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As filed with the Securities and Exchange Commission on May 2, 1996
Registration No. 811-7384
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form N-1A
REGISTRATION STATEMENT
Under
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
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NICHOLAS-APPLEGATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
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600 West Broadway, 30th Floor
San Diego, California 92101
(Address, including zip code, of Principal Executive Offices)
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Arthur E. Nicholas
c/o Nicholas-Applegate Capital Management
600 West Broadway, 30th Floor
San Diego, California 92101
(Name and address of agent for service)
Copies to:
Robert E. Carlson
Paul, Hastings, Janofsky & Walker
555 South Flower Street
Los Angeles, California 90071
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant to Section
8(b) of the Investment Company Act of 1940. However, Interests in the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "Securities Act"), because such Interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act. Investments in the Registrant
may only be made by investment companies, registered broker-dealers, insurance
company separate accounts, common or commingled trust funds, group trusts or
similar organizations or entities that are "accredited investors" within the
meaning of Regulation D under the Securities Act. This Registration Statement
does not constitute an offer to sell, or the solicitation of an offer to buy,
any Interests of the Registrant.
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NICHOLAS-APPLEGATE-Registered Trademark- INVESTMENT TRUST
Nicholas-Applegate Core Growth Fund
Nicholas-Applegate Emerging Growth Fund
Nicholas-Applegate Mini-Cap Growth Fund
Nicholas-Applegate Emerging Countries Growth Fund
Nicholas-Applegate Income & Growth Fund
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate International Growth Fund
Nicholas-Applegate Global Growth & Income Fund
Nicholas-Applegate Government Income Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate Fully Discretionary Fixed Income Fund
Nicholas-Applegate Value Fund
Nicholas-Applegate Money Market Fund
PART A
ITEM 1. COVER PAGE. Not applicable.
ITEM 2. SYNOPSIS. Not applicable.
ITEM 3. CONDENSED FINANCIAL INFORMATION. Not applicable.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Nicholas-Applegate Investment Trust, a Delaware business trust (the
"Trust"), is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Trust currently has fourteen series (each a "Fund" and collectively the
"Funds")-- Nicholas-Applegate Core Growth Fund (the "Core Growth Fund"),
Nicholas-Applegate Emerging Growth Fund (the "Emerging Growth Fund"),
Nicholas-Applegate Mini-Cap Growth Fund (the "Mini-Cap Fund"),
Nicholas-Applegate Emerging Countries Fund (the "Emerging Countries Fund"),
Nicholas-Applegate Income & Growth Fund (the "Income & Growth Fund"),
Nicholas-Applegate Balanced Growth Fund (the "Balanced Fund"),
Nicholas-Applegate Worldwide Growth Fund (the "Worldwide Fund"),
Nicholas-Applegate International Growth Fund (the "International Fund"),
Nicholas-Applegate Global Growth & Income Fund (the "Global Growth Fund"),
Nicholas-Applegate Government Income Fund (the "Government Fund"),
Nicholas-Applegate Short-Intermediate Fixed Income Fund (the "Short-Intermediate
Fund"), Nicholas-Applegate Fully Discretionary Fixed Income Fund (the "Fully
Discretionary Fund"), Nicholas-Applegate Value Fund (the "Value Fund") and
Nicholas-Applegate Money Market Fund (the "Money Market Fund"). The assets of
the Funds are managed by Nicholas-Applegate Capital Management (the "Investment
Adviser").
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Beneficial interests in each Fund ("Interests") are issued solely in
private placement transactions that do not involve any "public offering" within
the meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in a Fund may only be made by investment
companies, registered broker-dealers, insurance company separate accounts,
common or commingled trust funds, group trusts or similar organizations or
entities that are "accredited investors" within the meaning of Regulation D
under the Securities Act (each an "Investor" and collectively the "Investors").
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any "security" within the meaning of the
Securities Act.
INVESTMENT OBJECTIVES AND POLICIES.
CORE GROWTH FUND
The investment objective of the Core Growth Fund is to maximize
long-term capital appreciation. The Fund invests primarily in common stocks of
U.S. companies the earnings and stock prices of which are expected by its
Investment Adviser to grow faster than the average rate of companies in the
Standard & Poor's 500 Stock Price Index (the "S&P 500"). Companies in which the
Fund invests do business in a cross-section of industries and may be growth
companies, cyclical companies or companies believed to be undergoing a basic
change in operations or markets which, in the opinion of the Investment Adviser,
would result in a significant improvement in earnings. The securities of such
companies may be subject to more volatile market movements than securities of
larger, more established companies because the issuers typically are more
subject to changes in earnings and prospects. Although the Fund is not
restricted to investments in companies of any particular size, it currently
intends to invest primarily in companies with middle market capitalizations and
above (generally, above $500 million). There can be no assurance that the Fund
will achieve its investment objective. See "Investment Policies and Strategies"
for a discussion of the risks associated with investment in such growth
companies.
Under normal market conditions, at least 75% of the Fund's total
assets will be invested in common stocks. The remainder of the Fund's assets
may be invested in preferred convertible securities issued by similar growth
companies, investment grade corporate debt securities, securities issued or
guaranteed by the U.S. Government and its agencies and instrumentalities and
various other securities and instruments described in "Investment Policies and
Strategies" below. The Fund may invest up to 20% of its total assets, directly
or indirectly through American Depository Receipts, in securities issued by
foreign issuers. See "Investment Policies and Strategies" for a discussion of
the risks associated with investment in foreign securities. The other debt
securities in which the Fund may invest will be rated "Baa" or higher by Moody's
Investors Service, Inc. ("Moody's) or "BBB-" or higher by Standard & Poor's
Corporation ("S&P") or unrated if determined by the Investment Adviser to be of
comparable quality. These securities are of investment grade, which means that
their issuers are believed to have adequate capacity to pay interest and repay
principal, although certain of such securities in the lower
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grades have speculative characteristics, and changes in economic conditions or
other circumstances may be more likely to lead to a weakened capacity to pay
interest and principal than would be the case with higher rated securities. If
the rating of a debt security held by the Fund is downgraded below investment
grade, the Investment Adviser will sell the security as promptly as practicable.
The Fund may also make short sales, which is considered a speculative technique.
See "Investment Policies and Strategies" for a discussion of the risks
associated with short sale transactions.
EMERGING GROWTH FUND
The investment objective of the Emerging Growth Fund is to maximize
long-term capital appreciation. The Fund invests in the same types of
securities and companies as the Core Growth Fund, as described above, except
that the Emerging Growth Fund intends to invest primarily in companies with
smaller market capitalizations (E.G., up to $500 million). However, the Fund
will not necessarily sell any security held by it if the market capitalization
of the issuer increases above $500 million subsequent to purchase. The
securities of such companies may be subject to more volatile market movements
than securities of larger, more established companies, including the companies
in which the Core Growth Fund invests. There can be no assurance that the Fund
will achieve its investment objective. See "Core Growth Fund" above and
"Investment Policies and Strategies" for a discussion of the risks associated
with investments in growth companies, foreign companies, convertible and other
debt securities, short sales and other investments of the Emerging Growth Fund.
