<PAGE>
As filed with the Securities & Exchange Commission October 20, 1997
--------------------
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. 8 X
---- -----
Registration Statement Under the Investment Company Act of 1940 X
-----
Amendment No. 10 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:
X immediately upon filing pursuant to paragraph (b)
- --- on ___________ 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.
<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 Highlights
4. General Description of Registrant Investment Objective and Policies; 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
PART B: INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
N-1A Item No. Item Location in Registration Statement
------------- ---- ----------------------------------
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 Shareholders
Securities
16. Investment Advisory and Other Services Investment Advisory and Other Services
17. Brokerage Allocation and Other Practices Portfolio Transactions
18. Capital Stock and Other Securities Not Applicable (See Prospectus)
19. Purchase, Redemption, and Pricing of Portfolio Transactions - Portfolio
Securities Being Offered Valuation; Purchase of Shares; Redemption of Shares
20. Tax Status Taxation; Investment Objective and Policies - Taxes
21. Underwriters Not Applicable
22. Calculation of Performance Data Yield, Total Return, and Other Performance
Statistics
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.
<PAGE>
THE ANALYTIC SERIES FUND
(800) 374-2633
PROSPECTUS DATED OCTOBER 20, 1997
A NO-LOAD OPEN-END FUND WITH NO SALES CHARGE OR REDEMPTION FEE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Highlights..................................... 3
Fund Expenses.................................. 6
Financial Highlights........................... 7
Investment Objectives and Policies............. 10
Investment Risks............................... 13
Who Should Invest.............................. 15
Implementation of Policies..................... 16
Management of the Fund......................... 31
Investment Adviser............................. 31
The Share Price of Each Portfolio.............. 35
<CAPTION>
PAGE
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<S> <C>
Dividends, Capital Gains and Taxes............. 36
General Information............................ 38
Yield, Total Return, and Other Calculations.... 39
SHAREHOLDER GUIDE.............................. 41
Opening an Account............................. 41
Purchasing Shares.............................. 41
Redeeming Shares............................... 43
Exchanging Shares.............................. 47
Withdrawal Plan................................ 48
</TABLE>
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
of Additional Information is incorporated by reference into this Prospectus and
a copy may be obtained without charge by calling the Fund's sub-transfer agent
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 OCTOBER 20, 1997
<PAGE>
THE ANALYTIC SERIES FUND
(800) 374-2633
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Analytic Series Fund, a Delaware business trust (the
AND POLICIES "Fund"), is a 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
the Fund's sub-transfer agent 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.
</TABLE>
2
<PAGE>
HIGHLIGHTS
<TABLE>
<S> <C>
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 10
</TABLE>
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
MAY USE
MAY USE OPTIONS FOREIGN
PORTFOLIO PRIMARY INVESTMENTS AND FUTURES SECURITIES
- --------------------------- ------------------------------------------------------------ --------------- -------------
<S> <C> <C> <C>
Short-Term Government Shorter term U.S. Treasury & U.S. Government agency fixed Yes Yes
income securities, with an average duration of 1 to 3 years
Master Fixed Income Intermediate and longer term U.S. Government and high grade Yes Yes
corporate and mortgage-related fixed income securities
Enhanced Equity Publicly traded common stocks with average capitalization Yes Yes
typical of medium to large companies
</TABLE>
<TABLE>
<S> <C>
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 13
</TABLE>
RISK SUMMARY
<TABLE>
<CAPTION>
INTEREST RATE
AND CURRENCY EXPECTED PORTFOLIO
PORTFOLIO CREDIT RISK EQUITY RISK RISK PRICE FLUCTUATIONS
- --------------------------- ---------------- -------------------- --------- ---------------------
<S> <C> <C> <C> <C>
Short-Term Government Low None Low Low to Moderate
Master Fixed Income High Low to Moderate Low Moderate to High
Enhanced Equity Low High Low High to Very High
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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 31
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 36
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 36
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 41
REDEEMING SHARES Shares are redeemed without charge and redemptions may
be made by telephone, mail, or exchange to another
Portfolio in the Fund.
PAGE 43
ADMINISTRATIVE SERVICES UAM Fund Services, Inc., a wholly-owned subsidiary of
United Asset Management Corporation, is responsible for
performing
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
and overseeing all administrative, fund accounting,
dividend disbursing and transfer agent services for the
Fund. UAM Fund Services has subcontracted certain of
these services to Chase Global Funds Services Company,
an affiliate of The Chase Manhattan Bank. Chase Global
Funds Services Company will act as the Fund's
sub-dividend disbursing agent, sub-transfer agent and
sub-shareholder servicing agent.
PAGE 33
Shareholder inquiries should be addressed to the Fund's
sub-shareholder servicing agent at: Analytic Funds, c/o
Chase Global Funds Services Company, P.O. Box 2798,
Boston, MA 02208; telephone (800) 374-2633.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
FUND EXPENSES The following table illustrates the expenses and fees
that a shareholder of the Fund will incur. However,
transaction fees may be charged if a broker-dealer or
other financial intermediary deals with the Fund on your
behalf (See "Shareholder Guide-- Purchasing Shares").
The other expenses set forth below are estimates for the
fiscal year ending December 31, 1997 and are annualized
based on each Portfolio's operations during the semi-
annual period ended June 30, 1997, except that they have
been restated to reflect the current expense caps.
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM MASTER ENHANCED
GOVERNMENT FIXED INCOME EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------- ----------- ------------ ---------
<S> <C> <C> <C>
Sales Load Imposed on Purchases........................................... None None None
Sales Load Imposed on Reinvested Dividends................................ None None None
Redemption Fees........................................................... None None None
Exchange Fees............................................................. None None None
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHORT-TERM MASTER ENHANCED
GOVERNMENT FIXED INCOME EQUITY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------- -------------- --------------- -------------
Management Fees (after expense reimbursement)*............................ 0.00% 0.45% 0.00%
12b-1 Fees................................................................ None None None
Other Expenses (after expense reimbursement)*............................. 0.60 0.45 1.00
--- --- ---
Total Fund Operating Expenses (after expense reimbursement)*.............. 0.60 % 0.90 % 1.00 %
</TABLE>
* 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%, 0.90% and
1.00% of average daily net assets for the Short-Term Government, Master Fixed
Income and Enhanced Equity Portfolios, respectively, for the year ending
December 31, 1997. Without such reimbursement, it is estimated based on the
operations of each Portfolio during the semi-annual period ended June 30,
1997, adjusted in the case of the Master Fixed Income Portfolio for a decrease
in assets since June 30, 1997, that annual expenses for each Portfolio for the
year ending December 31, 1997 would be as follows:
<TABLE>
<CAPTION>
SHORT-TERM MASTER ENHANCED
GOVERNMENT FIXED INCOME EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- --------------- -------------
<S> <C> <C> <C>
Management Fees........................................................... 0.30% 0.45% 0.60%
Other Expenses............................................................ 4.24% 2.66% 1.07%
--- --- ---
Total Fund Operating Expenses............................................. 4.54% 3.11% 1.67%
</TABLE>
<TABLE>
<S> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Short-Term Government........................................................ $ 6 $ 19 $ 33 $ 75
Master Fixed Income.......................................................... 9 29 50 111
Enhanced Equity.............................................................. 10 32 55 122
</TABLE>
The purpose of the above information is to help an investor in the Fund to
understand the various fees and expenses an investor will bear directly or
indirectly. THE EXAMPLE IS NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES AND
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
6
<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. Also presented in the
tables below are unaudited semi-annual financial statements for the six-month
period ended June 30, 1997. Copies of the Fund's 1996 Annual Report to
Shareholders and 1997 Semi-Annual Report to Shareholders may be obtained, at no
charge, by telephoning the Fund at the telephone number appearing on the cover
page of this Prospectus.
SHORT-TERM GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED ONE MONTH
JUNE ENDED
30, YEAR ENDED DECEMBER 31, DECEMBER
1997 ---------------------------------- 31,
(UNAUDITED) 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 9.83 $ 9.98 $ 9.55 $ 10.03 $ 10.03 $ 10.00
------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 0.27 0.62 0.56 0.48 0.53 0.05
Net realized and unrealized gains
(losses) on investments............. (0.06 ) (0.10) 0.43 (0.48) 0.00 0.03
------- ------- ------- ------- ------- -----------
Total from investment operations.... 0.21 0.52 0.99 0.00 0.53 0.08
------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS:
From net investment income............ 0.27 0.66 0.56 0.48 0.53 0.05
Return of capital..................... 0.00 0.01 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- -----------
Total distributions................. 0.27 0.67 0.56 0.48 0.53 0.05
------- ------- ------- ------- ------- -----------
Net asset value, end of period.......... $ 9.77 $ 9.83 $ 9.98 $ 9.55 $ 10.03 $ 10.03
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
TOTAL RETURN............................ 2.20 % 5.28% 10.65% 0.00% 5.37% 9.38%
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)........ $1,049 $ 1,008 $27,880 $24,481 $26,097 $ 7,619
Ratio of expenses to average net
assets(1).............................. 4.54 %+ 0.76% 0.82% 0.85% 0.75% 0.77%+
Ratio of net investment income to
average net assets..................... 5.56 %+ 5.99% 5.76% 5.37% 4.91% 5.45%+
Portfolio turnover rate................. 0.00 % 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 0.60%+, 0.56%, 0.50%, 0.45%, 0.45%, and 0.45%+ for the six
months ended June 30, 1997, for each of the years in the periods ended
December 31, 1996, and for the month ended December 31, 1992, respectively.
