrant and its investment adviser, 700 South Flower Street, Suite
2400, Los Angeles, CA 90017.
ITEM 31. MANAGEMENT SERVICES
Not applicable
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding shares to call a meeting of
shareholders for the purpose of voting upon the question of removal of
a Trustee, it will do so and will assist in communications with other
shareholders as required by Section 16(c) of the Investment Company
Act of 1940.
In addition, Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Irvine, and State of California, on the 28th day
of April, 1997.
THE ANALYTIC SERIES FUND
(Registrant)
By
-----------------------------------
Michael F. Koehn, Chairman
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- -------------------------
Harindra de Silva President April 28, 1997
- -------------------------
Gregory M. McMurran Treasurer (Chief Financial Officer) April 28, 1997
- -------------------------
Michael F. Koehn Chairman of the Board of Trustees April 28, 1997
- -------------------------
Michael D. Butler* Trustee April 28, 1997
- -------------------------
Robertson Whittemore* Trustee April 28, 1997
- -------------------------
April 28, 1997
*By
---------------------
Deborah Sheflin
Attorney-in-fact
C-5
<PAGE>
EXHIBIT INDEX
THE ANALYTIC SERIES FUND
EXHIBIT DESCRIPTION PAGE
11 Consent of Independent Auditors C-7
19 Financial Statements C-25
27 Financial data schedule
C-6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to (a) the use in this Post-Effective Amendment No. 5 to Registration
Statement No. 33-55758 on Form N-1A of our report dated February 10, 1997, on
the statement of assets and liabilities, including the Schedule of Portfolio
Investments, of The Analytic Series Fund (comprising the Short-Term
Government, Master Fixed Income and Enhanced Equity portfolios), as of
December 31, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the four
years in the period then ended and for the one month ended December 31, 1992
appearing in Part B, the Statement of Additional Information of such
Registration Statement, (b) the reference to us under the heading "Financial
Highlights" in the Prospectus, which are a part of such Registration
Statement, and (c) the reference to us under the headings "Independent
Auditors" and "Financial Statements" in the Statement of Additional
Information of such Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 29, 1997
C-7
<PAGE>
MEMBER OF
100% NO-LOAD-TRADEMARK-
ANALYTIC SERIES FUND MUTUAL FUND COUNCIL
- -------------------------
January 31, 1997
Dear Fellow Shareholders,
U.S. stock markets dipped during December putting a damper on an otherwise
strong performing quarter. The Dow Jones was up 10.3% for the quarter and 29.0%
for the year. The S&P 500 was up 8.3% for the quarter and 23.0% for the year.
The S&P MidCap 400 was up 6.1% for the quarter and 18.8% for the year. The
NASDAQ 100 Index was up 11.4% for the quarter and 40.4% for the year. All of the
above are with dividends reinvested.
The best performing industries for the quarter were electronic
semi-conductor, tobacco, and oil and gas drilling, all up over 20%. For the
year, the best performing industries were oil and gas drilling, shoes and
electronic semi-conductor, all up over 45%. The worst performing industries
during the quarter were health care, manufactured housing, and hardware and
tools, all down over 9%. For the year the worst performing industries were
machines, broadcast/media, and trucking, all down over 18%.
U.S. fixed income investors enjoyed a good fourth quarter of 1996. Price
returns were positive across the yield curve with investors in long-term bonds
enjoying the largest gains. For the quarter, total returns ranged from 4.7% for
30 year government bonds to 1.9% for the two year Treasury note. However, for
all of 1996 bond returns were mixed. Thirty-year government bonds declined 4.4%
for the year, while at the same time two-year Treasury note advanced 4.8%.
Ten-year notes were flat returning 0.1% for 1996. For the first quarter of 1997
Analytic-TSA is looking for the yield curve to steepen. Due to increasing
industrial capacity utilization and strong U.S. equity returns, we believe that
yields will increase for longer maturity government debt.
The Analytic Series Fund has enjoyed outstanding returns over the current
period. The next sections present the performance of each portfolio followed by
a chart of universe comparisons.
SHORT-TERM GOVERNMENT PORTFOLIO
For the quarter ending December 31, 1996, your Portfolio's total return was
2.68%, and 5.28% for the year. The Merrill Lynch 1 to 3 Year Treasury Index
increased 1.91% and 5.00%, respectively. At year end, the Portfolio's share
price was $9.83 after paying its 42nd consecutive monthly dividend (since public
inception) from net investment income. The total quarterly dividend paid through
December 31 was $0.30 per share and $0.66 for the year, and the SEC 30-day yield
was 4.92%.
As we indicated in our last shareholder letter, this Portfolio redeemed the
holdings of a large shareholder in December of 1996. December 31 assets are at
$1,085,275 and expenses through March 1997 remain capped at a 0.60% annual rate.
Currently your allocation is 69% U.S. Treasury and 31% in cash. The large cash
position is in anticipation of an additional shareholder redemption/reallocation
from the Short-Term Government Portfolio to another Analytic fund in early 1997.
The status of this Portfolio will be a subject for review at the March 1997
Board of Trustees meeting.
C-25
<PAGE>
MASTER FIXED INCOME PORTFOLIO
For the quarter ending December 31, 1996, your Portfolio was up 3.09%, and
5.69% for the year. The Lehman Bothers Government/Corporate Bond Index (LBGC)
was up 3.06% for the quarter and 2.91% for the year. The Lehman Brothers
Government Aggregate Bond Index (Bond Aggregate) was up 3.00% for the quarter,
3.61% for the year. At year end, the Portfolio's share price was $10.27 after
paying its 42nd consecutive monthly dividend (since public inception) from net
investment income. The total quarterly dividend paid through December 31 was
$0.17 per share and $0.71 for the year, and the SEC 30-day yield was 6.05%.
Your Portfolio is diversified across a variety of major fixed income
categories. For the quarter, U.S. Treasuries (74% of the LBGC) returned 2.92%.
The U.S. Government Agency sector (non-Treasury issues) of the index returned
2.89%. The U.S. Government mortgage backed securities component of the index
returned 3.00%. The corporate sector of the index returned 3.57% for the
quarter, outperforming the other major fixed income categories.
Your Portfolio currently has an allocation of 77% to the traditional fixed
income sector, which consists of high quality U.S. Treasury and Agency
securities, corporate bonds and mortgage backed securities. This sector of your
Portfolio returned 5.18% for the quarter and 4.98% for the year.
The option hedged equity sector of your Portfolio consists of deeply hedged
large and mid capitalization stocks. At year end, 20% of your Portfolio was
allocated to this sector. This sector of your Portfolio returned 2.66% for the
quarter and 11.29% for the year. This sector of the Portfolio is defensively
positioned against a possible retreat in the equity market, and over full market
cycles is expected to outperform the Bond Aggregate.
Your Portfolio maintains an investment discipline that focuses on long-term
investment results and not short term market speculation. The cash held for
investments in your Portfolio was 15% at year end.
Over the one quarter, one year, and three year periods ending December 31,
1996, the Master Fixed Income Portfolio was rated by Lipper Analytical Services,
Inc. as the number one mutual fund in its category. Lipper currently rates the
Master Fixed Income Portfolio as an "A". Furthermore, Morningstar, Inc. places
the Master Fixed Income Portfolio in the top 1% of all funds in its category
over a three year period ending December 31, 1996. The long-term focus and
allocation, plus a favorable market environment, has resulted in strong
performance for the year and since inception.
ENHANCED EQUITY PORTFOLIO
The quarter ending December 31, 1996 was exciting, as this was the first
quarter using our new stock selection model. The new model is based on research
pioneered by Professor Robert A. Haugen and was featured in BUSINESS WEEK,
December 16, 1996. The model utilizes 50 factors grouped into the following
categories: profitability, valuation, recent performance, size and liquidity.
During the quarter, your Portfolio's net asset value increased 11.4% per
share, while the S&P 500 Index increased 8.3%, both with dividends reinvested.
At quarter end, your Portfolio's share price was $12.09 and its dividend was
0.10 per share, which was the 14th consecutive quarterly dividend from net
investment income. With the strong fourth quarter, your Portfolio's net asset
value matched the performance of the S&P 500 Index, both increasing 23.0% for
the calendar year 1996.
C-26
<PAGE>
The strong fourth quarter and solid 1996 performance resulted in the
Enhanced Equity Portfolio receiving a 5-Star rating (highest rating available)
from Morningstar, Inc. for the year ending December 31, 1996. The rating was
given to the Portfolio within its equity universe of more than 1,000 mutual
funds and was awarded due to its strong performance and below average risk. In
fact, the fourth quarter performance ranked the Enhanced Equity Portfolio in the
top 10% of all funds in this universe.