MINI-CAP FUND
The investment objective of the Mini-Cap Fund is to maximize long-term
capital appreciation. The Fund invests in the same types of securities and
companies as the Core Growth Fund, as described above, except that the Mini-Cap
Fund intends to invest primarily in companies with small market capitalizations
(E.G., up to $100 million). However, the Fund will not necessarily sell any
security held by it if the market capitalization of the issuer increases above
$100 million subsequent to purchase. The securities of such companies may be
subject to more volatile market movements than securities of larger, more
established companies, including the companies in which the Core Growth Fund
invests. There can be no assurance that the Mini-Cap Fund will achieve its
investment objective. See "Core Growth Fund" above and "Investment Policies and
Strategies" for a discussion of the risks associated with investments in growth
companies, foreign companies, convertible and other debt securities, short sales
and other investments of the Mini-Cap Fund.
EMERGING COUNTRIES FUND
The investment objective of the Emerging Countries Fund is to maximize
long-term capital appreciation. Assets of the Fund are invested primarily in
equity securities of issuers located in countries with emerging securities
markets -- that is, countries with securities markets
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which are, in the opinion of the Investment Adviser, emerging as investment
markets but have yet to reach a level of maturity associated with developed
foreign stock markets, especially in terms of participation by foreign
investors. The Fund currently expects to invest in issuers located in some or
all of the following emerging market countries: Argentina, Brazil, Chile,
China, Colombia, the Czech Republic, Greece, Hungary, India, Indonesia, Israel,
Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland,
Portugal, Singapore, South Africa, Sri Lanka, South Korea, Taiwan, Thailand,
Turkey and Venezuela. At the discretion of the Investment Adviser, the Fund may
also invest in other countries with emerging securities markets.
Under normal market conditions, as a fundamental policy which cannot
be changed without shareholder approval, at least 65% of the Emerging Countries
Fund's total assets will be invested in securities of issuers located in at
least three different countries (other than the United States). With this
exception, the Fund is not driven by allocation considerations with respect to
any particular countries, geographic regions or economic sectors. Although the
Fund is authorized to invest more than 25% of its total assets in the securities
of issuers located in any one country, it does not currently intend to do so.
However, the Investment Adviser currently selects portfolio securities for the
Fund from an investment universe of approximately 6,000 foreign issuers in 20
emerging markets.
The Fund may invest up to 10% of its total assets in closed-end
country funds. The Fund may also invest up to 20% of its total assets in
securities of issuers that are not domiciled or do not have their principal
places of business in developing countries, but that have or will have
substantial assets in developing countries, or derive or expect to derive a
substantial portion of their total revenues from either goods and services
produced in, or sales made in, developing countries.
Under normal market conditions, at least 75% of the Emerging Countries
Fund's total assets will be invested in equity securities (common and preferred
stocks), and warrants to acquire such securities. The remainder of the Fund's
assets will be invested in debt securities of foreign companies and foreign
governments and their agencies and instrumentalities which the Investment
Adviser believes present attractive opportunities for capital growth, as well as
in various other securities and instruments described below.
The debt securities in which the Emerging Countries Fund may invest
will be rated "Baa" or higher by Moody's or "BBB" or higher by S&P or unrated if
determined by the Investment Adviser to be of comparable quality. At least 75%
of the Fund's total assets invested in such securities will be invested in
securities rated A or better by Moody's or S&P or, if unrated, determined to be
of comparable quality by the Investment Adviser. See "Core Growth Fund" above
for a discussion of these securities. If the rating of a debt security held by
the Fund is downgraded below investment grade, the security will be sold as
promptly as practicable.
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The Emerging Countries Fund intends to invest principally in
securities that are listed on a bona fide securities exchange or are actively
traded in an over-the-counter market (either within or outside the issuer's
domicile country). The Fund will not invest in securities denominated in a
foreign currency unless, at the time of investment, such currency is considered
by the Investment Adviser to be fully exchangeable into United States dollars
without significant legal restriction. The Fund may purchase securities issued
by the government of, or a company located in, one nation but denominated in the
currency of another nation (or in a multinational currency unit).
There can be no assurance the Fund will achieve its investment
objective. See "Investment Policies and Strategies" for a description of the
rules associated with investments in emerging countries and other investments of
the Emerging Countries Fund.
INCOME & GROWTH FUND
The investment objective of the Income & Growth Fund is to maximize
total return, consisting of capital appreciation and current income. The Fund
invests primarily in convertible and equity securities of U.S. companies the
earnings and stock prices of which are expected by the Investment Adviser to
grow at above-average rates. Convertible securities are bonds, debentures,
corporate notes or preferred stocks which pay interest or dividends and which
may be converted into common stock at the option of the holder. Convertible
securities provide for participation in the appreciation of the underlying
common stock but at a lower level of risk because the yield is higher and the
security is senior to the common stock upon liquidation of the issuer. There
can be no assurance that the Fund will achieve its investment objective.
Under normal market conditions at least 65% of the Income & Growth
Fund's total assets will be invested in convertible securities and in common
stocks received upon conversion or exchange of such securities and retained in
the Fund's portfolio to permit orderly disposition. Up to 35% of the Fund's
total assets may be invested in other securities, including non-convertible
equity (common and preferred stocks) and debt securities and securities issued
or guaranteed by the U.S. Government. See "Investment Policies and Strategies"
for a description of the various other securities and instruments in which the
Fund may invest. The Fund may also invest in Eurodollar convertible securities
and American Depository Receipts. See "Investment Policies and Strategies" for
a discussion of the risks associated with investment in foreign securities. At
all times, a minimum of 25% of the Fund's total assets will be invested in
income-producing securities (including convertible securities and debt
securities), and a minimum of 25% of the Fund's total assets will be invested in
equity securities (including common and preferred stocks).
The issuers of the convertible and equity securities in which the
Income & Growth Fund invests will be the same types of growth companies as those
in which the Core Growth Fund invests. See "Core Growth Fund" above and
"Investment Policies and Strategies" for a discussion of the risks associated
with investment in such growth companies. The Income &
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Growth Fund's convertible and other debt securities will generally be investment
grade securities rated "Baa" or higher by Moody's or "BBB-" or higher by S&P or
unrated if determined by the Investment Adviser to be of comparable quality, as
described above under "Core Growth Fund." However, a portion (less than 35%) of
the Income & Growth Fund's net assets may be invested in debt securities rated
below investment grade or unrated if the Investment Adviser believes that the
financial condition of the issuer or the protection afforded to the particular
securities is stronger than would otherwise be indicated by such low ratings or
the lack thereof. Debt securities with ratings below "Baa" or "BBB-," commonly
referred to as "junk bonds," are speculative and subject to greater market
fluctuations and risk of loss of income and principal than higher rated bonds.
If the rating of an investment grade security held by the Fund is downgraded,
the Investment Adviser will determine whether it is in the best interests of the
Fund to continue to hold such security in its investment portfolio. However, if
the downgrading of a debt security causes the Fund to retain 35% or more of its
net assets in junk bonds, the Fund will sell sufficient principal amount of junk
bonds as promptly as practicable to ensure that it does not hold 35% or more of
its net assets in such securities. See "Investment Policies and Strategies" for
a discussion of the risks associated with investment in junk bonds.
BALANCED FUND
The investment objective of the Balanced Fund is to provide investors
with a balance of long-term capital appreciation and current income. The Fund
invests in equity securities (common and preferred stocks), convertible
securities and warrants primarily of U.S. companies, debt securities (bonds,
debentures and notes), money market instruments and other short-term investments
and instruments described in "Investment Policies and Strategies" below. Under
normal circumstances, the Fund will allocate approximately 60% of the total
value of its assets to equity securities, convertible securities and warrants
and approximately 40% to debt securities, money market instruments and other
short-term investments and instruments.