+ Annualized
7
<PAGE>
MASTER FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED ONE MONTH
JUNE ENDED
30, YEAR ENDED DECEMBER 31, DECEMBER
1997 ----------------------------------- 31,
(UNAUDITED) 1996 1995 1994 1993 1992
------- ------- ------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $10.27 $ 10.41 $ 9.50 $10.26 $ 10.06 $10.00
------- ------- ------- ------ ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 0.28 0.58 0.61 0.64 0.67 0.04
Net realized and unrealized gains
(losses) on investment and option
transactions........................ 0.04 (0.01) 0.91 (0.75) 0.41 0.06
------- ------- ------- ------ ------- -----------
Total from investment operations.... 0.32 0.57 1.52 (0.11) 1.08 0.10
------- ------- ------- ------ ------- -----------
LESS DISTRIBUTIONS:
From net investment income............ 0.28 0.58 0.61 0.64 0.67 0.04
From net realized gains............... 0.00 0.12 0.00 0.01 0.21 0.00
In excess of net realized gains....... 0.00 0.01 0.00 0.00 0.00 0.00
------- ------- ------- ------ ------- -----------
Total distributions................... 0.28 0.71 0.61 0.65 0.88 0.04
------- ------- ------- ------ ------- -----------
Net asset value, end of period.......... $10.31 $ 10.27 $ 10.41 $ 9.50 $ 10.26 $10.06
------- ------- ------- ------ ------- -----------
------- ------- ------- ------ ------- -----------
TOTAL RETURN............................ 3.19 % 5.69% 16.43% (1.04)% 10.94% 13.09%
------- ------- ------- ------ ------- -----------
------- ------- ------- ------ ------- -----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)........ $31,038 $28,926 $24,868 $6,155 $ 8,066 $9,219
Ratio of expenses to average net
assets(1).............................. 0.90 %+ 0.97% 1.03% 1.17% 1.04% 1.05%+
Ratio of net investment income to
average net assets..................... 5.61 %+ 5.66% 5.99% 7.16% 6.39% 5.63%+
Portfolio turnover rate................. 10.56 % 21.95% 31.82% 44.30% 105.39% 0.00%
Average commission rate(2).............. $0.0220 $0.0418 $0.0277
</TABLE>
(1) Gross of Adviser reimbursed expenses and expenses indirectly paid through
broker arrangements. With both expense reductions, such ratios would have
been 0.90%+, 0.72%, 0.69%, 0.60%, 0.60% and 0.60%+ for the six months ended
June 30, 1997, 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
8
<PAGE>
ENHANCED EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED ONE MONTH
JUNE ENDED
30, YEAR ENDED DECEMBER 31, DECEMBER
1997 ---------------------------------- 31,
(UNAUDITED) 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $12.09 $ 12.94 $ 9.83 $ 10.15 $ 10.02 $ 10.00
------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 0.07 0.21 0.23 0.28 0.40 0.01
Net realized and unrealized gains
(losses) on investments and
options............................. 1.94 2.74 3.22 (0.32) 0.62 0.02
------- ------- ------- ------- ------- -----------
Total from investment
operations...................... 2.01 2.95 3.45 (0.04) 1.02 0.03
------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS:
From net investment income............ 0.06 0.21 0.23 0.28 0.40 0.01
From net realized gains............... 0.00 3.58 0.11 0.00 0.37 0.00
In excess of net realized gains....... 0.00 0.01 0.00 0.00 0.00 0.00
Return of capital..................... 0.00 0.00 0.00 0.00 0.12 0.00
------- ------- ------- ------- ------- -----------
Total distributions................... 0.06 3.80 0.34 0.28 0.89 0.01
------- ------- ------- ------- ------- -----------
Net asset value, end of period.......... $14.04 $ 12.09 $ 12.94 $ 9.83 $ 10.15 $ 10.02
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
TOTAL RETURN............................ 16.65 % 22.95% 35.36% (0.37)% 10.07% 4.08%
------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- -----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($000)........ $4,838 $ 3,519 $ 2,318 $ 1,511 $ 903 $12,823
Ratio of expenses to average net
assets(1).............................. 1.67 %+ 1.51 (1) 1.33 (1) 1.35% 1.35% 1.07%+
Ratio of net investment income to
average net assets..................... 1.31 %+ 1.53% 2.02% 3.24% 2.16% 1.66%+
Portfolio turnover rate................. 113.80 % 179.47% 10.15% 24.75% 76.34% 25.20%
Average commission rate(2).............. $0.0272 $0.0658 $0.0431
</TABLE>
(1) Gross of Adviser reimbursed expenses and expenses paid indirectly through
broker arrangements.With both expense reductions, such ratios would have
been 1.00%+, 0.91%, 0.50%, 0.24%, 0.57%, and 0.70%+ for the six months ended
June 30, 1997, 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
9
<PAGE>
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The investment objectives and policies of each Portfolio
AND POLICIES 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.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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.
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
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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.
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.
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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.
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.
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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.
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
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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.
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
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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.
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
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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.
FLOATING RATE AND OTHER Each Portfolio may invest in securities which offer a
DEBT SECURITIES 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
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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
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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.
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
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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.
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
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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.
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.
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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
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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.
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
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warrant can be prudently exercised (in which event the
warrant may expire without being exercised, 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).
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
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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.
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;
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(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
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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.
Until the fiscal year beginning January 1, 1998, 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. Until January 1, 1998, 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 Standard & Poor's
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 Each of the Portfolios may purchase the securities of
INVESTMENT COMPANIES 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
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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.
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
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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.
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
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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.
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.
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
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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 and
makes investment decisions for 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, Inc. with which he has 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 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.
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. Bein has been a
member of the portfolio management and research team for
the Adviser since
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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, Inc, which he
joined in March 1986. Mr. Dobson is the Executive Vice
President of the Fund and Analytic Optioned Equity 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 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%
DISTRIBUTOR UAM Fund Distributors, Inc., a wholly-owned subsidiary
of United Asset Management Corporation, is the
distributor of the Fund's shares. Its principal office
is located at 211 Congress Street, Boston, Massachusetts
02110. Under a Distribution Agreement with the Fund (the
"Distribution Agreement"), the Distributor, as agent of
the Fund, has agreed to use its best efforts as sole
distributor of Fund shares. The Distributor does not
receive any fee or other compensation under the
Distribution Agreement. The Distribution Agreement
provides that the Fund will bear costs of registration
of its shares with the Securities and Exchange
Commission ("SEC") and various states as well as the
printing of its prospectuses, its Statement of
Additional Information and its reports to shareholders.
ADMINISTRATIVE SERVICES UAM Fund Services, Inc., a wholly-owned subsidiary of
United Asset Management Corporation, performs and
oversees all administrative, fund accounting, dividend
disbursing and transfer agent services to the Fund
pursuant to a Fund Administration Agreement with the
Fund (the "Administration Agreement"). For its services
UAM Fund Services receives a fee based on net assets.
UAM Fund Services' principal office is located at 211
Congress Street, Boston, Massachusetts 02110. UAM Fund
Services has subcontracted some of these services to
Chase
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Global Funds Services Company, an affiliate of The Chase
Manhattan Bank. Chase Global Funds Services Company is
located at 73 Tremont Street, Boston, Massachusetts
02108.
Chase Global Funds Services Company is the Fund's sub-
dividend disbursing agent, sub-transfer agent and sub-
shareholder servicing agent. The shareholder servicing
phone number is (800) 374-2633. All other administrative
and accounting functions are performed by UAM Fund
Services.
EXPENSES In addition to 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%, 0.90% and 1.00% of average daily net
assets for the SHORT-TERM GOVERNMENT, MASTER FIXED
INCOME and ENHANCED EQUITY PORTFOLIOS, respectively, for
the year ending December 31, 1997. During the first six
months of 1997, the ratios of operating expenses to
average net assets on an annualized basis in the
SHORT-TERM GOVERNMENT PORTFOLIO, MASTER FIXED INCOME
PORTFOLIO, and ENHANCED EQUITY PORTFOLIO, before expense
reimbursements, were 4.54%, 0.90% and 1.67%,
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.
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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.
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 expenses. 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 The share price or "net asset value" per share of each
EACH PORTFOLIO 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
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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.
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 (the "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
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any particular year. 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.
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.
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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.
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.
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As of September 30, 1997, Prison Law Office held of
record more than 25% of the outstanding shares of the
ENHANCED EQUITY and SHORT-TERM GOVERNMENT PORTFOLIOS and
may be considered a controlling person of these
Portfolios 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 the Fund's
sub-shareholder servicing agent at: Analytic Funds, P.O.