This Fund is suited for the investor with a tolerance for risk similar to
the S&P 500 Index. The three other Analytic Funds have lower levels of risk and
allow investors to adjust their portfolio with ease. Should you have any
questions regarding your Fund's investment strategy or results, please do not
hesitate to call us at 1-800-374-2633.
WE APPRECIATE YOUR BUSINESS AND THANK YOU FOR INVESTING WITH US.
/s/ Alan L. Lewis /s/ Dennis M. Bein, CFA /s/ Scott T. Barker
Alan L. Lewis Dennis M. Bein, CFA Scott T. Barker
President Portfolio Manager Portfolio Manager
ANALYTIC SERIES FUND
AVERAGE ANNUAL COMPOUND TOTAL RETURN
(GROWTH RATE), FROM INCEPTION 7/1/93--12/31/96, PERCENT
<TABLE>
<CAPTION>
4TH QUARTER 1 YEAR INCEPTION
------------- --------- -----------
<S> <C> <C> <C>
Short-Term Government Portfolio.... 2.68% 5.28% 5.02%
Master Fixed Income Portfolio...... 3.09 5.69 6.88
Enhanced Equity Portfolio.......... 11.38 22.95 17.01
</TABLE>
C-27
<PAGE>
GROWTH OF $10,000 INVESTMENT
7/1/93 -- 12/31/96
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ENHANCED EQUITY PORTFOLIO S&P 500 CPI
<S> <C> <C> <C>
10 10 10
9/93 10.1624 10.2558 10.0485
12/93 10.4496 10.4931 10.097
3/94 10.1202 10.0928 10.1939
6/94 10.2129 10.134 10.2493
9/94 10.5367 10.633 10.3463
12/94 10.4108 10.6303 10.367
3/95 11.3428 11.6652 10.4848
6/95 12.4813 12.7721 10.5609
9/95 13.508 13.7875 10.6094
12/95 14.092 14.6091 10.6302
3/96 14.8653 15.4032 10.7826
6/96 15.4336 16.0986 10.8518
9/96 15.5541 16.5911 10.9142
12/96 17.3267 17.98 11.2438
Past performance not predictive of future
performance.
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MASTER FIXED INCOME
PORTFOLIO LEHMAN BROS GOVT/CORP BOND INDEX
<S> <C> <C>
10.00 10.00
9/93 10.342 10.3315
12/93 10.3628 10.3018
3/94 10.0771 9.9778
6/94 10.0532 9.8544
9/94 10.2294 9.9037
12/94 10.2555 9.9402
3/95 10.6921 10.4355
6/95 11.2698 11.1121
9/95 11.4999 11.3248
12/95 11.9407 11.8525
3/96 11.9751 11.5751
6/96 12.0309 11.6295
9/96 12.2425 11.8353
12/96 12.62 12.1969
Past performance not predictive of future
performance.
<CAPTION>
LB AGGREGATE BOND INDEX
<S> <C>
10.00
9/93 10.2606
12/93 10.2661
3/94 9.9712
6/94 9.8687
9/94 9.929
12/94 9.9665
3/95 10.4692
6/95 11.1071
9/95 11.3256
12/95 11.808
3/96 11.5973
6/96 11.6635
9/96 11.8782
12/96 12.2347
Past performance not predictive of future
performance.
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MERRILL LYNCH 1-3 YR TSY.
SHORT TERM GOVERNMENT PORTFOLIO INDEX
<S> <C> <C>
10 10
9/93 10.1432 10.1435
12/93 10.1995 10.2034
3/94 10.1008 10.1525
6/94 10.0895 10.1609
9/94 10.2041 10.261
12/94 10.1992 10.2614
3/95 10.5418 10.606
6/95 10.856 10.946
9/95 11.0165 11.1105
12/95 11.274 11.3901
3/96 11.2866 11.4281
6/96 11.3863 11.5435
9/96 11.5605 11.7342
12/96 11.8693 11.9573
Past performance not predictive of future
performance.
</TABLE>
C-28
<PAGE>
The Analytic Series Funds
Universe Comparisons*
Annualized Return Ending December 31, 1996
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH FUNDS GROWTH & INCOME FUNDS
<S> <C> <C> <C> <C> <C>
1 Year Since Inception 1 Year Since Inception
95th 29.34% 21.03% 95th 28.25% 19.05%
75th 23.03% 17.60% 75th 22.62% 17.57%
median 19.19% 15.36% median 20.91% 16.23%
25th 15.81% 13.53% 25th 18.42% 14.38%
5th 9.23% 10.64% 5th 15.13% 11.60%
EE: 22.95% 17.01% EE: 22.95% 17.01%
Corporate High Quality Government High Quality
Intermediate Maturity Funds Short Maturity Funds
1 Year Since Inception 1 Year Since Inception
95th 5.03% 6.39% 95th 5.31% 5.15%
75th 3.70% 5.74% 75th 4.37% 4.80%
median 3.06% 5.15% median 3.75% 4.40%
25th 2.44% 4.73% 25th 3.01% 4.04%
5th 1.22% 3.91% 5th 2.20% 3.26%
MFI: 5.69% 6.87% STG: 5.28% 5.02%
</TABLE>
*Source: Morningstar.
Distributions show 95th, 75th, median, 25th and 5th percentiles.
n=Number of funds in investment objective for that time period.
Inception Date: July 1, 1993.
C-29
<PAGE>
SHORT-TERM GOVERNMENT PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Principal Maturity Market
Amount Coupon Date Value
- --------- ------- -------- ----------
<C> <S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS--69.33% OF NET ASSETS
$300,000 Treasury Note 5.625% 11/30/00 $ 294,797
200,000 Treasury Note 6.125% 5/31/97 200,531
200,000 Treasury Note 7.250% 2/15/98 203,219
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $706,577) 698,547
CASH EQUIVALENTS--30.57%
SEI Cash Plus Trust--Prime Obligation, 5.61% 308,046
EXCESS OTHER ASSETS OVER LIABILITIES (NET)--0.10% 986
----------
NET ASSETS--100% $1,007,579
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-30
<PAGE>
SHORT-TERM GOVERNMENT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Securities portfolio at market value (identified cost $706,577)..................................... $ 698,547
Cash equivalents.................................................................................... 308,046
Accrued interest receivable......................................................................... 14,518
Unamortized organization expense.................................................................... 2,518
----------
Total assets...................................................................................... 1,023,629
LESS LIABILITIES:
Accrued expenses.................................................................................... 16,050
----------
NET ASSETS............................................................................................ $1,007,579
----------
----------
REPRESENTED BY:
Paid-in capital..................................................................................... $1,809,522
Net realized loss on investment and foreign currency transactions................................... (793,913)
Net unrealized depreciation of investment and foreign currency transactions......................... (8,030)
----------
$1,007,579
----------
----------
Net asset value, purchase and redemption price per outstanding capital share
(102,458 capital shares outstanding).............................................................. $ 9.83
----------
----------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................................... $ 1,521,025 $ 1,523,439
Net realized loss on investment and foreign currency transactions........ (444,657) (257,536)
Change in unrealized appreciation on investment and foreign currency
translations........................................................... (8,088) 1,360,958
----------------- -----------------
Increase in net assets from operations................................. 1,068,280 2,626,861
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............................................... (1,521,025) (1,523,442)
Return of Capital........................................................ (12,345) 0
----------------- -----------------
Decrease in net assets from distributions.............................. (1,533,370) (1,523,442)
----------------- -----------------
FUND SHARE TRANSACTIONS:
Proceeds from sales of 115,424 and 228,201 capital shares for 1996 and
1995, respectively..................................................... 1,165,744 2,264,736
Proceeds from 149,181 and 154,571 capital shares issued upon reinvestment
of distributions for 1996 and 1995, respectively....................... 1,465,395 1,523,106
Cost of 2,957,142 and 151,085 capital shares redeemed for 1996 and 1995,
respectively........................................................... (29,038,540) (1,492,184)
----------------- -----------------
(Decrease) increase in net assets from fund share transactions......... (26,407,401) 2,295,658
----------------- -----------------
Net (decrease) increase in net assets.................................... (26,872,491) 3,399,077
Net assets, beginning of year.......................................... 27,880,070 24,480,993
----------------- -----------------
Net assets, end of year................................................ $ 1,007,579 $ 27,880,070
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-31
<PAGE>
SHORT-TERM GOVERNMENT PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................. $1,675,376
----------
Total investment income................................. 1,675,376
----------
EXPENSES:
Fees paid to Analytic-TSA Global Asset Management (the
Adviser):
Investment advisory and management fees................. 76,404
Transfer agent and accounting fees...................... 54,386
Audit and tax fees........................................ 20,965
Shareholder services, reports and notices................. 13,153
Registration fees......................................... 9,219
Custodian fees............................................ 7,925
Directors' fees and expenses.............................. 6,457
Legal fees................................................ 3,185