Temporary deviations from the Fund's 60%/40% balance of securities due
to market fluctuations in the value of securities or otherwise will be permitted
so long as the percentage of equity securities in the Fund's investment
portfolio is not more than 70% or less than 50% of the value of the Fund's total
assets. If the value of the equity securities, convertible securities and
warrants in the Fund's investment portfolio increases above 70% or decreases
below 50%, the Fund will effect sales or purchases of certain of its existing
investments as promptly as practicable to restore the 60%/40% ratio. Such a
portfolio adjustment may cause the Fund to buy or sell securities which have
appreciated or depreciated in value at times different from when the Investment
Adviser would otherwise have made such purchases and sales. Such purchases and
sales may also cause the Fund to incur a higher proportion of short-term capital
gains than might otherwise be the case. There can be no assurance that the Fund
will achieve its investment objective.
The issuers of the Balanced Fund's equity investments will be the same
types of growth companies as those in which the Core Growth Fund invests. See
"Core Growth Fund" above
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and "Investment Policies and Strategies" for a discussion of the risks
associated with investment in such growth companies. The debt securities in
which the Balanced Fund may invest include debt securities issued by the U.S.
Government and its agencies and instrumentalities and corporate debt securities.
The ratings (or in the case of unrated securities, the Investment Adviser's
assessment of comparable quality) of the Fund's convertible and other debt
securities, and its policies regarding downgraded securities, will be the same
as those of the Income & Growth Fund. The Fund may invest a portion (less than
35%) of its net assets in convertible and debt securities rated below investment
grade or in unrated securities of comparable quality. Such securities or "junk
bonds" are speculative and subject to greater market fluctuations and risk of
loss of income and principal than higher rated bonds. See "Income & Growth
Fund" above and "Investment Policies and Strategies" for a discussion of the
risks associated with investment in junk bonds.
WORLDWIDE FUND
The investment objective of the Worldwide Fund is to maximize
long-term capital appreciation. The Fund invests primarily in equity securities
of U.S. and foreign companies. Such companies may be in the earlier states of
development, growth companies, cyclical companies or companies believed to be
undergoing a basic change in operations or markets which, in the opinion of the
Investment Adviser, would result in a significant improvement in earnings. The
securities of such companies may be subject to more volatile market movements
than securities of larger, more established companies. Although the Fund is not
restricted to investments in companies of any particular size, it currently
intends to invest principally in companies with smaller to middle market
capitalizations (I.E., from $100 million to $5 billion). See "Investment
Policies and Strategies" for a discussion of the risks associated with
investment in such companies.
The Worldwide Fund may invest in securities issued by companies based
or operating in any country, including the United States. Under normal market
conditions, as a fundamental policy which cannot be changed without shareholder
approval, at least 65% of the Fund's assets will be invested in securities of
issuers located in at least three countries, one of which may be the United
States. The Fund will normally invest approximately 30% of total assets in
securities of U.S. issuers. With these exceptions, the Fund is not driven by
allocation considerations with respect to any particular countries, geographic
regions or economic sectors. The Investment Adviser currently selects portfolio
securities for the Fund from an investment universe of approximately 9,000 U.S.
companies and 12,000 foreign issuers in the 20 largest international markets.
Countries in which investment opportunities will be sought include Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy,
Japan, Malaysia, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States. However, the Fund may
also invest in securities issued by companies based in other countries such as
the countries of Eastern Europe and South America, Indonesia, Korea, Mexico, the
Philippines, Portugal and Thailand. The Fund may also invest up to 10% of its
assets in closed-end country funds. An investment in such funds may result
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in duplication of fees. See "Investment Policies and Strategies" for a
discussion of the risks associated with investment in foreign securities. There
can be no assurance that the Fund will achieve its investment objective.
Under normal market conditions, at least 75% of the Fund's total
assets will be invested in equity securities (common and preferred stocks and
warrants) and securities convertible into equity securities. The remainder of
the Worldwide Fund's assets will be invested in debt securities of foreign
companies and foreign governments and their agencies and instrumentalities,
which the Investment Adviser believes present attractive opportunities for
capital growth, as well as in various other securities and instruments described
in the "Investment Policies and Strategies" below. The ratings (or in the case
of unrated securities, the Investment Adviser's assessment of comparable
quality) of the Fund's debt securities, and its policies regarding downgraded
securities, will be the same as those of the Core Growth Fund. See "Core Growth
Fund" above. The Fund also make short sales, which is considered a speculative
technique. See "Investment Policies and Strategies" for a discussion of the
risks associated with short sale transactions.
INTERNATIONAL FUND
The International Fund seeks to maximize long-term capital
appreciation. Assets of the International Fund are invested in the same types
of securities as the Worldwide Fund, except that the International Fund does not
invest in securities of U.S. companies. Under normal market conditions, as a
fundamental policy which cannot be changed without shareholder approval, at
least 65% of the Fund's total assets will be invested in securities of issuers
located in at least three countries. There can be no assurance that the Fund
will achieve its investment objective. See "Worldwide Fund" above.
GLOBAL GROWTH FUND
The investment objective of the Global Growth Fund is long-term
capital appreciation while providing current income. Assets of the Fund are
invested primarily in a diversified portfolio of equity securities, bonds and
money market instruments of U.S. and foreign issuers. Although the Fund is not
restricted to investments in companies of any particular size, it currently
intends to invest principally in established companies in the world's leading
industrial nations and in other rapidly growing countries. There can be no
assurance that the Fund will achieve its investment objectives. See "Investment
Policies and Strategies" for a discussion of the risks associated with
investment in such securities, bonds and money market instruments.
Under normal market conditions, as a fundamental policy which cannot
be changed without shareholder approval, at least 65% of the Fund's total assets
will be invested in securities of issuers located in at least three different
countries (one of which may be the United States). With this exception, the
Fund is not driven by allocation considerations with respect to any particular
countries, geographic regions or economic sectors. Although the Fund is
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authorized to invest more than 25% of its total assets in the securities of
issuers located in any one country, it does not currently intend to do so.
Countries in which investment opportunity be sought are the same as for the
International Growth Fund, except that the Global Growth & Income Fund may also
invest up to 10% of its net assets in securities issued by companies based in
other countries such as the countries of Eastern Europe and South America,
Indonesia, Korea, Mexico, the Philippines, Portugal and Thailand. The Fund may
also invest up to 10% of its total assets in closed-end country funds. An
investment in such funds may result in duplication of fees.
Under normal market conditions, at least 60% of the Fund's total
assets will be invested in equity securities (common and preferred stocks), and
warrants to acquire such securities. The remainder of the Fund's assets will be
invested in debt securities of foreign companies and foreign governments and
their agencies and instrumentalities which the Investment Adviser believes
present attractive opportunities for capital growth, as well as in various other
securities and instruments described in "Investment Policies and Strategies."
The Fund's convertible and other debt securities will generally be
investment grade securities rated "Baa" or higher by Moody's or "BBB-" or higher
by S&P or unrated if determined by the Investment Adviser to be of comparable
quality. See "Core Growth Fund" above for a discussion of these securities.
However, a portion (less than 35%) of the Fund's net assets may be invested in
debt securities rated below investment grade or in unrated securities of
comparable quality if the Investment Adviser believes that the financial
condition of the issuer or the protection afforded to the particular securities
is stronger than would otherwise be indicated by such low ratings or the lack
thereof. See "Income & Growth Fund" above and "Investment Policies and
Strategies" for a discussion of the risks associated with investment in junk
bonds.