Box 2798, Boston, MA 02208; telephone (800) 374-2633.
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 Chase Manhattan Bank.
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
SEC under the Securities Act of 1933. Copies of the
Registration Statement may be obtained at a reasonable
charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
YIELD, TOTAL RETURN, AND OTHER From time to time the Fund may advertise the "yield",
CALCULATIONS "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.
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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
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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. Shares of a Portfolio may be
purchased by customers of broker-dealers or other
financial intermediaries ("Service Agents") which have
established a shareholder servicing relationship with
the Fund on behalf of their customers. Service Agents
may impose additional or different conditions on
purchases or redemptions of Portfolio shares and may
charge transaction or other account fees. Each Service
Agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding
additional or different purchase or redemption
conditions. Shareholders who are customers of Service
Agents should consult their Service Agent for
information regarding these fees and conditions. Amounts
paid to Service Agents may include transaction fees
and/or service fees paid by the Fund from the subject
Portfolio's assets attributable to the Service Agent,
which would not be imposed if shares of the Portfolio
were purchased directly from the Fund or its
distributor. Service Agents may provide shareholder
services to their customers that are not available to a
shareholder dealing directly with the Fund.
Service Agents may enter confirmed purchase orders on
behalf of their customers. If shares of a Portfolio are
purchased in this manner, the Service Agent must receive
your investment order before the close of trading on the
New York Stock Exchange, and transmit it to the Fund's
Sub-Transfer Agent, Chase Global Funds Services Company,
prior to the close of their business day to receive that
day's share price. Proper payment for the order must
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be received by the Sub-Transfer Agent no later than the
time when the Portfolio is priced on the following
business day. Service Agents are responsible to their
customers and the Fund for timely transmission of all
subscription and redemption requests, investment
information, documentation and money.
The Fund reserves the right to reject any purchase order
or to suspend or modify the continuous offering of its
shares.
BY MAIL Initial purchases of Fund shares may be made by mailing
FOR INITIAL INVESTMENTS, COMPLETE a completed and signed Account Registration Form
AND SIGN AN ACCOUNT REGISTRATION together with a check made payable to THE ANALYTIC
FORM. FOR SUBSEQUENT INVESTMENTS, SERIES FUND (REFERENCE PORTFOLIO NAME), to:
COMPLETE A MAIL REMITTANCE FORM. The Analytic Series Fund Street Address (overnight
mail)
P.O. Box 2798 73 Tremont Street
Boston, MA 02208 Boston, MA 02108
(800) 374-2633
For subsequent purchases, complete the Mail Remittance
Form (located on a statement) and return it to the above
address with a check made payable to THE ANALYTIC SERIES
FUND (REFERENCE PORTFOLIO NAME).
BY WIRE Before wiring funds, you must telephone the Fund's
TELEPHONE THE FUND'S SUB-TRANSFER sub-transfer agent at (800) 374-2633 with the sending
AGENT AT (800) 374-2633 BEFORE bank's name, date and amount being wired to insure
WIRING FUNDS. proper investment. There is no charge by the Fund for
wire purchases.
Federal funds wiring instructions are:
The Chase Manhattan Bank
ABA #021000021
The Analytic Series Fund -- (NAME OF PORTFOLIO)
CREDIT DDA 9102791614
ACCOUNT REGISTRATION: (YOUR NAME)
ACCOUNT #: (YOUR ACCOUNT NUMBER)
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 Form has been received.
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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 the Fund's
sub-transfer agent 5 business days prior to the
effective date of the change. For further information
concerning signature guarantees, see "SIGNATURE
GUARANTEES".
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 4:00 P.M. Eastern 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
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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 the Fund's sub-transfer agent 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 sub-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 sub-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 sub-transfer agent is
responsible for unauthorized telephone redemptions by a
person reasonably believed to be a shareholder unless
the sub-transfer agent has received written notice
canceling the 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 the
Fund's sub-transfer agent by telephone, shares may be
redeemed in writing as described below.
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BY MAIL A shareholder may redeem all or part of his shares by
written request to the Fund's sub-transfer agent at the
address set forth under "Purchasing Shares--By Mail"
above. 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 SEC.
PAYMENT-IN-KIND The Fund has made an election with the SEC 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 SEC.
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
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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.
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 With the exception of qualified retirement plan
REQUIREMENT 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.
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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 4:00 P.M.
Eastern 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 the Fund's sub-transfer agent at
(800) 374-2633.
The Fund's sub-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 sub-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 sub-transfer agent is
responsible for unauthorized telephone exchanges by a
person reasonably believed to be a shareholder unless
the sub-transfer agent has received written notice
canceling the telephone exchange authorization. The Fund
may change or discontinue the telephone exchange
privilege without notice. For your protection, the Fund
and its agents reserve the right to record all calls.
The Fund reserves the right to refuse a 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 the Fund's
sub-transfer agent 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 the Fund's sub-transfer agent at the
address set forth under "Purchasing Shares--By Mail"
above. The written request
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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.
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,
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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 the address set forth above under
"Purchasing Shares--By Mail" at least 5 business days
prior to the effective date of the change.
IMPORTANT WITHDRAWAL PLAN Withdrawal payments should not be considered dividends,
INFORMATION 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.
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OFFICERS AND TRUSTEES
CHAIRMAN OF THE
BOARD OF TRUSTEES.... Michael F. Koehn
TRUSTEE.............. Michael D. Butler
TRUSTEE.............. Robertson Whittemore
PRESIDENT............ Harindra de Silva
EXECUTIVE VICE
PRESIDENT AND
SECRETARY............ Charles L. Dobson
TREASURER............ Gregory M. McMurran
SENIOR VICE
PRESIDENT............ Angelo A. Calvello
SENIOR VICE
PRESIDENT............ Marie Nastasi Arlt
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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
UAM Fund Services, Inc.
211 Congress Street
Boston, MA 02110
CUSTODIAN
The Chase Manhattan Bank
1211 Avenue of the Americas
New York, NY 10036
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, CA 90017
INDEPENDENT ACCOUNTANTS
Deloitte & ToucheLLP
1000 Wilshire Blvd.
Los Angeles, CA 90017
THE ANALYTIC SERIES FUND
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208
Phone: (800) 374-2633
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE
ADVISER. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION.
ANALYTICFUNDS
THE ANALYTIC
SERIES FUND
- ----------------------
ENHANCED EQUITY
MASTER FIXED INCOME
SHORT-TERM GOVERNMENT
PROSPECTUS
OCTOBER 20, 1997
MEMBER OF
100% NO-LOAD-TM-
MUTUAL FUND COUNCIL
- ----------------------------------------------------------------
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PART B
THE ANALYTIC SERIES FUND
(800) 374-2633
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 20, 1997
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Fund's current Prospectus dated October 20, 1997. To
obtain this Prospectus without charge, please call the Fund at the telephone
number above.
TABLE OF CONTENTS PAGE
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objective and Policies. . . . . . . . . . . . . . . . 2
Investment Limitations . . . . . . . . . . . . . . . . . . . . . 15
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 18
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . 18
Management of the Fund . . . . . . . . . . . . . . . . . . . . . 18
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . 20
Investment Advisory and Other Services . . . . . . . . . . . . . 22
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . 24
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Yield, Total Return, and Other Performance Statistics. . . . . . 27
Additional Information . . . . . . . . . . . . . . . . . . . . . 30
Appendix-Description of Bond Ratings . . . . . . . . . . . . . . 32
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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.
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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.
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.
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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.
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.
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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 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
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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.
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.
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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.
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
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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.
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.
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
B-8
<PAGE>
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.
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.
B-9
<PAGE>
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.
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.
B-10
<PAGE>
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.
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-11
<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").
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.
B-12
<PAGE>
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.
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 "SEC") 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.
B-13
<PAGE>
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 PORTFOLIO 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.
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.
B-14
<PAGE>
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.
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.
B-15
<PAGE>
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.
(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.
B-16
<PAGE>
(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).
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.
B-17
<PAGE>
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 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%.
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 Trustee who is an
interested person of the Fund, as defined under the 1940 Act.)
MICHAEL F. KOEHN* - CHAIRMAN OF THE BOARD OF TRUSTEES, Date of Birth: 9/16/46.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
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, Date of Birth: 4/24/35.
28775 EL MIO LANE, MISSION VIEJO, CA 92692
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.
B-18
<PAGE>
ROBERTSON WHITTEMORE - TRUSTEE, Date of Birth: 10/30/44.
8470 EL PASEO GRANDE, LA JOLLA, CA 92037
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, Date of Birth: 9/15/60.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
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, Date of
Birth:12/9/41.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017 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.
GREGORY M. MC MURRAN - TREASURER, Date of Birth: 7/20/54.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
Chief Investment Officer of the Adviser and Treasurer of the Analytic 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, Date of Birth: 11/8/49.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
Chief Operating Officer and Secretary 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
Executive Vice President of TSA Capital Management.