Organizational expenses................................... 2,747
----------
Total expenses........................................ 194,441
Reimbursed expenses by the adviser........................ (40,090)
----------
Net expenses.............................................. 154,351
----------
Net investment income..................................... 1,521,025
----------
NET REALIZED & UNREALIZED LOSSES ON INVESTMENT AND FOREIGN CURRENCY
TRANSACTIONS
Net realized loss on investment and foreign currency
transactions:
Proceeds................................................ $31,838,277
Less cost............................................... 32,282,934
-----------
Net realized loss on investment and foreign currency
transactions........................................ (444,657)
Net unrealized loss:
Change in unrealized appreciation on investments........ (8,088)
----------
Net realized and unrealized loss on investment and
foreign currency transactions....................... (452,745)
----------
Net increase in net assets from operations.......... $1,068,280
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-32
<PAGE>
MASTER FIXED INCOME PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
FIXED INCOME SECURITIES
Principal Maturity Market
Amount Coupon Date Value
- ---------- -------- -------- -----------
U.S. TREASURY OBLIGATIONS--19.07% OF NET ASSETS
<C> <S> <C> <C> <C>
$ 300,000 Treasury Bond 7.500% 11/15/16 $ 324,891
250,000 Treasury Bond 8.000 11/15/21 286,601
350,000 Treasury Note 5.250 7/31/98 347,211
1,000,000 Treasury Note 5.625 11/30/00 982,656
500,000 Treasury Note 5.875 6/30/00 496,641
250,000 Treasury Note 6.250 2/15/03 249,726
150,000 Treasury Note 6.375 1/15/99 151,453
250,000 Treasury Note 6.375 8/15/02 251,680
1,500,000 Treasury Note 6.500 5/15/05 1,510,781
200,000 Treasury Note 8.000 5/15/01 213,781
250,000 Treasury Note 8.500 11/15/00 270,234
125,000 Treasury Note 8.875 5/15/00 135,566
275,000 Treasury Note 9.125 5/15/99 293,949
-----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $5,648,570) 5,515,170
-----------
U.S. MORTGAGE BACKED SECURITIES--15.21%
1,144,585 Federal Home Loan Mortgage Corporation Pool #66053 7.000% 12/13/25 1,122,407
600,016 Federal Home Loan Mortgage Corporation Pool #80397 7.500 4/1/26 600,578
103,292 Federal Home Loan Mortgage Gold Pool #C00120 8.000 5/1/22 105,293
102,244 Federal Home Loan Mortgage Corporation Pool #A00771 8.500 8/1/17 109,058
1,170,944 Federal National Mortgage Association Pool #250440 7.000 1/1/26 1,144,964
107,850 Federal National Mortgage Association Pool #55554 8.500 6/1/08 113,314
568,592 Government National Mortgage Association Pool #345414 6.500 11/1/23 542,295
+ 121,108 Government National Mortgage Association Pool #8228 7.000 7/20/23 122,437
104,731 Government National Mortgage Association Pool #326210 7.500 9/15/22 104,764
123,201 Government National Mortgage Association Pool #344313 7.500 7/15/23 123,239
77,538 Government National Mortgage Association Pool #341445 8.000 12/15/22 79,090
59,085 Government National Mortgage Association Pool #311857 8.500 9/15/21 61,204
38,096 Government National Mortgage Association Pool #302242 9.500 2/15/21 41,191
13,273 Government National Mortgage Association Pool #290783 10.000 6/15/20 14,600
28,609 Government National Mortgage Association Pool #297479 10.000 9/15/20 31,470
36,506 Government National Mortgage Association Pool #299059 10.000 10/15/20 40,157
39,830 Government National Mortgage Association Pool #298778 10.000 11/15/20 43,811
-----------
TOTAL U.S. MORTGAGE BACKED SECURITIES (Cost $4,458,892) 4,399,872
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-33
<PAGE>
MASTER FIXED INCOME PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
FIXED INCOME SECURITIES (CONTINUED)
Principal Maturity Market
Amount Coupon Date Value
- ---------- -------- -------- -----------
U.S. AGENCY OBLIGATIONS--25.82%
<C> <S> <C> <C> <C>
$ 200,000 Federal Farm Credit Bank 8.050% 5/21/07 $ 200,397
500,000 Federal Home Loan Bank 5.880 8/20/03 483,438
100,000 Federal Home Loan Bank 6.320 12/4/97 100,547
500,000 Federal Home Loan Bank 6.830 6/7/01 503,437
665,000 Federal Home Loan Mortgage Corporation 7.750 11/7/01 701,471
500,000 Federal National Mortgage Association 5.875 2/2/06 472,470
525,000 Federal National Mortgage Association 6.360 8/16/00 527,001
1,000,000 Federal National Mortgage Association 6.625 4/18/01 1,011,015
1,000,000 Federal National Mortgage Association 7.000 5/10/01 1,011,166
200,000 Federal National Mortgage Association 7.550 4/22/02 210,175
400,000 Federal National Mortgage Association 7.650 3/10/05 425,209
300,000 Federal National Mortgage Association 7.900 4/10/02 301,613
200,000 Private Export Funding Corporation 6.900 1/31/03 204,333
250,000 Private Export Funding Corporation 9.450 12/31/99 272,390
500,000 Student Loan Marketing Association 6.050 9/14/00 498,125
300,000 Tennessee Valley Authority 6.000 6/15/97 300,065
250,000 Tennessee Valley Authority 6.375 6/15/05 245,417
-----------
TOTAL U.S. AGENCY OBLIGATIONS (Cost $7,462,426) 7,468,269
-----------
CORPORATE OBLIGATIONS--15.72%
95,000 African Development Bank 6.750% 10/1/04 96,324
125,000 Amoco Canada Corporation 6.750 2/15/05 124,919
161,000 Atlantic Richfield Corporation 10.250 7/2/00 166,647
100,000 Australia Commonwealth 8.375 3/15/17 113,147
650,000 Ciba Geigy Corporate 7.000 4/18/97 651,626
100,000 Du Pont (E.I.) de Nemours 6.000 12/1/01 97,373
100,000 Du Pont (E.I.) de Nemours 8.500 2/15/03 106,375
220,000 Ford Capital BV 9.500 8/9/00 238,975
280,000 General Electric Capital 8.500 7/24/08 317,002
500,000 General Motors Acceptance Corporation 6.875 7/15/01 504,219
200,000 KFW International Finance 7.625 2/15/04 211,013
250,000 Kingdom of Sweden 12.750 10/15/97 263,086
105,000 Kingdom of Sweden 11.125 6/1/15 146,508
100,000 Limited, Inc. 8.875 8/15/99 105,017
250,000 McGraw-Hill, Inc. 9.430 9/1/00 273,240
250,000 Norddeutsche Landesbank Corporate 6.875 3/10/03 251,641
250,000 Premark Corporation 10.500 9/15/00 280,807
600,000 Republic of Austria Corporate 7.250 1/16/97 600,344
-----------
TOTAL CORPORATE OBLIGATIONS (Cost $4,638,244) 4,548,263
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-34
<PAGE>
<TABLE>
<CAPTION>
FIXED INCOME SECURITIES (CONCLUDED)
Principal Maturity Market
Amount Date Value
- ---------- -------- -----------
ZERO COUPON BONDS--0.75%
<C> <S> <C> <C> <C>
$ 50,000 Kingdom of Sweden 4/1/04 $ 30,889
1,000,000 Resolution Funding Corp. 1/15/21 186,632
-----------
TOTAL ZERO COUPON BONDS (Cost $196,945) 217,521
-----------
TOTAL FIXED INCOME SECURITIES--76.57%
(Cost $22,405,077) $22,149,095
-----------
-----------
</TABLE>
+ Adjustable Rate
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-35
<PAGE>
MASTER FIXED INCOME PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Outstanding Options
(*Indicates Put)
-----------------------------------------------------
COMMON STOCKS Investments Market Value
----------------------- ------------------
Number Market Shares Expiration Exercise Options Options
of Shares Value Optioned Date Price Bought Sold
--------- ----------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AIR TRANSPORTATION--0.06%
Comair, Inc. $ 5,000 Mar '97 $22.50* $ $ 6,875
Continental Airlines, Inc., Class B 5,000 Mar '97 25.00 22,813
-------- --------
22,813 6,875
-------- --------
BUILDING/PACKAGE MATERIALS--0.38%
Ball Corp. 5,000 130,000 5,000 May '97 22.50 20,000
----------- --------
130,000 20,000
----------- --------
CHEMICALS--(0.03%)
Monsanto Co. 7,500 Jan '97 40.00* 10,313
--------
10,313
--------
COMPUTER SERVICES/SOFTWARE--0.90%
Cisco Systems, Inc. 5,000 318,125 5,000 Apr '97 55.00 58,750
----------- --------
318,125 58,750
----------- --------
COMPUTERS--0.08%
EMC Corp. 5,000 Apr '97 30.00 25,625
H B O & Co. 2,500 Feb '97 50.00* 2,656
-------- --------
25,625 2,656
-------- --------
COSMETICS & PERSONAL CARE--0.22%
Herbalife Int'l., Inc. 5,000 Mar '97 20.00 63,750
--------
63,750
--------
ELECTRICAL EQUIPMENT--0.00%
General Instrument Corp. 4,000 Mar '97 30.00 1,000
--------
1,000
--------
ELECTRONICS--0.74%
Altera Corp. 20,000 Mar '97 70.00 20,000
Applied Materials 4,000 Jul '97 35.00 23,750
Atmel Corp. 4,000 Feb '97 32.50 13,000
Hewlett-Packard Co. 5,000 251,250 5,000 Jan '98 35.00 93,750
----------- -------- --------
251,250 56,750 93,750
----------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-36
<PAGE>
<TABLE>
<CAPTION>
Investments Outstanding Options
----------------------- (*Indicates Put)
-----------------------------------------------------
Market Value
------------------
COMMON STOCKS (CONTINUED)
Number Market Shares Expiration Exercise Options Options
of Shares Value Optioned Date Price Bought Sold
--------- ----------- -------- ---------- -------- -------- --------