The Global Growth Fund intends to invest principally in securities
that are listed on a bona fide securities exchange or are actively traded in an
over-the-counter market (either within or outside the issuer's domicile
country). The Fund will not invest in securities denominated in a foreign
currency unless, at the time of investment, such currency is considered by the
Investment Adviser to be fully exchangeable into United States dollars without
significant legal restriction. The Fund may purchase securities issued by the
government of, or a company located in, one nation but denominated in the
currency of another nation (or in a multinational currency unit).
GOVERNMENT FUND
The investment objective of the Government Fund is to seek to maximize
current income consistent with prudent investment risk and preservation of
capital. The Fund invests primarily in investment grade, intermediate-term debt
securities of the U.S. Government and its agencies and instrumentalities. Such
securities are of varying maturities, with a weighted average portfolio duration
(expected life) generally from three to six years. The Fund may invest in
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direct obligations of the United States (such as Treasury bills, notes and
bonds, which are supported by the full faith and credit of the United States)
and obligations (including mortgage-related securities) issued or guaranteed by
agencies and instrumentalities of the U.S. Government that are established under
an act of Congress. These agencies and instrumentalities may include, but are
not limited to, the Government National Mortgage Association, Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation, Student Loan
Marketing Association, Federal Farm Credit Banks, Federal Home Loan Banks, and
Resolution Funding Corporation. Under normal market conditions, at least 75% of
the total assets of the Fund will be invested in securities issued or guaranteed
by the U.S. Government or its agencies and instrumentalities. The remainder of
the Fund's assets may be invested in mortgage-related securities (including
collateralized mortgage obligations), investment grade debt securities,
short-term investments and other securities and instruments described in
"Investment Policies and Strategies" below. There can be no assurance that the
Fund will achieve its investment objective.
Although the Fund invests primarily in securities issued or guaranteed
by the U.S. Government or its agencies and instrumentalities, the value of the
Fund's Interests and its current yield will fluctuate and are not guaranteed by
the U.S. Government. The market value of the debt securities in which the Fund
will invest is generally affected by changes in the level of interest rates. An
increase in interest rates will tend to reduce their market value, and a decline
in interest rates will tend to increase their value. The magnitude of these
changes generally will be greater for securities with longer remaining
maturities than those with shorter maturities. Generally, the longer the
maturity of a debt security, the higher its yield and the greater its price
volatility. Conversely, the shorter the maturity, the lower the yield but the
greater the price stability.
Duration is one of the fundamental tools used by the Investment
Adviser in the selection of securities for the Government Fund. Developed as a
more precise alternative to the concept of "term to maturity," duration is a
measure of the expected life of a debt security on a present value basis and is
an indicator of a security's price movement and risk associated with changes in
interest rates. Duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure. Duration takes the length of
the time intervals between the present time and the time that interest and
principal payments are scheduled and weighs them by the present values of the
cash to be received at each future point in time. For any fixed income security
with interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being the same, the
lower the stated or coupon rate of interest of a fixed income security, the
longer the duration of the security; conversely, the higher the stated or coupon
rate of interest of a fixed income security, the shorter the duration of the
security. For example, the maturity of a current coupon bond with a three-year
duration is approximately 3.5 years, and the maturity of a current coupon bond
with a six-year duration is approximately nine years. In some situations the
standard duration calculation does not properly reflect the interest rate
exposure of a security, such as in the case of mortgage pass-through securities.
In such instances, the Investment Adviser will use more
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sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.
SHORT-INTERMEDIATE FUND
The Short-Intermediate Fund seeks primarily to preserve principal and
liquidity, and secondarily to realize a high level of current income. The Fund
seeks to provide a return greater than the return of one to three-year U.S.
Treasury obligations over a full market cycle. The Fund invests primarily in an
actively managed portfolio of investment grade fixed-income securities. The
Fund may invest in a broad range of fixed-income securities, including bonds,
notes, mortgage-backed and asset-backed securities, issued by U.S. and foreign
corporations or other entities, and sovereign debt securities of U.S. or foreign
governments or their agencies, authorities, instrumentalities or sponsored
enterprises. The Fund will invest only in obligations payable in U.S. dollars.
The Fund may purchase securities that pay interest on a fixed, variable,
floating or deferred basis. Under normal market conditions, at least 90% of the
Fund's total assets will be invested in such securities. The Fund may acquire
over-the-counter and illiquid securities, and may utilize techniques such as
when-issued securities and firm commitment agreements, forward roll
transactions, swap transactions, futures contracts, securities lending, and
borrowing. See "Investment Policies and Strategies" for a description of the
Fund's investment securities and techniques and associated risks.
The Short-Intermediate Fund may adopt a temporary defensive position
during adverse market conditions by investing without limit in high quality
money market instruments, including short-term U.S. Government securities,
negotiable certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The average dollar-weighted maturity of the Short-Intermediate Fund's
portfolio will be adjusted as the Investment Adviser determines market
conditions warrant. The minimum average dollar-weighted portfolio maturity of
the Fund's portfolio will be two years, and the maximum will be five years. The
Fund is not constrained as to the maximum maturity of its individual portfolio
securities. However, the Fund will normally invest in securities with final
maturities, average lives or interest rate reset frequencies of ten years or
less.
The debt securities in which the Short-Intermediate Fund may invest
will be rated at the time of purchase "Baa" or higher by Moody's, "BBB-" or
higher by S&P's Corporation ("S&P"), or equivalent ratings by other recognized
rating agencies, or may be unrated if determined by the Investment Adviser to be
of comparable quality. See "Core Growth Fund" above for a discussion of these
securities. The Investment Adviser anticipates that the average dollar-weighted
credit quality of the securities in the Fund's portfolio will be Aa or AA
according to Moody's and S&P's ratings, respectively, or comparable credit
quality as determined by the Investment Adviser. In the case of a security that
is rated differently by one or more rating services, the higher rating will be
used in computing the Fund's average dollar-weighted credit quality. If the
rating of a security held in the Fund's portfolio is downgraded
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below investment grade by a rating service (or determined to have fallen below
investment grade by the Investment Adviser in the case of unrated securities),
such action will be considered by the Investment Adviser in its evaluation of
the overall investment merits of the security, but will not necessarily result
in the sale of the security.
In order to achieve the Fund's investment objectives, the Investment
Adviser will seek to add value by moving portfolio investments among market
sectors (e.g., U.S. Treasury securities, corporate securities and
mortgage-booked securities), positioning investments in the most attractive
maturities along the yield curve, selecting undervalued investments in order to
take advantage of lower prices and higher yields, and varying the average
maturity of the Fund's portfolio to reflect interest rate forecasts. There can
be no assurance that use of these techniques will be successful.
FULLY DISCRETIONARY FUND
The Fully Discretionary Fund seeks to maximize total return. It seeks
to provide a total return greater than the return of an index of either
government/corporate debt or government/corporate/mortgage debt over a full
market cycle. The Fund invests primarily in an actively managed portfolio of
investment grade fixed-income securities. The Fund may invest in a broad range
of fixed-income securities, including bonds, notes, and mortgage-backed and
asset-backed securities issued by U.S. and foreign corporations or other
entities, and sovereign debt securities of U.S. or foreign governments or their
agencies, authorities, instrumentalities or sponsored enterprises. The Fund may
purchase securities that pay interest on a fixed, variable, or floating basis.