ANGELO A. CALVELLO - SENIOR VICE PRESIDENT, Date of Birth: 10/2/56.
700 SOUTH FLOWER STREET, SUITE 2400, LOS ANGELES, CA 90017
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 Trustees of the Fund who are affiliates of the Adviser receive no
fee or salary from the Fund. Each Trustee 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 Trustees who are not affiliates of the
Adviser is as follows:
<TABLE>
<CAPTION>
Aggregate Total Compensation From
Compensation from Pension/Retirement Estimated Annual Analytic Optioned Equity
The Analytic Series Benefits Accrued as Benefits from Fund and The Analytic
Name Fund Part of Fund Expenses Retirement 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>
PRINCIPAL SHAREHOLDERS
The following tables show, as of September 30, 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.
B-19
<PAGE>
SHORT-TERM GOVERNMENT PORTFOLIO (TOTAL SHARES OUTSTANDING 104,974)
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Analytic- TSA Global Asset Management, Inc. 42,995 41%
FAO Prison Law Office
700 South Flower Street
Suite 2400
Los Angeles, CA 90017
Analytic-TSA Global Asset Management Inc. 25,375 24.2%
FBO Mountain Grove Cemetery Association
700 South Flower Street
Suite 2400
Los Angeles, CA 90017
Tucker Anthony, Inc. 6,009 5.72%
VMEP NHC Pension
4 Landmark Square
Stamford, CT 06901
R. Borzilleir 6,003 5.72%
VMEP
4 Landmark Square
Stamford, CT 06901
All Officers and Trustees of the Fund as a group owned less than 1% of the
Fund's outstanding shares as of September 30, 1997.
MASTER FIXED INCOME PORTFOLIO (TOTAL SHARES OUTSTANDING 496,379)
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
National Financial Services Corp. 113,979 23%
FBO Exclusive Benefit of our Customers
200 Liberty Street
New York, NY 10281
Analytic-TSA Global Asset Management Inc. 87,450 17.6%
FBO Mountain Grove Cemetery Association
700 South Flower Street
Suite 2400
Los Angeles, CA 90017
R. Borzilleir 49,391 9.95%
VMEP
4 Landmark Square
Stamford, CT 06901
Tucker Anthony, Inc. 48,410 9.75%
VMEP NHC Pension
4 Landmark Square
Stamford, CT 06901
B-20
<PAGE>
All Officers and Trustees of the Fund as a group
owned 4% of the Fund's outstanding shares as
of September 30, 1997. 18,862 4.0%
ENHANCED EQUITY PORTFOLIO (TOTAL SHARES OUTSTANDING 433,218.304)
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Analytic-TSA Global Asset Management, Inc. 124,023 28.6%
FAO Prison Law Office
700 South Flower Street
Suite 2400
Los Angeles, CA 90017
Analytic-TSA Global Asset Management, Inc. 86,708 20.0%
FBO Mountain Grove Cemetery Association
700 South Flower Street
Suite 2400
Los Angeles, CA 90017
B-21
<PAGE>
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
Analytic-TSA Global Asset Management, Inc. 26,733 6.17%
UAM Profit Sharing Plan
700 South Flower Street
Suite 2400
Los Angeles, CA 90017
Greg McMurran 22,895 5.28%
2116 North Westwood Avenue
Santa Ana, CA 92706
All Officers and Trustees of the Fund as
a group owned 8% of the Fund's outstanding
shares as of September 30, 1997. 36,474 8.0%
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT ADVISER
Analytic Investment Management, Inc. acquired and merged with TSA Capital
Management Corporation on 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 Chairman 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 and Treasurer
Marie Nastasi Arlt Chief Operating Officer and Secretary
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. 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,
B-22
<PAGE>
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 in 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.
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.
ADMINISTRATIVE SERVICES
UAM Fund Services, Inc. ("UAM Fund Services"), a wholly-owned subsidiary of
UAMC, has agreed to perform and oversee all administrative, fund accounting,
dividend disbursing and transfer agent services to the Fund pursuant to a
Fund Administration Agreement with the Fund (the "Administration Agreement")
dated May 16, 1997. UAM Fund Services has subcontracted some of these
services to Chase Global Funds Services Company ("Chase Global Funds
Services"), an affiliate of The Chase Manhattan Bank.
The Fund pays UAM Fund Services a two part monthly fee: a Fund specific fee, at
the annual rate of 0.04% of net assets which is retained by UAM Fund Services
and a sub-administration fee which UAM Fund Services in turn pays to Chase
Global Funds Services. Chase Global Funds Services' monthly fee for its services
is calculated on an annualized basis as follows:
0.19 of 1% of the first $200 million of total net assets of the Fund
0.11 of 1% on the next $800 million of total net assets
0.07 of 1% on total net assets over $1 billion up to $3 billion
0.05 of 1% on total net assets over $3 billion
The Fund is subject to a graduated minimum fee schedule which starts at $2,000
per month and increases to $70,000 annually after eighteen months. If a
separate class of shares is added, its minimum annual fee increases by $20,000.
The fees paid to Chase Global Funds Services are the responsibility of UAM Fund
Services, and not the Fund.
Under the Administration Agreement, any liability of UAM Fund Services to
the Fund and its shareholders is limited to situations involving its own willful
misfeasance, bad faith, gross negligence or reckless disregard of duties. In
addition, the Fund has agreed to indemnify UAM Fund Services against certain
matters, including all expenses arising out of actions of UAM Fund Services
pursuant to the Administration Agreement (other than those involving UAM Fund
Services' willful misfeasance, bad faith, gross negligence or reckless disregard
of duties).
UAM Fund Services may assign its obligations under the Administration
Agreement to subcontractors approved by the Board of Trustees, but no such
assignment will relieve UAM Fund Services of its obligations to the Fund. The
Agreement may be terminated without penalty upon 60-days' written notice by
either party.
DISTRIBUTOR
UAM Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary of
UAMC, distributes shares of the Fund. Under the Distribution Agreement (the
"Distribution Agreement"), the Distributor, as agent of the Fund, agrees to use
its best efforts as sole distributor of Fund shares. The Distributor does not
receive any fee or other compensation under the
B-23
<PAGE>
Distribution Agreement. The Distribution Agreement continues in effect as
long as it is approved at least annually by the Fund's Board of Trustees.
Those approving the Distribution Agreement must include a majority of
Trustees who are not interested persons of any party to the Distribution
Agreement.
The term and termination provisions of the Distribution Agreement are similar
to those of the Fund's Investment Management Agreement. In addition, it
contains provisions limiting the liability of, and providing indemnification
to, the Distributor, that are similar to those of the Administration
Agreement, except that nothing in the Distribution Agreement protects the
Distributor from any liabilities which it may have under the Securities Act
of 1933 or the 1940 Act.
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.
Commissions charged by brokers that provide research services may be somewhat
higher than commissions charged by brokers that do not provide research
services. As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Adviser may cause a Portfolio to pay a broker-dealer that provides brokerage
and research services to the Adviser an amount of commission for effecting a
securities transaction for the Portfolio in excess of the commission another
broker-dealer would have charged for effecting that transaction. The Adviser
does not engage brokers and dealers whose commissions are believed to be
unreasonable in relation to brokerage and research services provided.
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
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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 (this requirement will no longer
apply beginning in fiscal year 1998); (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.
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.
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<PAGE>
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.
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 (which will no longer apply beginning in
fiscal year 1998).
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.
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
B-26
<PAGE>
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.
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
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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 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 SEC 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).
The total returns for each Portfolio for the various periods have been:
Short Term Master Fixed Enhanced
Government Income Equity
Portfolio Portfolio Portfolio
1 year
7/1/96 - 6/30/97 6.54% 8.24% 30.96%
From public inception
7/1/93 - 6/30/97 4.93% 6.82% 19.23%
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:
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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 June 30, 1997 is 5.53% and 5.46%, 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
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:
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<PAGE>
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.
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.
ADDITIONAL INFORMATION
THE CUSTODIAN
The Fund's Custodian is The Chase Manhattan Bank. Pursuant to the terms of the
Custodian Agreement, the Fund will forward to the Custodian the proceeds of each
purchase of 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.
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TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT
UAM Fund Services, Inc. is responsible for performing and overseeing all
administrative, fund accounting, dividend disbursing and transfer agent services
for the Fund. UAM Fund Services has also contracted certain of these services
to Chase Global Funds Services Company. Chase Global Funds Services will act as
the Fund's sub-dividend disbursing agent, sub-transfer agent and sub-shareholder
servicing agent (see "Investment Advisory and Other Services").
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 SEC.
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. Also
incorporated into this Statement of Additional Information by reference are
the Fund's unaudited financial statements included in the Fund's Semi-Annual
Report to Shareholders for the period ended June 30, 1997. These unaudited
financial statements reflect all adjustments which the Fund believes
necessary to a fair statement of the results for the period. Copies of the
Fund's Annual Report and Semi-Annual Report to Shareholders may be obtained
at no charge by telephoning the Fund at the number on the front page of this
Statement of Additional Information.