ENVIRONMENTAL CONTROL--0.00%
<S> <C> <C> <C> <C> <C> <C> <C>
WMX Technologies, Inc. $ 1,500 Jan '97 $35.00 $ 281 $
--------
281
--------
FINANCIAL SERVICES & BROKERS--0.55%
Schwab Charles Corp. 5,000 Jun '97 32.50 18,437
Student Loan Marketing 2,000 186,250 2,000 Jan '97 70.00 46,500
----------- -------- --------
186,250 18,437 46,500
----------- -------- --------
FOOD PROCESSING & WHOLESALE--0.89%
Coca-Cola Co. 5,000 263,125 5,000 Jan '97 50.00 15,625
General Mills, Inc. 2,000 Apr '97 60.00 9,875
----------- -------- --------
263,125 9,875 15,625
----------- -------- --------
FOREST PRODUCTS & PAPER--0.48%
James River Corp. 4,000 132,500 4,000 Mar '97 30.00* 2,250
Willamette Industries, Inc. 1,000 May '97 70.00 4,438
----------- --------
132,500 6,688
----------- --------
HOUSEHOLD PRODUCTS/WARES--0.00%
Sunbeam-Oster, Co., Inc. 5,000 Jan '97 17.50* 313
--------
313
--------
INSURANCE--0.76%
Aetna, Inc. 4,000 320,000 4,000 Jan '97 55.00 100,500
----------- --------
320,000 100,500
----------- --------
MACHINE CONSTRUCTION/DIVERSIFIED--0.01%
Caterpillar, Inc. 3,000 Feb '97 80.00 3,376
--------
3,376
--------
MEDICAL SUPPLIES & SERVICES--0.55%
Healthsouth Rehab Corp. 4,000 Jan '97 35.00 14,000
St Jude Medical, Inc. 4,000 Apr '97 35.00 33,500
United States Surgical Corp. 3,000 118,125 3,000 Jan '97 40.00 5,250
----------- -------- --------
118,125 47,500 5,250
----------- -------- --------
MISCELLANEOUS MANUFACTURING--0.03%
Eastman Kodak Co. 3,000 Jan '97 80.00 9,000
--------
9,000
--------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-37
<PAGE>
MASTER FIXED INCOME PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Investments Outstanding Options
----------------------- (*Indicates Put)
-----------------------------------------------------
Market Value
------------------
COMMON STOCKS (CONTINUED)
Number Market Shares Expiration Exercise Options Options
of Shares Value Optioned Date Price Bought Sold
--------- ----------- -------- ---------- -------- -------- --------
OIL/GAS DOMESTIC--0.02%
<S> <C> <C> <C> <C> <C> <C> <C>
Enserch Corp. $ 5,000 May '97 $22.50 $ 7,187 $
--------
7,187
--------
OIL/GAS INTERNATIONAL--0.54%
Amoco Corp. 2,500 201,250 2,500 Jan '97 55.00 64,062
Exxon Corp. 400 39,200 400 Jan '97 60.00 15,275
Helmerich And Payne 2,500 Mar '97 50.00* 3,906
----------- --------
240,450 83,243
----------- --------
OIL EQUIPMENT/EXPLORATION & SERVICES--0.40%
Pogo Producing 3,000 141,750 3,000 May '97 40.00 25,875
----------- --------
141,750 25,875
----------- --------
PHARMACEUTICALS & BIOTECHNOLOGY--(0.08%)
Centocor, Inc. 2,500 Jan '97 35.00 5,312
Chiron Corp. 8,000 Jan '97 20.00* 13,000
North American Vaccine 6,000 Mar '97 22.50* 15,750
Stryker 1,000 Mar '97 22.50* 375
-------- --------
5,312 29,125
-------- --------
PUBLISHING--0.00%
Deluxe Corp. 3,000 Jan '97 40.00 375
--------
375
--------
RESTAURANTS & LODGING--(0.02%)
HFS, Inc. 2,500 Jan '97 60.00* 6,094
--------
6,094
--------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-38
<PAGE>
<TABLE>
<CAPTION>
Investments Outstanding Options
----------------------- (*Indicates Put)
-----------------------------------------------------
Market Value
------------------
COMMON STOCKS (CONCLUDED)
Number Market Shares Expiration Exercise Options Options
of Shares Value Optioned Date Price Bought Sold
--------- ----------- -------- ---------- -------- -------- --------
TELECOMMUNICATION UTILITIES--0.07%
<S> <C> <C> <C> <C> <C> <C> <C>
Pacific Telesis Group $ 7,500 Apr '97 $35.00 $ 20,156 $
--------
20,156
----------- -------- --------
TOTALS $ 2,101,575 $298,125 $504,869
----------- -------- --------
----------- -------- --------
TOTAL FIXED INCOME SECURITIES--76.57%
(Cost $22,405,077) $22,149,095
TOTAL COMMONS STOCKS--7.27%
(Cost $1,732,252) 2,101,575
TOTAL OPTIONS PURCHASED--1.03%
(Cost $181,858) 298,125
-----------
TOTAL INVESTMENTS--84.87%
(Cost $24,319,186) 24,548,795
TOTAL OPTIONS SOLD (1.75%)
(Premiums $357,637) (504,869)
CASH EQUIVALENTS--15.60%
SEI Cash Plus Trust--Prime Obligation, 5.61% 4,510,906
EXCESS OTHER ASSETS OVER LIABILITIES (NET)--1.28% 370,707
-----------
NET ASSETS--100% $28,925,539
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-39
<PAGE>
MASTER FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Securities portfolio at market value (identified cost $24,319,186)................................. $24,548,795
Cash equivalents................................................................................... 4,510,906
Accrued interest receivable........................................................................ 385,702
Unamortized organization expense................................................................... 2,988
Dividends receivable............................................................................... 760
-----------
Total assets..................................................................................... 29,449,151
-----------
LESS LIABILITIES:
Options outstanding at market value (premiums received $357,637)................................... 504,869
Accrued expenses................................................................................... 18,743
-----------
Total liabilities................................................................................ 523,612
-----------
Net assets......................................................................................... $28,925,539
-----------
-----------
REPRESENTED BY:
Paid-in capital.................................................................................... $28,845,091
Distributions in excess of net realized gains...................................................... (1,929)
Net unrealized appreciation of investments and options outstanding................................. 82,377
-----------
$28,925,539
-----------
-----------
Net asset value, purchase and redemption price per outstanding capital share
(2,815,970 capital shares outstanding)........................................................... $ 10.27
-----------
-----------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................................... $ 1,517,339 $ 487,209
Net realized gain (loss) on investment and option transactions........... 388,620 26,252
Change in unrealized appreciation on investments and options
outstanding............................................................ (351,052) 778,853
----------------- -----------------
Increase in net assets from operations................................. 1,554,907 1,292,314
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............................................... (1,517,896) (488,984)
From net realized gains.................................................. (355,905) 0
In excess of net realized gains.......................................... (1,929) 0
----------------- -----------------
Decrease in net assets from distributions.............................. (1,875,730) (488,984)
----------------- -----------------
FUND SHARE TRANSACTIONS:
Proceeds from sales 1,071,233 and 1,901,469 capital shares for 1996 and
1995, respectively..................................................... 10,955,161 19,536,159
Proceeds from 22,483 and 39,530 capital shares issued upon
reinvestment of distributions for 1996 and 1995, respectively.......... 231,188 396,939
Cost of 665,512 and 201,131 capital shares redeemed for 1996 and 1995,
respectively........................................................... (6,807,732) (2,023,698)
----------------- -----------------
Increase in net assets from fund share transactions...................... 4,378,617 17,909,400
----------------- -----------------
Net increase in net assets............................................... 4,057,794 18,712,730
Net assets, beginning of year.......................................... 24,867,745 6,155,015
----------------- -----------------
Net assets, end of year................................................ $ 28,925,539 $ 24,867,745
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-40
<PAGE>
MASTER FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................................................. $ 53,120
Interest............................................................................... 1,657,612
----------
Total investment income.............................................................. 1,710,732
----------
EXPENSES:
Fees paid to Analytic-TSA Global Asset Management (the Adviser):
Investment advisory and management fees.............................................. 120,578
Transfer agent and accounting fees................................................... 57,248
Audit and tax fees..................................................................... 23,315
Custodian fees......................................................................... 18,439