Under normal market conditions, at least 65% of the Fund's total assets will be
invested in such securities. The Fund may acquire over-the-counter and illiquid
securities, and may utilize techniques such as when-issued securities and firm
commitment agreements, forward roll transactions, put and call options on
securities, swap transactions, futures contracts and options, securities
lending, and borrowing. See "Investment Policies and Strategies" for a
description of the Fund's investment securities and techniques and the
associated risks.
Although the Fully Discretionary Fund will invest primarily in
obligations payable in U.S. dollars, up to 30% of the Fund's portfolio assets
may be payable in other currencies. Countries in which non-dollar denominated
investments may be made will include Australia, Austria, Belgium, Canada,
Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, and the
United Kingdom. The Fund may or may not hedge against the currency risks
associated with such investments.
The Fully Discretionary Fund may adopt a temporary defensive position
during adverse market conditions by investing without limit in high quality
money market instruments, including short-term U.S. Government securities,
negotiable certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
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The average duration of the Fund's portfolio will be adjusted as the
Investment Adviser determines market conditions warrant. The average portfolio
duration of the Fund will range from two to eight years. The Fund is not
constrained as the maximum maturity of its individual portfolio securities.
However, its duration policy will limit the amount of longer-term investments in
its portfolio. See "Government Fund" above for an explanation of "duration."
The debt securities in which the Fully Discretionary Fund may invest
will be rated at the time of purchase investment grade by Moody's, S&P or other
recognized rating agencies, or may be unrated if determined by the Investment
Adviser to be of comparable quality. The Investment Adviser anticipates that
the average dollar-weighted credit quality of the securities in the Fund's
portfolio will be Aa or AA according to Moody's and S&P's ratings, respectively,
or comparable credit quality as determined by the Investment Adviser. The
policies of the Fund regarding determination of ratings and the disposition of
downgraded securities are the same as those of the Short-Intermediate Fund
described above.
In order to achieve the Fund's investment objectives, the Investment
Adviser will seek to add value by varying the average duration of the Fund's
portfolio to reflect interest rate forecasts, moving portfolio investments among
market sectors (e.g., non-dollar securities, U.S. Treasury securities, corporate
securities and mortgage-backed securities), positioning investments in the most
attractive maturities along the yield curve, and selecting undervalued
investments in order to take advantage of lower prices and higher yields. There
can be no assurance that use of these techniques will be successful.
VALUE FUND
The investment objective of the Value Fund is to provide a total
return consisting of capital appreciation plus dividend and interest income that
exceeds the total return realized on the Standard & Poor's 500 Stock Price
Index. Under normal circumstances, the Value Fund will invest at least 80% of
its total assets in a diversified portfolio of equity securities, primarily of
companies with larger market capitalizations (e.g. over $5 billion). Such
equity securities will include common stocks, preferred stocks, convertible
securities, and warrants. The Fund may invest in equity securities of domestic
issuers and in equity securities of foreign issuers that are traded in the
United States and comply with U.S. accounting standards. The Fund's portfolio
is designed to have risk, capitalization and industry characteristics similar to
those of the S&P 500 Index. The remainder of the Fund's assets will be invested
in debt securities of such domestic and foreign issuers that are considered by
the Investment Adviser to be cash equivalents, as well as in various other
securities described herein. There can be no assurance that the Value Fund will
achieve its investment objective.
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MONEY MARKET FUND
The investment objective of the Money Market Fund is to obtain a high
level of current income consistent with preservation of capital and maintenance
of liquidity. The Fund invests in high quality, short-term, U.S. dollar
denominated money market instruments. Such instruments include obligations
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies and instrumentalities; certificates of deposit, time deposits and
bankers' acceptance of certain domestic banks, foreign banks, foreign branches
of domestic and foreign banks, domestic branches of foreign banks, and domestic
savings and loan associations; commercial paper; and other short-term corporate
obligations, including those with floating or variable rates of interest; and
repurchase agreements with respect to any of the foregoing obligations. The
Fund may also invest in firm commitment agreements and other securities and
instruments described in "Investment Policies and Strategies" below under
certain circumstances. The Fund is neither insured nor guaranteed by the U.S.
Government, and there can be no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share.
All of the Fund's investments will mature in 397 days or less from the
date of purchase, and such investments will have a dollar-weighted maturity of
90 days or less. By limiting the maturity of its investments, the Fund seeks to
lessen changes in the value of its assets caused by fluctuations in short-term
interest rates; however, due to the short maturities of its investments, the
Fund will tend to have a lower yield (but less volatility) than funds that
invest in longer-term securities. In addition, the Fund will invest only in
securities determined by or under the supervision of the Trust's Board of
Trustees to present minimal credit risks and which at the time of purchase are
"eligible securities" as defined by Rule 2a-7 under the Investment Company Act.
Although the Fund will invest only in U.S. dollar denominated
instruments, the Fund may invest up to 20% of its total assets in securities
issued by foreign banks, foreign branches of domestic banks, domestic and
foreign branches of foreign banks, and commercial paper issued by foreign
issuers. Investment in such securities may subject the Money Market Fund to
certain special risks that are different from those incurred by a fund which
invests only in debt obligations of U.S. issuers, and the Investment Adviser
will give appropriate consideration to such risks. See "Investment Policies and
Strategies" below for a discussion of the risks associated with investment in
foreign securities.
The Money Market Fund is subject to certain restrictions required by
Rule 2a-7 under the Investment Company Act. In order to comply with such
restrictions, the Fund will not, among other things, purchase the securities of
any issuer if it would cause (i) more than 5% of its total assets to be invested
in the securities of any one issuer (excluding U.S. Government securities and
repurchase agreements fully collateralized by U.S. Government securities),
except as permitted by the Rule for certain securities for a period of up to
three business days after purchase, (ii) more than 5% of its total assets to be
invested in "second tier securities," as defined by the Rule, or (iii) more than
the greater of $1 million or 1% of its total net assets to
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be invested in the second tier securities of any one issuer. See Part B for a
more detailed description of the requirements of Rule 2a-7.
INVESTMENT TECHNIQUES AND PROCESSES.
The focus of the Investment Adviser's investment program is GROWTH
OVER TIME-Registered Trademark-. In making investment decisions for the Funds
with respect to equity securities, the Investment Adviser uses a proprietary
investment methodology which is designed to capture positive change at an early
stage. It adheres rigorously to this methodology, and applies it to various
segments of the capital markets, domestically and internationally. This
methodology consists of investment techniques and processes designed to identify
companies with attractive earnings and dividend growth potential and to evaluate
their investment prospects. These techniques and processes include
relationships with an extensive network of brokerage and research firms located
throughout the United States; computer-assisted fundamental analysis of
thousands of U.S. and foreign companies; established criteria for the purchase
and sale of individual securities; portfolio structuring and rebalancing
guidelines; securities trading techniques; and continual monitoring and
reevaluation of all holdings with a view to maintaining the most attractive mix
of investments. The Investment Adviser generally collects data (adjusted for
reporting and accounting differences) on approximately 26,000 companies in 35
countries (including the United States). There can be no assurance that use of
the proprietary investment methodology will be successful.
The decision to invest in any particular debt security for a Fund will
be based on such factors as the Investment Adviser's analysis of the effect of
the yield to maturity of the security on the average yield to maturity of the
total debt security portfolio of the Fund, the Investment Adviser's assessment
of the credit quality of the issuer and other factors the Investment Adviser
deems relevant. Additional techniques used in connection with the
Short-Intermediate Fund and Fully Discretionary Fund are described above. In
managing the debt security investments of the other Funds, the Investment
Adviser seeks to capture major moves in interest rates and utilizes a
proprietary model to identify interest rate trends in the bond market. There
can be no assurance that use of these techniques will be successful.