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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.
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.
B-32
<PAGE>
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.
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.
B-33
<PAGE>
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.
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
BBB for prudent investment. Considerable variability in risk during
BBB- economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations when
BB due. Present or prospective financial factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B-34
<PAGE>
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will
B not be met when due. Financial protection factors will fluctuate
B- widely 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.
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-35
<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-36
<PAGE>
B. Category 2: Good Grade
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-37
<PAGE>
PART C
OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(1) The following information is included in Part A - Prospectus:
Financial Highlights
(2) The following audited and unaudited information is included in
Part B - Statement of Additional Information:
Audited:
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,
and are incorporated by reference in Part B.
Unaudited:
Registrant's Statements of Assets and Liabilities including a
Schedule of Portfolio Investments, Statements of Changes in Net
Assets, Statement of Operations and related notes, are included
as part of Registrant's Semi-Annual Report to Shareholders for
the period ended June 30, 1997, and are 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 - filed as Exhibit 1.4 to Pre-Effective Amendment No.
6 and incorporated herein by reference.
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.
C-1
<PAGE>
6 Distribution Agreement between Registrant and UAM Fund
Distributors, Inc. dated May 1, 1997 -- filed as Exhibit 6 to
Registrant's Form N-1A Registration Statement on August 21, 1997
and incorporated herein by reference.
7 None
8 Custodian Agreement between Registrant and The Chase Manhattan
Bank dated September 8, 1997.
9.1 Fund Administration Agreement between Registrant and UAM Fund
Services, Inc. dated May 16, 1997 -- filed as Exhibit 9.1 to
Registrant's Form N-1A Registration Statement on August 21, 1997
and incorporated herein by reference..
9.2 Mutual Funds Service Agreement between UAM Fund Services, Inc.
and Chase Global Funds Services Company dated May 16, 1997 --
filed as Exhibit 9.2 to Registrant's Form N-1A Registration
Statement on August 21, 1997 and incorporated herein by
reference.
10 Opinion and Consent of Counsel -- included as part of Registrant's
Form 24f-2 Notice filed February 27,1997 and incorporated herein
by reference.
11 Consent of Independent Auditors.
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 Financial data schedule.
18 None.
19. Power of Attorney.
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.
ITEM 26: NUMBER OF HOLDERS OF SECURITIES
Number of Record
Holders As of
Portfolio Title of Class September 30, 1997
- -----------------------------------------------------------------------------
Short-Term Government Shares of Beneficial Interest 54
Master Fixed Income Shares of Beneficial Interest 70
Enhanced Equity Shares of Beneficial Interest 118
C-2
<PAGE>
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 limits the
liability of Registrant's Adviser in connection with performing its
obligations under the Agreements, except with respect to matters
involving its 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
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:
Name Office Other Employment
- ---- ------ ----------------
Roger G. Clarke Chairman of the Board President of Analytic-TSA
of Directors Investors (wholly owned
subsidiary of Adviser) and
Director of Investment
Securities of the Church of
Jesus Christ of Latter Day
Saints, since January 1996.
Formerly, Managing Director,
President, Chief Executive
Officer and Chief Investment
Officer of TSA Capital
Management
Michael F. Koehn Member of the Board of Co-founder and President of
Directors, President Analysis Group, Inc.; Director
and Chief Executive of Analytic Optioned Equity
Officer Fund; Trustee of The Analytic
Series Fund; Co-founder and
President of Analysis Group,
Inc.
C-3
<PAGE>
Gregory M. McMurran Chief Investment Treasurer of Analytic Optioned
Officer Equity Fund and The Analytic
Series Fund
Harindra de Silva Managing Director President of Analytic Optioned
and Treasurer 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.
Marie Nastasi Arlt Chief Operating and Senior Vice President of
Secretary Analytic Optioned Equity Fund
and The Analytic Series Fund.
Secretary, Treasurer,
Principal and Vice President
of Analytic-TSA Investors
(wholly owned subsidiary of
Adviser). Formerly, Executive
Vice President, Managing
Director, Principal, Treasurer
and Secretary of TSA Capital
Management.
The business address of such persons is 700 South Flower Street, Suite 2400, Los
Angeles, CA 90017
ITEM 29. PRINCIPAL UNDERWRITERS
(a) UAM Fund Distributors, Inc. (the "Distributor"), the firm
which acts as sole distributor of the Registrant's shares, also
acts as distributor for UAM Funds Trust, UAM Funds, Inc. and The
Analytic Optioned Equity Fund, Inc.
(b) The information required with respect to each Director and
officer of the Distributor is incorporated by reference to
Schedule A of Form BD filed by the Distributor pursuant to the
Securities and Exchange Act of 1934 (SEC File No. 8-41126).
(c) Not applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder will be maintained at the offices of
the Registrant and its investment adviser (700 South Flower
Street, Suite 2400, Los Angeles, CA 90017), the Registrant's
sub-transfer agent, sub-dividend disbursing agent and
sub-shareholder servicing agent (Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108) and the
Registrant's custodian bank (The Chase Manhattan Bank, 4 Chase
MetroTech Center, Brooklyn, NY 11245).
C-4
<PAGE>
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, and State of California,
on the ______ day of October, 1997.
THE ANALYTIC SERIES FUND
(Registrant)
By /s/ Michael F. Koehn
-----------------------------------
Michael F. Koehn, Chairman
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ Harindra de Silva
- --------------------------
Harindra de Silva President October ____, 1997
/s/ Gregory M. McMurran
- --------------------------
Gregory M. McMurran Treasurer (Chief October ____, 1997
Financial Officer)
/s/ Michael F. Koehn
- --------------------------
Michael F. Koehn Chairman of the October ____, 1997
Board of Trustees
/s/ Michael D. Butler
- --------------------------
Michael D. Butler* Trustee October ____, 1997
/s/ Robertson Whittemore
- --------------------------
Robertson Whittemore* Trustee October ____, 1997
October ____, 1997
*By /s/ Marie Nastasi Arlt
----------------------
Marie Nastasi Arlt
Attorney-in-fact
C-6
<PAGE>
EXHIBIT INDEX
THE ANALYTIC SERIES FUND
EXHIBIT DESCRIPTION
8 Custodian Agreement
11 Consent of Independent Auditors
19 Power of Attorney
27 Financial Data Schedules
C-7
<PAGE>
[LOGO]
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective September 8, 1997, and is between THE CHASE
MANHATTAN BANK ("Bank") and The Analytic Series Fund ("Customer").
It is hereby agreed as follows:
1. CUSTOMER ACCOUNTS.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for
any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive,
purchase or subscribe for the same or evidencing or representing any other
rights or interests therein and other similar property whether certificated
or uncertificated as may be received by Bank or its Subcustodian (as defined
in Section 3) for the account of Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for any
and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts may
be established and separately accounted for as additional Accounts hereunder.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Securities shall be held in the country or other jurisdiction in which
the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
<PAGE>
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular
currency. To the extent Instructions are issued and Bank can comply with
such Instructions, Bank is authorized to maintain cash balances on deposit
for Customer with itself or one of its "Affiliates" at such reasonable rates
of interest as may from time to time be paid on such accounts, or in
non-interest bearing accounts as Customer may direct, if acceptable to Bank.
For purposes hereof, the term "Affiliate" shall mean an entity controlling,
controlled by, or under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3
(or their securities depositories), such arrangement must be authorized by a
written agreement, signed by Bank and Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts
in accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and
principal place of business of any Subcustodian of Customer's Assets and the
name and address of the governmental agency or other regulatory authority that
supervises or regulates such Subcustodian.
4. USE OF SUBCUSTODIAN.
(a) Bank shall identify the Assets on its books as belonging to Customer.
(b) A Subcustodian shall hold such Assets together with assets belonging
to other customers of Bank in accounts identified on such Subcustodian's books
as custody accounts for the exclusive benefit of customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding Bank's
customers' assets shall provide that such assets shall not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration. Where Securities
are deposited by a Subcustodian with a securities depository, Bank shall cause
the Subcustodian to identify on its books as belonging to Bank, as agent, the
Securities shown on the Subcustodian's account on the books of such securities
depository. The foregoing shall not apply to the extent of any special
agreement or arrangement made by Customer with any particular Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required
by Bank.
<PAGE>
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion,
may advance Customer such excess amount which shall be deemed a loan payable
on demand, bearing interest at the rate customarily charged by Bank on
similar loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account,
with interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that
such amount has not been received in the ordinary course of business or (ii)
that such amount was incorrectly credited. If Customer does not promptly
return any amount upon such notification, Bank shall be entitled, upon oral
or written notification to Customer, to reverse such credit by debiting the
Deposit Account for the amount previously credited. Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim
or a proof of claim in any insolvency proceeding or take any other action
with respect to the collection of such amount, but may act for Customer upon
Instructions after consultation with Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities shall be transferred, exchanged or delivered by Bank or
its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which
the transaction occurs, including, without limitation, delivery of Securities
to a purchaser, dealer or their agents against a receipt with the expectation
of receiving later payment and free delivery. Delivery of Securities out of
the Custody Account may also be made in any manner specifically required by
Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are
actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in its
discretion if the related transaction fails to settle within a reasonable
period, determined by Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and debits
of the particular transaction at any time.