Registration fees...................................................................... 13,004
Shareholder services, reports and notices.............................................. 12,810
Directors' fees and expenses........................................................... 6,011
Organizational expenses................................................................ 3,259
Legal fees............................................................................. 2,938
Insurance and other expenses........................................................... 1,357
----------
Total expenses....................................................................... 258,959
Expenses paid indirectly............................................................... (15,140)
Reimbursed expenses by the Adviser..................................................... (50,426)
----------
Net expenses........................................................................... 193,393
----------
Net investment income.................................................................. 1,517,339
----------
NET REALIZED & UNREALIZED GAINS (LOSSES) ON INVESTMENT AND OPTION TRANSACTIONS:
Net realized gains on investment and option transactions:
Proceeds............................................................................. $7,998,570
Less cost............................................................................ 7,919,407
----------
Net realized gains on investments.................................................. 79,163
----------
Premiums received on options closed.................................................. 235,120
Less cost of closing purchase transactions........................................... 157,642
----------
Net realized gains on options closed............................................... 77,478
Premiums received on options expired................................................. 231,979
----------
Net realized gains on options...................................................... 309,457
----------
Total net realized gains........................................................... 388,620
Net unrealized losses:
Change in unrealized appreciation of investments outstanding........................... (246,077)
Change in unrealized appreciation of options outstanding............................. (104,975)
----------
Net change in unrealized appreciation.............................................. (351,052)
----------
Net realized and unrealized gains on investments and options....................... 37,568
----------
Net increase in net assets from operations......................................... $1,554,907
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-41
<PAGE>
ENHANCED EQUITY PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Investments
----------------------
Number of Market
COMMON STOCKS Shares Value
--------- ----------
<S> <C> <C>
AEROSPACE & DEFENSE--5.07% OF NET ASSETS
Boeing Co. 1,070 $ 113,821
United Technologies Corp. 976 64,416
----------
178,237
----------
AUTO RELATED--2.89%
Mascotech, Inc. Auto Parts 5,772 94,516
Modine Manufacturing, Co. 265 7,089
----------
101,605
----------
AUTOS & TRUCKS--0.87%
Ford Motor Co. 960 30,600
----------
30,600
----------
BANKS/SAVINGS & LOANS--8.50%
Chase Manhattan Corp. 1,151 102,727
First Citizens Bancshares, Class A 705 54,285
Firstar Corp. 270 14,175
Fulton Financial Corp. 2,657 57,125
Glenfed, Inc. 780 18,135
Old National Bancorp 732 28,731
Valley National Bankcorp 645 16,529
Washington Mutual Savings Bank 169 7,320
----------
299,027
----------
BUILDING/PACKAGE MATERIALS--1.19%
Servicemaster, Ltd. 854 22,311
U S G Corp.** 582 19,715
----------
42,026
----------
CHEMICALS--1.61%
Lyondell Petrochemical 1,078 23,716
Monsanto Co. 844 32,810
----------
56,526
----------
CLOSED-END FUNDS/HOLDING COMPANIES--3.22%
Kelly Services, Inc. 161 4,347
Manpower PLC 3,352 108,940
----------
113,287
----------
COMPUTER SERVICES/SOFTWARE--0.37%
Novell** 1,385 13,114
----------
13,114
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-42
<PAGE>
<TABLE>
<CAPTION>
Investments
----------------------
Number of Market
COMMON STOCKS (CONTINUED) Shares Value
--------- ----------
<S> <C> <C>
COMPUTERS--4.15%
Amdahl Corp.** 7,979 $ 96,746
Western Digital** 869 49,424
----------
146,170
----------
ELECTRIC/GAS/WATER UTILITIES--5.84%
Edison International 3,285 65,289
Public Service Con of New Mexico 4,656 91,374
Westcoast Energy, Inc. 2,911 48,759
----------
205,422
----------
ELECTRONICS--7.60%
General Electric Co. 1,052 104,016
Intel Corp. 759 99,382
National Service Industry 1,717 64,173
----------
267,571
----------
ENTERTAINMENT/ADVERTISING--0.63%
Viad, Corp. 1,353 22,324
----------
22,324
----------
FINANCIAL SERVICES & BROKERS--2.20%
Alliance Capital Management 791 21,060
Countrywide Credit 1,388 39,732
Newhall Land and Farming Co. 915 15,441
Sunamerica, Inc. 24 1,065
----------
77,298
----------
FOOD PROCESSING & WHOLESALE--7.90%
Dole Food Co. 287 9,722
Interstate Bakeries, Corp. 2,501 122,862
Pepsico, Inc. 3,459 101,176
SuperValu Stores 1,559 44,237
----------
277,997
----------
FOREST PRODUCTS & PAPER--2.71%
Kimberly Clark Corp. 444 42,291
Longview Fibre Co. 2,897 53,232
----------
95,523
----------
HOUSEHOLD PRODUCTS/WARES--1.53%
Procter & Gamble Co. 500 53,750
----------
53,750
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-43
<PAGE>
ENHANCED EQUITY PORTFOLIO (CONTINUED) DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Investments
----------------------
Number of Market
COMMON STOCKS (CONTINUED) Shares Value
--------- ----------
<S> <C> <C>
INSURANCE--7.34%
American International Group, Inc. 74 $ 8,010
Exel, Ltd. 2,305 87,302
Foremost Corp. of America 373 22,380
Gallagher Arthur 2,749 85,219
Reliance Group Holding, Inc. 6,050 55,206
----------
258,117
----------
MEDICAL SUPPLIES & SERVICES--0.80%
Universal Health Services, Inc.** 985 28,196
----------
28,196
----------
METALS & MINING--0.72%
Potash, Corp. 300 25,500
----------
25,500
----------
OIL/GAS DOMESTIC--6.37%
Imperial Oil, Ltd. 2,111 99,217
Murphy Oil 624 34,710
Occidental Petroleum 3,852 90,040
----------
223,967
----------
OIL/GAS INTERNATIONAL--1.91%
Chevron Corp. 354 23,010
Texaco, Inc. 449 44,059
----------
67,069
----------
OIL EQUIPMENT/EXPLORATION & SERVICES--2.83%
Canadian Occidental Petroleum 1,734 27,744
Noble Drilling Corp.** 2,280 45,315
Triton Energy, Corp.** 545 26,432
----------
99,491
----------
PHARMACEUTICALS & BIOTECHNOLOGY--5.58%
Bristol Myers Squibb Co. 359 39,041
Eli Lilly & Co. 810 59,130
Johnson & Johnson 1,972 98,107
----------
196,278
----------
PUBLISHING--2.29%
Lee Enterprises 3,465 80,561
----------
80,561
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-44
<PAGE>
<TABLE>
<CAPTION>
Investments
----------------------
Number of Market
COMMON STOCKS (CONCLUDED) Shares Value
--------- ----------
<S> <C> <C>
RAILROAD/TRUCKING/MISCELLANEOUS--2.23%
Illinois Central Transportation 599 $ 19,168
Yellow, Corp.** 4,129 59,355
----------
78,523
----------
RETAIL--GENERAL/DEPARTMENT--3.97%
Neiman Marcus Group** 2,908 74,154
Sears Roebuck & Co. 1,424 65,682
----------
139,836
----------
RETAIL--GROCERY/DRUG STORES--2.60%
Food Lion, Inc. 9,347 91,425
----------
91,425
----------
TELECOMMUNICATION UTILITIES--4.35%
Bell Atlantic Corp. 944 61,124
Century Telephone 2,976 91,885
----------
153,009
----------
TOTAL COMMONS STOCKS--97.27%
(Cost $3,191,986) 3,422,449
CASH EQUIVALENTS--2.52%
SEI Cash Plus Trust--Prime Obligation, 5.61% 88,800
EXCESS OTHER ASSETS OVER LIABILITIES (NET )--0.21% 7,392
----------
NET ASSETS--100.00% $3,518,641
----------
----------
</TABLE>
**NON-INCOME PRODUCING SECURITY
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-45
<PAGE>
ENHANCED EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Securities portfolio at market value (identified cost $3,191,986)................................... $3,422,449
Cash equivalents.................................................................................... 88,800
Dividends receivable................................................................................ 7,640
Unamortized organization expense.................................................................... 4,185
Interest receivable................................................................................. 692
----------
Total assets...................................................................................... 3,523,766
LESS LIABILITIES:
Accrued expenses.................................................................................... 5,125
----------
Net assets.......................................................................................... $3,518,641
----------
----------
REPRESENTED BY:
Paid-in capital..................................................................................... $3,289,791