PORTFOLIO TURNOVER.
The Investment Adviser's investment approach results in above-average
portfolio turnover for each Fund, as the Investment Adviser sells portfolio
securities when it is believed that the sale of a security owned by a Fund and
the purchase of another security of better value can enhance principal and/or
increase income. A security may also be sold to avoid any prospective decline
in market value or a security may be purchased in anticipation of a market rise.
Although it is not possible to predict future portfolio turnover rates
accurately, and such rates may vary from year to year, each Fund (other than the
Money Market Fund) anticipates that its annual portfolio turnover rate may be up
to 200%, which is substantially greater than that of many other investment
companies. A high rate of portfolio turnover (100% or more) should
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not result in the Short-Intermediate and Fully Discretionary Funds paying
greater brokerage commission expenses than would otherwise be the case, as most
transactions in debt securities are effected with dealers on a principal basis.
Such securities, however, are subject to a mark-up by the dealers. A high rate
of portfolio turnover for the other Funds involves correspondingly greater
brokerage commission expenses, which will be borne directly by the Funds and
ultimately by the Investors. High portfolio turnover (100% or more) may also
result in the realization of substantial net capital gains, and any
distributions derived from such gains may be ordinary income for federal tax
purposes.
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS.
Each Fund is subject to certain investment restrictions which
constitute fundamental policies. Fundamental policies may not be changed
without the approval of the holders of a majority of the outstanding Interests
of the affected Fund, as defined in the Investment Company Act. An investment
policy or restriction which is not described as fundamental in this Registration
Statement may be changed or modified by the Board of Trustees of the Trust
without Investor approval.
Each Fund's investment objective is a fundamental policy. Certain of
the investment restrictions which are fundamental policies are set forth below.
Additional investment restrictions are discussed in Part B.
1. No Fund may invest more than 5% of its total assets in the
securities of any one issuer. However, up to 25% of a Fund's total assets may
be invested without regard to this limitation, and this limitation does not
apply to investments in securities of U.S. Government or its agencies and
instrumentalities.
2. No Fund may purchase more than 10% of the outstanding voting
securities of any one issuer, or purchase the securities of any issuer for the
purpose of exercising control.
3. No Fund may invest 25% or more of its total assets in any one
particular industry; however, this restriction does not apply to the securities
of the U.S. Government, its agencies and instrumentalities or, with respect to
the Money Market Fund, domestic branches of U.S. banks and U.S. branches of
foreign banks which are subject to the same regulation as U.S. banks.
4. No Fund may make loans of its portfolio securities in an
aggregate amount exceeding 30% of the value of its total assets, or borrow money
(except from banks for temporary, extraordinary or emergency purposes or for the
clearance of transactions and in an aggregate amount not exceeding 20% of the
value of its total assets).
5. No Fund may invest more than 15% (10% in the case of the Money
Market Fund) of its net assets in illiquid securities.
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INVESTMENT POLICIES AND STRATEGIES.
SHORT-TERM INVESTMENTS (ALL FUNDS)
Each of the Funds may invest in short-term investments to maintain
liquidity for redemptions or during periods when, in the opinion of the
Investment Adviser, attractive investments are temporarily unavailable. Under
normal circumstances no more than 10% of a Fund's total assets will be retained
in cash (U.S. dollars or, in the case of the Emerging Countries, Worldwide,
International and Global Growth Funds, foreign currencies or multinational
currency units) and cash equivalents. The Money Market Fund, however, is under
no such restriction, as it invests all of its assets in short-term investments.
In addition, each Fund may invest without restriction in short-term investments
for temporary defensive purposes, such as when the securities markets or
economic conditions are expected to enter a period of decline. Short-term
investments in which the Funds may invest include U.S. Treasury bills or other
U.S. Government or Government agency or instrumentality obligations;
certificates of deposit; bankers' acceptances; time deposits; high quality
commercial paper and other short-term, high grade corporate obligations; shares
of money market mutual funds; or repurchase agreements with respect to such
securities. These instruments are described below. The Funds will only invest
in short-term investments which, in the opinion of the Investment Adviser,
present minimal credit and interest rate risk.
GOVERNMENT OBLIGATIONS (ALL FUNDS)
Securities issued or guaranteed by the U.S. Government or its agencies
and instrumentalities in which each of the Funds may invest include U.S.
Treasury securities, which differ only in their interest rates, maturities and
times of issuance. Treasury bills have initial maturities of one year or less;
Treasury notes have initial maturities of one to ten years; and Treasury bonds
generally have initial maturities of more than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow money from the Treasury; others, such as those
issued by the Federal National Mortgage Association, by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to U.S. Government-
sponsored agencies and instrumentalities, no assurance can be given that it will
always do so, since it is not so obligated by law. The Funds will invest in
securities issued or guaranteed by U.S.Government agencies and instrumentalities
only when the Investment Adviser is satisfied that the credit risk with respect
to the issuer is minimal.
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The Emerging Countries, Worldwide, International and Global Growth
Funds may invest in sovereign debt securities of emerging market governments and
their agencies and instrumentalities. Investments in such securities involve
special risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable to or unwilling to pay principal
or interest when due in accordance with the terms of the debt. Periods of
economic uncertainty may result in the volatility of market prices of sovereign
debt, and in turn the Funds' net asset value, to a greater extent than the
volatility inherent in domestic fixed income securities.
ZERO COUPON SECURITIES (INCOME & GROWTH, BALANCED, GLOBAL GROWTH,
GOVERNMENT, SHORT-INTERMEDIATE, FULLY DISCRETIONARY AND MONEY MARKET
FUNDS)
The Short-Intermediate and Fully Discretionary Funds may each invest
up to 50% of its net assets, and the Income & Growth, Balanced, Global Growth
and Government Funds may each invest up to 35% of its net assets, in "zero
coupon" securities issued or guaranteed by the U.S. Government and its agencies
and instrumentalities. Zero coupon securities may be issued by the U.S.
Treasury or by a U.S. Government agency, authority or instrumentality (such as
the Student Loan Marketing Association or the Resolution Funding Corporation).
In addition, the Money Market Fund may invest up to 5% of its net assets in
separately traded interest and principal component parts of U.S. Treasury
securities that are sold as zero coupon securities and are transferable through
the Federal book-entry system known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") and Coupons Under Book Entry Safekeeping
("CUBES"). Zero coupon securities are sold at a substantial discount from face
value and redeemed at face value at their maturity date without interim cash
payments of interest and principal. This discount is amortized over the life of
the security and such amortization will constitute the income earned on the
security for both accounting and tax purposes. Because of these features, such
securities may be subject to greater volatility as a result of changes in
prevailing interest rates than interest paying investments in which the Funds
may invest. Because income on such securities is accrued on a current basis,
even though the Funds do not receive the income currently in cash, the Funds may
have to sell other portfolio investments to obtain cash needed by the related
Investors to make income distributions.