7. ACTIONS OF BANK.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items
which call for payment upon presentation, to the extent that Bank or
Subcustodian is actually aware of such opportunities.
(b) Execute in the name of Customer such ownership and other certificates
as may be required to obtain payments in respect of Securities.
<PAGE>
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, Affiliates of Bank or any
Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications
shall indicate the identity of the entity having custody of the Assets.
Unless Customer sends Bank a written exception or objection to any Bank
statement within sixty (60) days of receipt, Customer shall be deemed to have
approved such statement. In such event, or where Customer has otherwise
approved any such statement, Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in
such statement or reasonably implied therefrom as though it had been settled
by the decree of a court of competent jurisdiction in an action where
Customer and all persons having or claiming an interest in Customer or
Customer's Accounts were parties.
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of Customer.
Bank shall have no liability for any loss occasioned by delay in the actual
receipt of notice by Bank or by its Subcustodians of any payment, redemption or
other transaction regarding Securities in the Custody Account in respect of
which Bank has agreed to take any action hereunder.
8. CORPORATE ACTIONS; PROXIES; TAX RECLAIMS.
(a) CORPORATE ACTIONS. Whenever Bank receives information concerning the
Securities which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"), Bank
shall give Customer notice of such Corporate Actions to the extent that Bank's
central corporate actions department has actual knowledge of a Corporate Action
in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person (as defined in Section 10
hereof), but if Instructions are not received in time for Bank to take timely
action, or actual notice of such Corporate Action was received too late to
seek Instructions, Bank is authorized to sell such rights entitlement or
fractional interest and to credit the Deposit Account with the proceeds or
take any other action it deems, in good faith, to be appropriate in which
case it shall be held harmless for any such action.
(b) PROXY VOTING. Bank shall provide proxy voting services, if elected by
Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) TAX RECLAIMS.
(i) Subject to the provisions hereof, Bank shall apply for
a reduction of withholding tax and any refund of any tax paid or
tax credits which apply in each applicable market in respect of
income payments on Securities for the benefit of Customer which
Bank believes may be available to such Customer.
<PAGE>
(ii) The provision of tax reclaim services by Bank is
conditional upon Bank receiving from the beneficial owner of
Securities (A) a declaration of its identity and place of
residence and (B) certain other documentation (pro forma copies
of which are available from Bank). Customer acknowledges that,
if Bank does not receive such declarations, documentation and
information, additional United Kingdom taxation shall be deducted
from all income received in respect of Securities issued outside
the United Kingdom and that U.S. non-resident alien tax or U.S.
backup withholding tax shall be deducted from U.S. source income.
Customer shall provide to Bank such documentation and information
as it may require in connection with taxation, and warrants that,
when given, this information shall be true and correct in every
respect, not misleading in any way, and contain all material
information. Customer undertakes to notify Bank immediately if
any such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third
party for any taxes, fines or penalties payable by Bank or
Customer, and shall be indemnified accordingly, whether these
result from the inaccurate completion of documents by Customer or
any third party acting as agent for Customer, or as a result of
the provision to Bank or any third party of inaccurate or
misleading information or the withholding of material information
by Customer or any other third party, or as a result of any delay
of any revenue authority or any other matter beyond the control
of Bank.
(iv) Customer confirms that Bank is authorized to deduct from
any cash received or credited to the Deposit Account any taxes or levies
required by any revenue or governmental authority for whatever reason in
respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with
respect to taxation levied by the revenue authorities of the
countries notified to Customer from time to time and Bank may, by
notification in writing, at its absolute discretion, supplement
or amend the markets in which the tax reclaim services are
offered. Other than as expressly provided in this sub-clause,
Bank shall have no responsibility with regard to Customer's tax
position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or,
in whole or in part, by one or more third parties appointed by
Bank (which may be Affiliates of Bank); provided that Bank shall
be liable for the performance of any such third party to the same
extent as Bank would have been if it performed such services
itself.
9. NOMINEES.
Securities which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities
depository, as the case may be. Bank may without notice to Customer
cause any such Securities to cease to be registered in the name of any
such nominee and to be registered in the name of Customer. In the
event that any Securities registered in a nominee name are called for
partial redemption by the issuer, Bank may allot the called portion to
the respective beneficial holders of such class of security in any
manner Bank deems to be fair and equitable. Customer shall hold Bank,
Subcustodians, and their respective nominees harmless from any
liability arising directly or indirectly from their status as a mere
record holder of Securities in the Custody Account.
<PAGE>
10. AUTHORIZED PERSONS.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder.
Such persons shall continue to be Authorized Persons until such time as Bank
receives Instructions from Customer or its designated agent that any such
employee or agent is no longer an Authorized Person. [nb]11. INSTRUCTIONS.
11. INSTRUCTIONS.
The term "Instructions" means instructions of any Authorized
Person received by Bank, via telephone, telex, facsimile transmission,
bank wire or other teleprocess or electronic instruction or trade
information system acceptable to Bank which Bank believes in good
faith to have been given by Authorized Persons or which are
transmitted with proper testing or authentication pursuant to terms
and conditions which Bank may specify. Unless otherwise expressly
provided, all Instructions shall continue in full force and effect
until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which
confirmation may bear the facsimile signature of such Person), but
Customer shall hold Bank harmless for the failure of an Authorized
Person to send such confirmation in writing, the failure of such
confirmation to conform to the telephone instructions received or
Bank's failure to produce such confirmation at any subsequent time.
Bank may electronically record any Instructions given by telephone,
and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make
available to Customer or its Authorized Persons.
12. STANDARD OF CARE; LIABILITIES.
(a) Bank shall be responsible for the performance of only such
duties as are set forth herein or expressly contained in Instructions
which are consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. Bank shall
be liable to Customer for any loss which shall occur as the
result of the failure of a Subcustodian to exercise reasonable
care with respect to the safekeeping of such Assets to the same
extent that Bank would be liable to Customer if Bank were holding
such Assets in New York. In the event of any loss to Customer by
reason of the failure of Bank or its Subcustodian to utilize
reasonable care, Bank shall be liable to Customer only to the
extent of Customer's direct damages, to be determined based on
the market value of the property which is the subject of the loss
at the date of discovery of such loss and without reference to
any special conditions or circumstances. Bank shall have no
liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even
if Bank has been advised as to the possibility of the same and
regardless of the form of the action. Bank shall not be
responsible for the insolvency of any Subcustodian which is not a
branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission,
default or the solvency of any broker or agent which it or a
Subcustodian appoints unless such appointment was made
negligently or in bad faith.
<PAGE>
(iii) Bank shall be indemnified by, and without
liability to Customer for any action taken or omitted by Bank
whether pursuant to Instructions or otherwise within the scope
hereof if such act or omission was in good faith, without
negligence. In performing its obligations hereunder, Bank may
rely on the genuineness of any document which it believes in good
faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of
any taxes or other governmental charges, and any related expenses
with respect to income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the
advice of counsel (who may be counsel for Customer) on all
matters and shall be without liability for any action reasonably
taken or omitted pursuant to such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be
liable for any loss which results from: 1) the general risk of
investing, or 2) investing or holding Assets in a particular
country including, but not limited to, losses resulting from
malfunction, interruption of or error in the transmission of
information caused by any machines or system or interruption of
communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions;
regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions
which prevent the orderly execution of securities transactions or
affect the value of Assets.
(viii) Neither party shall be liable to the other for any
loss due to forces beyond their control including, but not
limited to strikes or work stoppages, acts of war (whether
declared or undeclared) or terrorism, insurrection, revolution,
nuclear fusion, fission or radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of
this Section 12, it is specifically acknowledged that Bank shall have
no duty or responsibility to:
(i) question Instructions or make any suggestions to
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise Customer or an Authorized Person regarding
any default in the payment of principal or income of any security
other than as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other
party to which Securities are delivered or payments are made
pursuant hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons issuing Instructions
shall bear any responsibility to review such confirmations
against Instructions issued to and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding
that Bank or any of its divisions or Affiliates may have a material
interest in a transaction, or circumstances are such that Bank may
have a potential conflict of duty or interest including the fact that
Bank or any of its Affiliates may provide brokerage services to
<PAGE>
other customers, act as financial advisor to the issuer of Securities, act
as a lender to the issuer of Securities, act in the same transaction
as agent for more than one customer, have a material interest in the
issue of Securities, or earn profits from any of the activities listed
herein.