Distributions in excess of net realized gains....................................................... (1,613)
Net unrealized appreciation of investments.......................................................... 230,463
----------
$3,518,641
----------
----------
Net asset value, purchase and redemption price per outstanding capital share
(291,163 capital shares outstanding).............................................................. $ 12.09
----------
----------
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................................... $ 44,694 $ 37,243
Net realized gain on investment and option transactions.................. 784,299 25,830
Change in unrealized appreciation on investments and options............. (197,964) 475,306
----------------- -----------------
Increase in net assets from operations................................. 631,029 538,379
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............................................... (44,694) (37,803)
From net realized gains.................................................. (784,299) (19,165)
In excess of net realized gains.......................................... (1,613) 0
----------------- -----------------
Decrease in net assets from distributions.............................. (830,606) (56,968)
----------------- -----------------
FUND SHARE TRANSACTIONS:
Proceeds from sales of 72,792 and 79,259 capital shares for 1996 and
1995, respectively..................................................... 1,003,474 918,435
Proceeds from 68,061 and 4,599 capital shares issued upon reinvestment of
distributions for 1996 and 1995, respectively.......................... 826,051 56,617
Cost of 28,811 and 58,462 capital shares redeemed for 1996 and 1995,
respectively........................................................... (428,908) (650,359)
----------------- -----------------
Increase in net assets from fund share transactions...................... 1,400,617 324,693
----------------- -----------------
Net increase in net assets............................................... 1,201,040 806,104
Net assets, beginning of year.......................................... 2,317,601 1,511,497
----------------- -----------------
Net assets, end of year................................................ $ 3,518,641 $ 2,317,601
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-46
<PAGE>
ENHANCED EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends....................................... $ 66,211
Interest........................................ 4,936
---------
Total investment income....................... 71,147
---------
EXPENSES:
Fees paid to Analytic /TSA Global Asset
Management (the Adviser):
Investment advisory and management fees....... 17,494
Transfer agent and accounting fees............ 7,140
Audit and tax fees.............................. 6,928
Organizational expenses......................... 4,565
Registration fees............................... 3,852
Custodian fees.................................. 1,809
Shareholder services, reports and notices....... 1,156
Directors' fees and expenses.................... 611
Legal fees...................................... 310
Insurance and other expenses.................... 142
---------
Total expenses................................ 44,007
Expenses paid indirectly........................ (3,920)
Reimbursed expenses by the adviser.............. (13,634)
---------
Net expenses.................................... 26,453
---------
Net investment income........................... 44,694
---------
NET REALIZED & UNREALIZED GAINS (LOSSES) ON
INVESTMENT AND OPTION TRANSACTIONS:
Net realized gains (losses) on investment and
option transactions:
Proceeds...................................... $5,288,947
Less cost..................................... 4,439,155
----------
Net realized gain on investments............ 849,792
---------
Premiums received on options closed........... 41,046
Less cost of closing purchase transactions.... 106,539
----------
Net realized losses on options closed......... (65,493)
---------
Total net realized gains.................... 784,299
---------
Net unrealized gains (losses):
Change in unrealized appreciation of
investments outstanding..................... (198,285)
Change in unrealized appreciation of options
outstanding................................. 321
----------
Net change in unrealized appreciation....... (197,964)
---------
Net realized and unrealized gains on
investment and option transactions........ 586,335
---------
Net increase in net assets from
operations.............................. $ 631,029
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
C-47
<PAGE>
SHORT-TERM GOVERNMENT PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ONE
MONTH
ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
---------------------------------- -----------
1996 1995 1994 1993 1992
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 9.98 $ 9.55 $ 10.03 $ 10.03 $ 10.00
------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.62 0.56 0.48 0.53 0.05
Net realized and unrealized gains
(losses) on investment and foreign
currency transactions............... (0.10) 0.43 (0.48) 0.00 0.03
------- ------- ------- ------- -----------
Total from investment operations.... 0.52 0.99 0.00 0.53 0.08
------- ------- ------- ------- -----------
LESS DISTRIBUTIONS:
From net investment income............ 0.66 0.56 0.48 0.53 0.05
Return of capital..................... 0.01 0.00 0.00 0.00 0.00
------- ------- ------- ------- -----------
Total distributions................. 0.67 0.56 0.48 0.53 0.05
------- ------- ------- ------- -----------
Net asset value, end of period.......... $ 9.83 $ 9.98 $ 9.55 $ 10.03 $ 10.03
------- ------- ------- ------- -----------
------- ------- ------- ------- -----------
TOTAL RETURN............................ 5.28% 10.65% 0.00% 5.37% 9.38%+
------- ------- ------- ------- -----------
------- ------- ------- ------- -----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)........ $ 1,008 $27,880 $24,481 $26,097 $ 7,619
Ratio of expenses to average net
assets(1).............................. 0.76% 0.82% 0.85% 0.75% 0.77%+
Ratio of net investment income to
average net assets..................... 5.99% 5.76% 5.37% 4.91% 5.45%+
Portfolio turnover rate................. 31.48% 10.15% 3.21% 85.69% 0.00%
</TABLE>
(1) Gross of Adviser reimbursed expenses. With expense reduction, such ratios
would have been 0.56%, 0.50%, 0.45%, 0.45%, 0.45%+ for each of the years in
the periods ended December 31, 1996 and for the month ended December 31,
1992, respectively.
+ Annualized
C-48
<PAGE>
MASTER FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED DECEMBER 31 ENDED
----------------------------------- DECEMBER 31
1996 1995 1994 1993 1992
------- ------- ------ ------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 10.41 $ 9.50 $10.26 $ 10.06 $10.00
------- ------- ------ ------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................. 0.58 0.61 0.64 0.67 0.04
Net gains (losses) on investments and
options (realized and unrealized)... (0.01) 0.91 (0.75) 0.41 0.06
------- ------- ------ ------- -----------
Total from investment operations.... 0.57 1.52 (0.11) 1.08 0.10
------- ------- ------ ------- -----------
LESS DISTRIBUTIONS:
From net investment income............ 0.58 0.61 0.64 0.67 0.04
From net realized gains............... 0.12 0.00 0.01 0.21 0.00
In excess of net realized gains....... 0.01 0.00 0.00 0.00 0.00
------- ------- ------ ------- -----------
Total distributions................. 0.71 0.61 0.65 0.88 0.04
------- ------- ------ ------- -----------
Net asset value, end of period.......... $ 10.27 $ 10.41 $ 9.50 $ 10.26 $10.06
------- ------- ------ ------- -----------
------- ------- ------ ------- -----------
TOTAL RETURN............................ 5.69% 16.43% (1.04)% 10.94% 13.09%+
------- ------- ------ ------- -----------
------- ------- ------ ------- -----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)........ $28,926 $24,868 $6,155 $ 8,066 $9,219
Ratio of expenses to average net
assets(1).............................. 0.97% 1.03% 1.17% 1.04% 1.05%+
Ratio of net investment income to
average net assets..................... 5.66% 5.99% 7.16% 6.39% 5.63%+
Portfolio turnover rate................. 21.95% 31.82% 44.30% 105.39% 0.00%
Average commission rate(2).............. $0.0418 $0.0277
</TABLE>
(1) Gross of Adviser reimbursed expenses and expenses indirectly paid through
brokerage arrangements. With both expense reductions, such ratios would have
been 0.72%, 0.69%, 0.60%, 0.60% and 0.60%+ for each of the years in the
periods ended December 31, 1996 and for the month ended December 31, 1992,
respectively.