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CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANKERS' ACCEPTANCES (ALL
FUNDS)
Each of the Funds may invest in certificates of deposit, time deposits
and bankers' acceptances issued by domestic banks, foreign banks, foreign
branches of domestic banks, domestic and foreign branches of foreign banks, and
domestic savings and loan associations, all of which at the date of investment
have capital, surplus and undivided profits as of the date of their most recent
published financial statements in excess of $100 million, or less than $100
million if the principal amount of such bank obligations is insured by the
Federal Deposit Insurance Corporation. Certificates of deposit are certificates
evidencing the obligation of a bank to repay funds deposited with it for a
specified period of time. Time deposits are non-negotiable deposits maintained
in a banking institution for a specified period of time at a stated interest
rate. Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer; these instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity.
COMMERCIAL PAPER (ALL FUNDS)
Each of the Funds may invest in commercial paper of domestic and
foreign entities which is rated (or guaranteed by a corporation the commercial
paper of which is rated) in the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"), including
"P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P, or, if rated by only one
NRSRO, in such NRSRO's two highest grades, or, if not rated, is issued by an
entity which the Investment Adviser, acting pursuant to guidelines established
by the Master Trust's Board of Trustees, has determined to be of minimal credit
risk and comparable quality. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
VARIABLE RATE DEMAND NOTES (ALL FUNDS)
Each of the Funds may purchase floating and variable rate demand notes
and bonds, which are obligations ordinarily having stated maturities in excess
of one year, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes, which are obligations that permit a Fund to invest fluctuating amounts,
which may change daily without penalty. The interest rates on these notes are
adjusted at designated intervals or whenever there are changes in the market
rates of interest on which the interest rates are based. The issuer of such
obligations normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the obligations plus
accrued interest upon a specified number of days' notice to the holders of such
obligations. Because these obligations are direct lending arrangements between
the lender and borrower, it is not contemplated that such instruments generally
will be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value. Such obligations
frequently are not rated by credit rating agencies and a Fund may invest in
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obligations which are not so rated only if the Investment Adviser determines
that at the time of investment the obligations are of comparable quality to the
other obligations in which the Fund may invest. The Investment Adviser will
monitor the creditworthiness of the issuers of such obligations and their
earning power and cash flow, and will also consider situations in which all
holders of such notes would redeem at the same time. Investment by a Fund in
floating or variable rate demand obligations as to which it cannot exercise the
demand feature on not more than seven days' notice will be subject to the Fund's
limit on illiquid securities of 15% (10% in the case of the Money Market Fund)
of net assets if there is no secondary market available for these obligations.
MUNICIPAL SECURITIES (SHORT-INTERMEDIATE AND FULLY DISCRETIONARY
FUNDS)
Each of the Short-Intermediate and Fully Discretionary Funds may
invest up to 5% of its net assets in tax-exempt securities such as state and
municipal bonds if the Investment Adviser believes they will provide competitive
returns. Such securities may include general obligation notes and bonds secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest; revenue notes and bonds payable only from the
revenues derived from a particular facility or only from the proceeds of a
special excise tax; lease obligations issued by state or local government
authorities to acquire land, equipment or facilities; and certificates of
participation issued by municipalities or municipal authorities to evidence a
proportionate interest in rental or lease payments relating to specific
projects.
CORPORATE DEBT SECURITIES (ALL FUNDS)
The non-convertible corporate debt securities in which the Funds may
invest include obligations of varying maturities (such as debentures, bonds and
notes) over a cross-section of industries. The value of a debt security changes
as interest rates fluctuate, with longer-term securities fluctuating more widely
in response to changes in interest rates than those of shorter-term securities.
A decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
The corporate debt securities purchased by such Funds are generally of
investment grade, except that certain of the Funds may invest some of their
assets in debt securities rated below investment grade. See "Junk Bond
Considerations" below. For short-term purposes, all Funds may invest in
corporate obligations which mature in one year or less and which are rated "Aa"
or higher by Moody's, "AA" or higher by S&P, rated in the two highest rating
categories by any other NRSRO, or are unrated but determined by the Investment
Adviser to be of minimal credit risk and comparable quality.
CONVERTIBLE SECURITIES AND WARRANTS (ALL FUNDS OTHER THAN
SHORT-INTERMEDIATE, FULLY DISCRETIONARY AND MONEY MARKET FUND)
All Funds other than the Short-Intermediate Fully Discretionary and
Money Market Funds may invest in securities which may be exchanged for,
converted into, or exercised to
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acquire a predetermined number of shares of the issuer's common stock at the
option of the holder during a specified time period (such as convertible
preferred stocks, convertible debentures and warrants). Convertible securities
generally pay interest or dividends and provide for participation in the
appreciation of the underlying common stock but at a lower level of risk because
yield is higher and the security is senior to common stock. Convertible
securities may also include warrants which give the holder the right to purchase
at any time during a specified period a predetermined number of shares of common
stock at a fixed price but which do not pay a fixed dividend. Investments in
warrants involve certain risks, including the possible lack of a liquid market
for resale, potential price fluctuations as a result of speculation or other
factors, and the 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
exercised, resulting in a loss of a Fund's entire investment therein. As a
matter of operating policy, no Fund will invest more than 5% of its net assets
in warrants.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The credit standing of the issuer
and other factors may also affect the investment value of a convertible
security. The conversion value of a convertible security is determined by the
market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the convertible security is
governed principally by its investment value. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value.
Like other debt securities, the market value of convertible securities
tends to vary inversely with the level of interest rates. The value of the
security declines as interest rates increase and increases as interest rates
decline. Although under normal market conditions longer term securities have
greater yields than do shorter term securities of similar quality, they are
subject to greater price fluctuations. Fluctuations in the value of a Fund's
investments will be reflected in its net asset value per share. A convertible
security may be subject to redemption at the option of the issuer at a price
established in the instrument governing the convertible security. If a
convertible security held by a Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Convertible debt securities purchased by the Income & Growth and
Balanced Growth Funds are subject to certain minimum rating requirements (see
"Junk Bond Considerations" below). Convertible debt securities purchased by the
other Funds, which are acquired in whole or substantial part for their equity
characteristics, are not subject to such rating requirements.
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JUNK BOND CONSIDERATIONS (INCOME & GROWTH, BALANCED AND GLOBAL GROWTH
FUNDS)
The Income & Growth, Balanced and Global Growth Funds may invest a
portion (less than 35%) of their respective net assets in convertible and other
debt securities rated below "Baa" by Moody's or "BBB-" by S&P or below
investment grade by other recognized rating agencies, or in unrated securities
determined by the Investment Adviser to be of comparable quality if the
Investment Adviser believes that the financial condition of the issuer or the
protection afforded to the particular securities is stronger than would
otherwise be indicated by such low ratings or the lack thereof. Securities
rated below "Baa" or "BBB-," commonly referred to as "junk bonds," are subject
to greater risk of loss of income and principal than higher-rated bonds and are
considered to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal, which may in any case decline during
sustained periods of deteriorating economic conditions or rising interest rates.
Junk bonds are also generally considered to be subject to greater market risk in
times of deteriorating economic conditions, and to wider market and yield
fluctuations, than higher-rated securities. Junk bonds may also be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The market for such securities may
be thinner and less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold. To the
extent that there is no established secondary market for lower-rated securities,
a Fund may experience difficulty in valuing such securities and, in turn, its
assets. In addition, adverse publicity and investor perceptions about junk
bonds, whether or not based on fundamental analysis, may tend to decrease the
market value and liquidity of such securities.
Legislation has been and could be adopted limiting the use, or tax and
other advantages, of junk bonds which could adversely affect their value. Under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, for
example, federally insured savings and loan associations were required to divest
their investments in non-investment grade corporate debt securities by July 1,
1994.