13. FEES AND EXPENSES.
Customer shall pay Bank for its services hereunder the fees set
forth in Schedule B hereto or such other amounts as may be agreed upon
in writing, together with Bank's reasonable out-of-pocket or
incidental expenses, including, but not limited to, legal fees. Bank
shall have a lien on and is authorized to charge any Accounts of
Customer for any amount owing to Bank under any provision hereof
14. MISCELLANEOUS.
(a) FOREIGN EXCHANGE TRANSACTIONS. To facilitate the
administration of Customer's trading and investment activity, Bank is
authorized to enter into spot or forward foreign exchange contracts
with Customer or an Authorized Person for Customer and may also
provide foreign exchange through its subsidiaries, Affiliates or
Subcustodians. Instructions, including standing instructions, may be
issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available.
In all cases where Bank, its subsidiaries, Affiliates or Subcustodians
enter into a foreign exchange contract related to Accounts, the terms
and conditions of the then current foreign exchange contract of Bank,
its subsidiary, Affiliate or Subcustodian and, to the extent not
inconsistent, this Agreement shall apply to such transaction.
(b) CERTIFICATION OF RESIDENCY, ETC. Customer certifies that it
is a resident of the United States and shall notify Bank of any
changes in residency. Bank may rely upon this certification or the
certification of such other facts as may be required to administer
Bank's obligations hereunder. Customer shall indemnify Bank against
all losses, liability, claims or demands arising directly or
indirectly from any such certifications.
(c) ACCESS TO RECORDS. Bank shall allow Customer's independent
public accountant reasonable access to the records of Bank relating to
the Assets as is required in connection with their examination of
books and records pertaining to Customer's affairs. Subject to
restrictions under applicable law, Bank shall also obtain an
undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has
physical possession of any Assets as may be required in connection
with the examination of Customer's books and records.
(d) GOVERNING LAW; SUCCESSORS AND ASSIGNS, CAPTIONS THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN NEW YORK and
shall not be assignable by either party, but shall bind the successors
in interest of Customer and Bank. The captions given to the sections
and subsections of this Agreement are for convenience of reference
only and are not to be used to interpret this Agreement.
(e) ENTIRE AGREEMENT; APPLICABLE RIDERS. Customer represents
that the Assets deposited in the Accounts are (Check one):
Employee Benefit Plan or other assets subject to the
----
Employee Retirement Income Security Act of 1974, as amended
("ERISA");
X Investment Company assets subject to certain U.S.
----
Securities and Exchange Commission rules
and regulations;
<PAGE>
Neither of the above.
----
This Agreement consists exclusively of this document together
with Schedules A and B, Exhibits I - _______ and the following
Rider(s) [Check applicable rider(s)]:
ERISA
----
X INVESTMENT COMPANY
----
X PROXY VOTING
----
X SPECIAL TERMS AND CONDITIONS
----
There are no other provisions hereof and this Agreement
supersedes any other agreements, whether written or oral, between the
parties. Any amendment hereto must be in writing, executed by both
parties.
(f) SEVERABILITY. In the event that one or more provisions
hereof are held invalid, illegal or unenforceable in any respect on
the basis of any particular circumstances or in any jurisdiction, the
validity, legality and enforceability of such provision or provisions
under other circumstances or in other jurisdictions and of the
remaining provisions shall not in any way be affected or impaired.
(g) WAIVER. Except as otherwise provided herein, no failure or
delay on the part of either party in exercising any power or right
hereunder operates as a waiver, nor does any single or partial
exercise of any power or right preclude any other or further exercise,
or the exercise of any other power or right. No waiver by a party of
any provision hereof, or waiver of any breach or default, is effective
unless in writing and signed by the party against whom the waiver is
to be enforced.
(h) REPRESENTATIONS AND WARRANTIES. (i) Customer hereby
represents and warrants to Bank that: (A) it has full authority and
power to deposit and control the Securities and cash deposited in the
Accounts; (B) it has all necessary authority to use Bank as its
custodian; (C) this Agreement constitutes its legal, valid and binding
obligation, enforceable in accordance with its terms; (D) it shall
have full authority and power to borrow moneys and enter into foreign
exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the
duties of Bank. (ii) Bank hereby represents and warrants to Customer
that: (A) it has the full power and authority to perform its
obligations hereunder, (B) this Agreement constitutes its legal, valid
and binding obligation; enforceable in accordance with its terms; and
(C) that it has taken all necessary action to authorize the execution
and delivery hereof.
(i) NOTICES. All notices hereunder shall be effective when
actually received. Any notices or other communications which may be
required hereunder are to be sent to the parties at the following
addresses or such other addresses as may subsequently be given to the
other party in writing: (a) Bank: The Chase Manhattan Bank, 4 Chase
MetroTech Center, Brooklyn, N.Y. 11245, Attention: Global Investor
Services, Investment Management Group; and (b) Customer: The
Analytic_TSA Global Asset Management, Inc., 700 South Flower Street,
Los Angeles, CA 90017.
(j) TERMINATION. This Agreement may be terminated by Customer
or Bank by giving sixty (60) days written notice to the other,
provided that such notice to Bank shall specify the names of the
persons to whom Bank shall deliver the Assets in the Accounts. If
notice of termination is given by Bank, Customer shall, within sixty
(60) days following receipt of the notice, deliver to Bank
Instructions specifying the names
<PAGE>
of the persons to whom Bank shall deliver the Assets. In either case
Bank shall deliver the Assets to the persons so specified, after
deducting any amounts which Bank determines in good faith to be owed
to it under Section 13. If within sixty (60) days following receipt of
a notice of termination by Bank, Bank does not receive Instructions
from Customer specifying the names of the persons to whom Bank shall
deliver the Assets, Bank, at its election, may deliver the Assets to a
bank or trust company doing business in the State of New York to be
held and disposed of pursuant to the provisions hereof, or to
Authorized Persons, or may continue to hold the Assets until
Instructions are provided to Bank.
(k) MONEY LAUNDERING. Customer warrants and undertakes to Bank
for itself and its agents that all Customer's customers are properly
identified in accordance with U.S. Money Laundering Regulations as in
effect from time to time.
(l) IMPUTATION OF CERTAIN INFORMATION. Bank shall not be held
responsible for and shall not be required to have regard to
information held by any person by imputation or information of which
Bank is not aware by virtue of a "Chinese Wall" arrangement. If Bank
becomes aware of confidential information which in good faith it feels
inhibits it from effecting a transaction hereunder Bank may refrain
from effecting it.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first-above written.
THE ANALYTIC SERIES FUND
By: /s/ Harindra de Silva
-----------------------
Title: Managing Director
Date: September 8, 1997
THE CHASE MANHATTAN BANK
By: /s/ Donald P. Hearn
-----------------------
Title: Senior Vice President
Date: September 8, 1997
<PAGE>
STATE OF MASSACHUSETTS)
: ss.
COUNTY OF SUFFOLK)
On this 8th day of September, 1997, before me personally came Donald P.
Hearn, to me known, who being by me duly sworn, did depose and say that he
resides in Boston at 73 Tremont Street, that he is a Senior Vice President of
The Chase Manhattan Bank, the entity described in and which executed the
foregoing instrument; that he knows the seal of said entity, that the seal
affixed to said instrument is such seal, that it was so affixed by order of
said entity, and that he signed his name thereto by like order.
/s/ Donald P. Hearn
--------------------
Donald P. Hearn
Sworn to before me this 8th
day of September, 1997.
/s/ Marquette K. Bamberg
- ------------------------
Marquette K. Bamberg
Notary
<PAGE>
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
The Analytic Series Fund
effective September 8, 1997
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940, as amended (the "1940 Act"),
as the same may be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the Securities and Exchange Commission ("SEC") or the Exemptive
Order applicable to accounts of this nature issued to Bank (1940 Act, Release
No. 12053, November 20, 1981), as amended, or unless Bank has otherwise
specifically agreed, Customer shall be solely responsible to assure that the
maintenance of Assets hereunder complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of
the SEC.
The following modifications are made to the Agreement:
Section 3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein
shall mean a branch of a qualified U.S. bank, an eligible foreign
custodian or an eligible foreign securities depository, which are
further defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as
defined in Rule 17f-5 under the 1940 Act;
(b) "eligible foreign custodian" shall mean (i) a banking
institution or trust company, incorporated or organized under the
laws of a country other than the United States, that is regulated
as such by that country's government or an agency thereof and
that has shareholders' equity in excess of $200 million in U.S.
currency (or a foreign currency equivalent thereof) as of the
close of its fiscal year most recently completed prior to the
date hereof, (ii) a majority owned direct or indirect subsidiary
of a qualified U.S. bank or bank holding company that is
incorporated or organized under the laws of a country other than
the United States and that has shareholders' equity in excess of
$100 million in U.S. currency (or a foreign currency equivalent
thereof) as of the close of its fiscal year most recently
completed prior to the date hereof, (iii) a banking institution
or trust company incorporated or organized under the laws of a
country other than the United States or a majority owned direct
or indirect subsidiary of a qualified U.S. bank or bank holding
company that is incorporated or organized under the laws of a
country other than the United States which has such other
qualifications as shall be specified in Instructions and approved
by Bank; or (iv) any other entity that shall have been so
qualified by exemptive order, rule or other appropriate action of
the SEC; and
(c) "eligible foreign securities depository" shall mean a
securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United
States, which operates (i) the central system for handling
securities or equivalent book-entries in that country, or (ii) a
transnational system for the central handling of securities or
equivalent book-entries.