(2) The formula for calculating the average commission rate is total commissions
paid divided by the total shares purchased and sold. Each option contract is
100 shares.
+ Annualized
C-49
<PAGE>
ENHANCED EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED DECEMBER 31 ENDED
---------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
------- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period...................... $ 12.94 $ 9.83 $10.15 $10.02 $ 10.00
------- ------- ------ ------ ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.21 0.23 0.28 0.40 0.01
Net realized and unrealized gains (losses) on investment
and option transactions............................... 2.74 3.22 (0.32) 0.62 0.02
------- ------- ------ ------ ------------
Total from investment operations...................... 2.95 3.45 (0.04) 1.02 0.03
------- ------- ------ ------ ------------
LESS DISTRIBUTIONS:
From net investment income.............................. 0.21 0.23 0.28 0.40 0.01
From net realized gains................................. 3.58 0.11 0.00 0.37 0.00
In excess of net realized gains......................... 0.01 0.00 0.00 0.00 0.00
Return of capital....................................... 0.00 0.00 0.00 0.12 0.00
------- ------- ------ ------ ------------
Total distributions................................... 3.80 0.34 0.28 0.89 0.01
------- ------- ------ ------ ------------
Net asset value, end of period............................ $ 12.09 $ 12.94 $ 9.83 $10.15 $ 10.02
------- ------- ------ ------ ------------
------- ------- ------ ------ ------------
TOTAL RETURN.............................................. 22.95% 35.36% (0.37)% 10.07% 4.08%+
------- ------- ------ ------ ------------
------- ------- ------ ------ ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000).......................... $ 3,519 $ 2,318 $1,511 $ 903 $12,823
Ratio of expenses to average net assets(1)................ 1.51% 1.33% 1.35% 1.35% 1.07%+
Ratio of net investment income to average net assets...... 1.53% 2.02% 3.24% 2.16% 1.66%+
Portfolio turnover rate................................... 179.47% 10.15% 24.75% 76.34% 25.20%
Average commission rate(2)................................ $0.0658 $0.0431
</TABLE>
(1) Gross of Adviser reimbursed expenses and expenses indirectly paid through
brokerage arrangements. With both expense reductions, such ratios would have
been 0.91%, 0.50%, 0.24%, 0.57% and 0.70% for each of the years in the
periods ended December 31, 1996 and for the month ended December 31, 1992,
respectively.
(2) The formula for calculating the average commission rate is total commission
paid divided by the total shares purchased and sold. Each option contract is
100 shares.
+ Annualized
C-50
<PAGE>
THE ANALYTIC SERIES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Analytic Series Fund (the "Fund") was organized on November 18, 1992, under
the laws of the state of Delaware, and is registered under the Investment
Company Act of 1940, as amended, as a no load, open-end diversified investment
company or "mutual fund" consisting of three separate portfolios. These
portfolios are: the Short-Term Government Portfolio, the Master Fixed Income
Portfolio and the Enhanced Equity Portfolio. Operations commenced on November
30, 1992.
The investment objective of each of the portfolios are as follows:
SHORT-TERM GOVERNMENT PORTFOLIO--to provide a high level of income consistent
with both low fluctuations in market value and low credit risk. At least 80%
of the total assets of the portfolio will be invested in U.S. government
securities.
MASTER FIXED INCOME PORTFOLIO--to provide above-average total returns from a
diversified bond portfolio consisting primarily of domestic government,
corporate, and mortgage-related fixed income securities.
ENHANCED EQUITY PORTFOLIO--to provide above-average total returns from a
diversified equity portfolio which consists primarily of domestic common
stocks and related investment such as options and futures.
DERIVATIVE FINANCIAL INSTRUMENTS--Each portfolio may utilize various call
option, put option, and financial futures strategies in pursuit of its
objective. These techniques will be used to hedge against changes in securities
prices, interest rates, or foreign currency exchange rates on securities held or
intended to be acquired by the portfolio to reduce the volatility of the
currency exposure associated with foreign securities, or as an efficient means
of adjusting exposure to stock or bond markets, and not for speculation. The
Portfolios will only write covered call and cash secured put options.
BASIS OF PRESENTATION--The financial statements have been prepared in conformity
with generally accepted accounting principles. The preparation of the financial
statements requires management to make estimates and assumptions that effect the
reported amount of assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from these estimates.
INVESTMENT VALUATION--Common stocks and outstanding options are recorded at
market value. Investments traded on securities exchanges are valued at the last
sale price on the day of valuation or, in the absence of a sale that day, at the
mean between the last current bid and asked prices. Fixed income securities are
valued on the basis of prices provided by a pricing service. Securities for
which quotations are not readily available, including circumstances in which it
is determined by Analytic-TSA Global Asset Management, Inc. (formerly Analytic
Investment Management, Inc.) (the "Adviser") the bid or ask prices are not
reflective of a security's market value, are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Board of Trustees.
C-51
<PAGE>
INVESTMENT INCOME AND INVESTMENT TRANSACTIONS--Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Investment
transactions are accounted for on the trade date (the date the order to buy or
sell is executed). Realized gains and losses from investment transactions are
reported on an identified cost basis for both financial statement and Federal
income tax purposes.
OPTION ACCOUNTING PRINCIPLES--When a covered call or put option is written in a
portfolio, an amount equal to the premium received by the portfolio is included
in the portfolio's statement of assets and liabilities as an asset and an
equivalent liability. The amount of the liability will be subsequently
marked-to-market to reflect the current market value of the option written.
When a covered written call expires on its stipulated expiration date, or if the
portfolio enters into a closing purchase transaction, the Fund will realize a
gain (or loss if the cost of the closing purchase transaction exceeds the
premium received when the call option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option will be extinguished. When a covered written call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received.
When a portfolio writes a covered put option, cash equal to the exercise price
is placed in an interest-bearing escrow account to secure the outstanding put
option. When a put option expires, or if the portfolio enters into a closing
purchase transaction, the portfolio will realize a gain or loss on the option
transaction, the cash is released from escrow, and the liability related to such
option is extinguished. When a put option is exercised, the portfolio uses the
cash in escrow to purchase the security, the cost of the security is reduced by
the premium originally received, and no gain or loss is recognized.
THE SHARE PRICE OF EACH PORTFOLIO--The share price or "net asset value" per
share of each portfolio is computed once daily at 4:30 P.M. Eastern Time, after
the close of trading of the New York Stock Exchange and various option exchanges
on each day the exchanges are open for trading. The share price for each
portfolio is calculated by dividing the total value of the portfolio's assets,
less the sum of liabilities and the value of outstanding options, by the
outstanding shares of the portfolio.
FEDERAL INCOME TAXES--It is the Fund's intention to comply with the provisions
of the Internal Revenue Code enabling each portfolio to qualify as a regulated
investment company and, in the manner provided therein, to distribute all of its
taxable income to its shareholders. Accordingly, no provision for income taxes
has been made.
The Short-Term Government has unused capital loss carryfowards of $793,913 at
December 31, 1996 which will expire through December 31, 2001. These realized
losses are intended to be used to offset future net capital gains.
The cost of investments (including options) for federal income tax purposes is
the same as for the cost for financial statement purposes at December 31, 1996.
C-52
<PAGE>
Net unrealized appreciation/(depreciation) of investments and options held at
December 31, 1996, since date of acquisition, was:
<TABLE>
<CAPTION>
AGGREGATE GROSS AGGREGATE GROSS NET
UNREALIZED UNREALIZED UNREALIZED
GAIN LOSS GAIN/(LOSS)
--------------- --------------- -----------
<S> <C> <C> <C>
Short-Term Government Portfolio.... $ 0 $ (8,030) $ (8,030)
Master Fixed Income Portfolio...... 699,813 (617,436) 82,377
Enhanced Equity Portfolio.......... 275,337 (44,874) 230,463
</TABLE>
DISTRIBUTIONS TO SHAREHOLDERS--Distributions are recorded on the ex-dividend
date. Certain foreign currency gains (losses) are taxable as ordinary income
and, therefore, increase (decrease) taxable ordinary income available for
distribution.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for foreign currency transactions, passive
foreign investment companies (PFIC), market discount, capital loss carryforwards
and losses deferred due to wash sales. Certain funds also utilized earnings and
profits distributed to shareholders on redemption of shares as a part of the
dividends paid deduction for income tax purposes.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital and may affect the per-share
allocation between net investment income and realized and unrealized gain
(loss). Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investment and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is distributed
in the following year.
FOREIGN CURRENCY TRANSLATION--The accounting records of the Fund are maintained
in U.S. dollars. Investment securities and other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
prevailing rates of exchange at period end. Income receipts and expense payments
are translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions. Purchases and sales of securities are
translated into U.S. dollars at the contractual currency exchange rates
established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent net
gains and losses form sales and maturities of forward currency contracts,
disposition of foreign currencies, and the difference between the amount of net
investment income accrued and the U.S. dollar amount actually received. The
effects of changes in foreign currency exchange rates on investment in
securities are included with the net realized and unrealized gain or loss on
investment securities.
ORGANIZATION EXPENSES--Organization expenses will be amortized over a period
from November 30, 1992 not exceeding five years. In the event that the Adviser
or any subsequent holder redeems any of its original shares prior to the end of
the five-year period, the proceeds of the redemption payable in respect of such
shares shall be reduced by the pro rata share (based on the proportionate share
of the original shares redeemed to the total number of original shares
outstanding at the time of redemption) of the unamortized
C-53
<PAGE>
organization expenses as of the date of such redemption. In the event that the
Fund is liquidated prior to the end of the five-year period, the Adviser (or any
subsequent holder) shall bear the unamortized organization expenses.
2. INVESTMENT MANAGEMENT AGREEMENT AND "AFFILIATED PERSONS"
The Adviser is a wholly-owned subsidiary of United Asset Management Corporation,
a holding company that purchased all of the voting common stock of the Adviser
on May 9, 1985. The Adviser, subject to the control and direction of the Fund's
board of trustees, manages and supervises the investment operations of the Fund
and the composition of its portfolio, and makes recommendations to the trustees
as to investment policies.
As compensation for furnishing investment advisory, management and other
services, and costs and expenses assumed, pursuant to the Investment Management
Agreement each portfolio of the Fund pays the Adviser an annual fee based on the
average daily net assets of that portfolio. These annual fee schedules are:
<TABLE>
<S> <C>
Short-Term Government Portfolio............................... 0.30%
Master Fixed Income Portfolio................................. 0.45%
Enhanced Equity Portfolio..................................... 0.60%
</TABLE>
The Adviser also acts as the Fund's transfer agent, dividend disbursing agent
and shareholder relations servicing agent for which each portfolio pays a fee
based on the number of accounts and the average daily net assets of each
portfolio. Each portfolio also pays the Adviser a fee based on its average daily
net assets to perform various accounting services including the calculation of
its daily share price and maintaining its general accounting records.
The Adviser voluntarily agreed to reimburse expenses that exceeded the following
percentages of average daily net assets for the respective years ending December
31.
<TABLE>
<CAPTION>
1996 1995 1994 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Short-Term Government Portfolio........................ .60% .50% .45% .45%
Master Fixed Income Portfolio.......................... .80% .70% .60% .60%
Enhanced Equity Portfolio.............................. 1.00% .80% .70% .70%
</TABLE>
At December 31, 1996, six officers and one trustee of the Fund are also officers
and director of the Adviser.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES
For the year ended December 31, 1996, the cost basis of purchases and proceeds
of sales (including $295,752 premiums for call options exercised in the Master
Fixed Income Portfolio) aggregated:
<TABLE>
<CAPTION>
COST OF PROCEEDS OF
PURCHASES SALES
------------- -------------
<S> <C> <C>
Short-Term Government Portfolio.................................................... $ 5,867,265 $ 31,838,277
Master Fixed Income Portfolio...................................................... 10,691,919 7,998,570
Enhanced Equity Portfolio.......................................................... 5,795,456 5,288,947
</TABLE>
C-54
<PAGE>
Transactions in option contracts written in the Master Fixed Income Portfolio
were as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
----------- -----------
<S> <C> <C>
Outstanding at beginning of year......................................................... 507 $ 410,168
Options written.......................................................................... 2,183 710,321
Options terminated in closing purchase transactions...................................... (368) (235,122)
Options expired.......................................................................... (1,032) (231,978)
Options exercised........................................................................ (541) (295,752)
----------- -----------
Outstanding at December 31, 1996......................................................... 749 $ 357,637
----------- -----------
----------- -----------
</TABLE>
Transactions in option contracts written in the Enhanced Equity Portfolio were
as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
--------- --------
<S> <C> <C>
Outstanding at beginning of year............................ 2 $ 1,292
Options written............................................. 30 39,754
Options terminated in closing purchase transactions......... (32) (41,046)
--- --------
Outstanding at December 31, 1996............................ 0 $ 0
--- --------
--- --------
</TABLE>
At December 31, 1996, portfolio securities valued at $1,969,075 was held in
escrow by the custodian in connection with covered call options written in the
Master Fixed Income Portfolio. There were no option contracts outstanding at
December 31, 1996 in the Enhanced Equity Portfolio, and there were no option
contracts written in the Short-Term Government Portfolio during the year ended
December 31, 1996.
4. AFFILIATED SHAREHOLDERS
At December 31, 1996, excluding ownership by the Adviser's retirement plan,
certain officers and trustees owned less than 5% of the Enhanced Equity and
Short-Term Government Portfolios of the Fund.
5. EXPENSES PAID INDIRECTLY
The Fund has entered into an agreement whereby certain operating expenses of the
Fund are paid indirectly by a broker, based upon a percentage of commissions
earned by the broker for execution of portfolio transactions. For the year ended
December 31, 1996, such expenses amounted to $15,140 and $3,920 in the Master
Fixed Income and Enhanced Equity Portfolios, respectively. Gross commission
rates for this broker are consistent with those of other brokers utilized by the
Fund.
C-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE ANALYTIC SERIES FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of the Analytic Series Fund (comprising
the Short-Term Government, Master Fixed Income and Enhanced Equity portfolios)
(the "Fund") as of December 31, 1996 and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
four years in the period then ended and for the one month ended December 31,
1992. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned and
outstanding options at December 31, 1996 by correspondence with custodians. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting The Analytic Series Fund as of
December 31, 1996, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for each of the four years in the period then ended
and for the one month ended December 31, 1992 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
[SIG]
LOS ANGELES, CALIFORNIA
FEBRUARY 10, 1997
C-56
<PAGE>
<TABLE>
<S> <C>
OFFICERS AND DIRECTORS
CHAIRMAN OF THE
BOARD OF TRUSTEES..... Michael F. Koehn
TRUSTEE............... Michael D. Butler
TRUSTEE............... Robertson Whittemore
PRESIDENT............. Alan L. Lewis
EXECUTIVE VICE
PRESIDENT
AND SECRETARY......... Charles L. Dobson
TREASURER............. Harindra de Silva
SENIOR VICE
PRESIDENT............. Deborah D. Boedicker
SENIOR VICE
PRESIDENT............. Marie Nastasi Arlt
VICE PRESIDENT........ Deborah C. Sheflin
</TABLE>
INVESTMENT ADVISOR
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
TRANSFER AGENT, DIVIDEND DISBURSEMENT AGENT,
AND SHAREHOLDER RELATIONS SERVICING AGENT
Analytic-TSA Global Asset Management, Inc.
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
CUSTODIAN
The Union Bank of California, N.A.
Mutual Fund Services
475 Sansome Street, 11th Floor
San Francisco, CA 94111
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90071
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
1000 Wilshire Blvd.
Los Angeles, CA 90017
THE ANALYTIC SERIES FUND
700 South Flower Street, Suite 2400
Los Angeles, CA 90017
Phone: (800) 374-2633
FAX: (213) 688-8856
[LOGO]
THE ANALYTIC
SERIES FUND
SHORT-TERM GOVERNMENT PORTFOLIO
MASTER FIXED INCOME PORTFOLIO
ENHANCED EQUITY PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
MEMBER OF
100% NO-LOAD-Trademark-
MUTUAL FUND COUNCIL
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> SHORT-TERM GOVERNMENT PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 706,577
<INVESTMENTS-AT-VALUE> 698,547
<RECEIVABLES> 14,518
<ASSETS-OTHER> 310,564
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,023,629
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,050
<TOTAL-LIABILITIES> 16,050
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,809,522
<SHARES-COMMON-STOCK> 102,458
<SHARES-COMMON-PRIOR> 2,794,994
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (793,913)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,030)
<NET-ASSETS> 1,007,579
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,675,376
<OTHER-INCOME> 0
<EXPENSES-NET> 154,351
<NET-INVESTMENT-INCOME> 1,521,025
<REALIZED-GAINS-CURRENT> (444,657)
<APPREC-INCREASE-CURRENT> (8,088)
<NET-CHANGE-FROM-OPS> (452,745)
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<DISTRIBUTIONS-OF-INCOME> (1,521,025)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (12,345)
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<NUMBER-OF-SHARES-REDEEMED> (2,957,142)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> MASTER FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> ENHANCED EQUITY FUND
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<OVERDISTRIBUTION-GAINS> (1,613)
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</TABLE>