<PAGE>
Customer represents that its Board of Directors has approved each of the
Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreements between Bank and each Subcustodian, which are attached as Exhibits
I through of Schedule A, and further represents that its Board has
determined that the use of each Subcustodian and the terms of each subcustody
agreement are consistent with the best interests of the Fund(s) and its
(their) shareholders. Bank shall supply Customer with any amendment to
Schedule A for approval. Customer has supplied or shall supply Bank with
certified copies of its Board of Directors resolution(s) with respect to the
foregoing prior to placing Assets with any Subcustodian so approved.
Section 11. INSTRUCTIONS.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made
pursuant to Section 5 and 6 hereof may be made only for the
purposes listed below. Instructions must specify the purpose for
which any transaction is to be made and Customer shall be solely
responsible to assure that Instructions are in accord with any
limitations or restrictions applicable to Customer by law or as
may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at
prices as confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or
otherwise become payable;
(c) In exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan or
merger, consolidation, reorganization, recapitalization or
readjustment;
(d) Upon conversion of Securities pursuant to their terms into
other securities;
(e) Upon exercise of subscription, purchase or other similar
rights represented by Securities;
(f) For the payment of interest, taxes, management or
supervisory fees, distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a
pledge of Securities, but only against receipt of amounts
borrowed;
(h) In connection with any loans, but only against receipt of
adequate collateral as specified in Instructions which shall
reflect any restrictions applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of
Customer and the delivery to, or the crediting to the account of,
Bank, its Subcustodian or Customer's transfer agent, such shares
to be purchased or redeemed;
(j) For the purpose of redeeming in kind shares of Customer
against delivery to Bank, its Subcustodian or Customer's transfer
agent of such shares to be so redeemed;
(k) For delivery in accordance with the provisions of any
agreement among Customer, Bank and a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of The
National Association of Securities Dealers, Inc., relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by Customer;
2
<PAGE>
(l) For release of Securities to designated brokers under
covered call options, provided, however, that such Securities
shall be released only upon payment to Bank of monies for the
premium due and a receipt for the Securities which are to be held
in escrow. Upon exercise of the option, or at expiration, Bank
shall receive from brokers the Securities previously deposited.
Bank shall act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and shall have no
responsibility or liability for any such Securities which are not
returned promptly when due other than to make proper request for
such return;
(m) For spot or forward foreign exchange transactions to
facilitate security trading, receipt of income from Securities or
related transactions;
(n) For other proper purposes as may be specified in
Instructions issued by an officer of Customer which shall include
a statement of the purpose for which the delivery or payment is
to be made, the amount of the payment or specific Securities to
be delivered, the name of the person or persons to whom delivery
or payment is to be made, and a certification that the purpose is
a proper purpose under the instruments governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. STANDARD OF CARE; LIABILITIES.
Add the following at the end of Section as 12:
(d) Bank hereby warrants to Customer that in its opinion, after
due inquiry, the established procedures to be followed by each of
its branches, each branch of a qualified U.S. Bank, each eligible
foreign custodian and each eligible foreign securities depository
holding Customer's Securities pursuant hereto afford protection
for such Securities at least equal to that afforded by Bank's
established procedures with respect to similar securities held by
Bank and its securities depositories in New York.
Section 14. ACCESS TO RECORDS.
ADD THE FOLLOWING LANGUAGE TO THE END OF SECTION 14(C):
Upon reasonable request from Customer, Bank shall furnish
Customer such reports (or portions thereof) of Bank's system of
internal accounting controls applicable to Bank's duties
hereunder. Bank shall endeavor to obtain and furnish Customer
with such similar reports as it may reasonably request with
respect to each Subcustodian and securities depository holding
Assets.
3
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
THE ANALYTIC SERIES FUND
dated September 8, 1997.
1. Global Proxy Services ("Proxy Services") shall be provided for
the countries listed in the procedures and guidelines
("Procedures") furnished to Customer, as the same may be amended
by Bank from time to time on prior notice to Customer. The
Procedures are incorporated by reference herein and form a part
of this Rider.
2. Proxy Services shall consist of those elements as set forth in
the Procedures, and shall include (a) notifications
("Notifications") by Bank to Customer of the dates of pending
shareholder meetings, resolutions to be voted upon and the return
dates as may be received by Bank or provided to Bank by its
Subcustodians or third parties, and (b) voting by Bank of proxies
based on Customer directions. Original proxy materials or copies
thereof shall not be provided. Notifications shall generally be
in English and, where necessary, shall be summarized and
translated from such non-English materials as have been made
available to Bank or its Subcustodian. In this respect Bank's
only obligation is to provide information from sources it
believes to be reliable and/or to provide materials summarized
and/or translated in good faith. Bank reserves the right to
provide Notifications, or parts thereof, in the language
received. Upon reasonable advance request by Customer, backup
information relative to Notifications, such as annual reports,
explanatory material concerning resolutions, management
recommendations or other material relevant to the exercise of
proxy voting rights shall be provided as available, but without
translation.
3. While Bank shall attempt to provide accurate and complete
Notifications, whether or not translated, Bank shall not be
liable for any losses or other consequences that may result from
reliance by Customer upon Notifications where Bank prepared the
same in good faith.
4 Notwithstanding the fact that Bank may act in a fiduciary
capacity with respect to Customer under other agreements or
otherwise under the Agreement, in performing Proxy Services Bank
shall be acting solely as the agent of Customer, and shall not
exercise any discretion with regard to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Securities are: (i) on loan; (ii) at registrar for registration
or reregistration; (iii) the subject of a conversion or other
corporate action; (iv) not held in a name subject to the control
of Bank or its Subcustodian or are otherwise held in a manner
which precludes voting; (v) not capable of being voted on account
of local market regulations or practices or restrictions by the
issuer; or (vi) held in a margin or collateral account.
6 Customer acknowledges that in certain countries Bank may be
unable to vote individual proxies but shall only be able to vote
proxies on a net basis (E.G., a net yes or no vote given the
voting instructions received from all customers).
<PAGE>
7. Customer shall not make any use of the information provided
hereunder, except in connection with the funds or plans covered
hereby, and shall in no event sell, license, give or otherwise
make the information provided hereunder available, to any third
party, and shall not directly or indirectly compete with Bank or
diminish the market for Proxy Services by provision of such
information, in whole or in part, for compensation or otherwise,
to any third party.
8. The names of Authorized Persons for Proxy Services shall be
furnished to Bank in accordance with Section 10 of the Agreement.
Proxy Services fees shall be as set forth in Section 13 of the
Agreement or as separately agreed.
2
<PAGE>
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH The Analytic Series Fund
------------------------
DATE September 8, 1997
------------------------
<PAGE>
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
----------------------------------
DOMESTIC CORPORATE ACTIONS AND PROXIES
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the provisions of
Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a
Custody Account, such proxies (signed in blank, if issued in
the name of Bank's nominee or the nominee of a central
depository) and communications with respect to Securities in
the Custody Account as call for voting or relate to legal
proceedings within a reasonable time after sufficient copies
are received by Bank for forwarding to its customers. In
addition, Bank shall follow coupon payments, redemptions,
exchanges or similar matters with respect to Securities in
the Custody Account and advise Customer or the Authorized
Person for such Account of rights issued, tender offers or
any other discretionary rights with respect to such
Securities, in each case, of which Bank has received notice
from the issuer of the Securities, or as to which notice is
published in publications routinely utilized by Bank for
this purpose.
FEES
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign
assets in the Accounts.
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Post-Effective Amendment No. 8 to Registration
Statement No. 33-55758 on Form N-1A of our report dated February 1997, on the
statement of assets and liabilities of The Analytic Series Fund including the
schedule of investments, as of December 31, 1996, and the related statements
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 five years in the period then ended 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
October 20, 1997
<PAGE>
EXHIBIT 19
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Marie Nastasi Arlt and Robert Flaherty, or either of them, to act severally
as attorney-in-fact for and in their respective names, places and steads, in
any and all capacities, to sign any or all amendments to the Registration
Statement of THE ANALYTIC SERIES FUND, pursuant to the Securities Act of
1933, and the Investment Company Act of 1940, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or any of them, may lawfully do
or cause to be done by virtue hereof.
Dated: October 20, 1997
/s/ Michael D. Butler
- --------------------------
Michael D. Butler
/s/ Michael Koehn
- --------------------------
Michael Koehn
/s/ Robertson Whittemore
- --------------------------
Robertson Whittemore
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<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
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<APPREC-INCREASE-CURRENT> (394)
<NET-CHANGE-FROM-OPS> 954
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<DISTRIBUTIONS-OF-INCOME> (829)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 231
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<SHARES-REINVESTED> 7
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<GROSS-EXPENSE> 133
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<PER-SHARE-NAV-BEGIN> 10.27
<PER-SHARE-NII> 0.28
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