The Investment Adviser will try to reduce the risk inherent in the
Funds' investment in such securities through credit analysis, diversification
and attention to current developments and trends in interest rates and economic
conditions. However, there can be no assurance that losses will not occur.
Since the risk of default is higher for lower-rated bonds, the Investment
Adviser's research and credit analysis are a correspondingly more important
aspect of its program for managing the Funds' investments in such debt
securities. The Investment Adviser will attempt to identify those issuers of
high-yielding securities whose financial condition is adequate to meet future
obligations, or has improved or is expected to improve in the future.
The Income & Growth and Balanced Growth Funds will in no event
purchase securities rated below "C" by Moody's or S&P. Debt securities with
such ratings are predominantly speculative with respect to the capacity of the
issuer to pay interest and repay principal. Unrated
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securities will also be considered for investment when the Investment Adviser
believes that the financial condition of the issuers of such securities, or the
protection afforded by the terms of the securities themselves, limit the risk to
a Fund to a degree comparable to that of rated securities which are consistent
with the Fund's investment objective and policies. See Part B for a description
of credit ratings.
The corporate debt securities purchased by the Short-Intermediate and
Fully Discretionary Funds will not necessarily be sold if their ratings
subsequently decline below investment grade. However, if the downgrading of an
investment grade security causes either of these Funds to hold 5% or more of its
net assets in securities rated below investment grade or determined by the
Investment Adviser to be of comparable quality, the Fund will sell sufficient
principal amount of such securities as promptly as practicable to make sure that
it holds less than 5% of its net assets in such securities.
Credit ratings evaluate the safety of principal and interest payments
of securities, not their market value. The rating of an issuer is also heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. As credit rating agencies may fail to timely change
credit ratings of securities to reflect subsequent events, the Investment
Adviser will also monitor issuers of such securities to determine if such
issuers will have sufficient cash flow and profits to meet required principal
and interest payments and to assure their liquidity. If the rating of a debt
security held by the Income & Growth or Balanced Growth Fund is downgraded below
"C", the Investment Adviser will determine whether it is in the best interests
of the Fund to continue to hold such security in its investment portfolio.
However, if the downgrading of an investment grade security causes the Income &
Growth Fund or Balanced Fund to hold 35% or more of its net assets in securities
rated below investment grade, the Fund will sell sufficient principal amount of
such securities as promptly as practicable to make sure that it holds less than
35% of its net assets in such securities.
The average percentages of assets invested by the Income & Growth and
Balanced Growth Funds in bonds of each permissible rating, on a monthly dollar-
weighted basis, were as follows for the year ended March 31, 1996: AA-3.86%
and 0%, A-10.76% and 1.93%; BBB-14.14% and 0%; BB-7.50% and 0%; B-20.20% and
31.98%; CCC-0.10% and 0%; nonrated 3.28% and 14.98%.
SYNTHETIC CONVERTIBLE SECURITIES (INCOME & GROWTH, GLOBAL GROWTH AND
VALUE FUNDS)
The Income & Growth, Global Growth and Value Funds may invest in
"synthetic" convertible securities, which are derivative positions composed of
two or more different securities whose investment characteristics, taken
together, resemble those of convertible securities. For example, the Fund may
purchase a non-convertible debt security and a warrant or option, which enables
the Fund to have a convertible-like position with respect to a company,
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group of companies or stock index. Synthetic convertible securities are
typically offered by financial institutions and investment banks in private
placement transactions. Upon conversion, the Fund generally receives an amount
in cash equal to the difference between the conversion price and the then
current value of the underlying security. Unlike a true convertible security, a
synthetic convertible comprises two or more separate securities, each with its
own market value. Therefore, the market value of a synthetic convertible is the
sum of the values of its fixed-income component and its convertible component.
For this reason, the values of a synthetic convertible and a true convertible
security may respond differently to market fluctuations. The Income & Growth
Fund, Global Growth and Value Funds only invest in synthetic convertibles with
respect to companies whose corporate debt securities are rated "A" or higher by
Moody's or "A" or higher by S&P, and will not invest more than 15% of its net
assets in such synthetic securities and other illiquid securities. See
"Illiquid Securities" below.
MORTGAGE-BACKED SECURITIES (ALL FUNDS OTHER THAN EMERGING COUNTRIES
AND INTERNATIONAL FUNDS)
Each of the Short-Intermediate and Fully Discretionary Funds may
invest in mortgage-backed securities. Mortgage-backed securities represent
direct or indirect participations in or obligations collateralized by and
payable from mortgage loans secured by real property. Each mortgage pool
underlying mortgage-backed securities will consist of mortgage loans evidenced
by promissory notes secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on real property. An
investment in mortgage-backed securities includes certain risks. Mortgage-
backed securities are often subject to more rapid repayment than their stated
maturity dates would indicate as a result of the pass-throughs or prepayments of
principal on the underlying loans, which may increase the volatility of such
investments relative to similarly rated debt securities. During periods of
declining interest rates, prepayment of loans underlying mortgage-backed
securities can be expected to accelerate and thus impair a Fund's ability to
reinvest the returns of principal at comparable yields. During periods of
rising interest rates, reduced prepayment rates may extend the average life of
mortgage-backed securities and increase a Fund's exposure to rising interest
rates. Accordingly, the market values of such securities will vary with changes
in market interest rates generally and in yield differentials among various
kinds of U.S. Government securities and other mortgage-backed securities.
The Government, Short-Intermediate and Fully Discretionary Funds may
invest in mortgage pass-through securities, which are fixed or adjustable rate
mortgage-backed securities that provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
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Each of the other Funds (except the Emerging Countries and
International Funds) may invest in certificates issued by the Government
National Mortgage Association as a short-term investment. GNMA certificates are
mortgage-backed securities representing part ownership of a pool of mortgage
loans, which are issued by lenders such as mortgage bankers, commercial banks
and savings associations, and are either insured by the Federal Housing
Administration or the Veterans Administration. A pool of these mortgages is
assembled and, after being approved by GNMA, is offered to investors through
securities dealers. The timely payment of interest and principal on each
mortgage is guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. Principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. Due to the
prepayment feature and the need to reinvest prepayments of principal at current
market rates, GNMA certificates can be less effective than typical bonds of
similar maturities at "locking in" yields during periods of declining interest
rates.
CMOS (GOVERNMENT, SHORT-INTERMEDIATE AND FULLY DISCRETIONARY FUNDS)
The Government, Short-Intermediate and Fully Discretionary Funds may
invest in collateralized mortgage obligations ("CMOs"), which are multiple class
mortgage-backed securities. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or of other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
adjustable interest rate and a final distribution date. In most cases, payments
of principal are applied to the CMO classes in the order of their respective
stated maturities, so that no principal payments will be made on a CMO class
until all other classes having an earlier stated maturity date are paid in full.
Sometimes, however, CMO classes are "parallel pay" (i.e., payments of principal
are made to two or more classes concurrently).
ASSET-BACKED SECURITIES (SHORT INTERMEDIATE AND FULLY DISCRETIONARY
FUNDS)
The Short-Intermediate and Fully Discretionary Funds may invest in
asset-backed securities, which represent participations in, or are secured by
and payable from, assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Asset-backed securities may also be collateralized
by a portfolio of U.S. Government securities, but are not direct obligations of
the U.S. Government, its agencies or instrumentalities. Payments or
distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution, or other
credit enhancements may be present; however, privately issued obligations
collateralized by a portfolio of privately issued asset-backed securities do not
involve any government-related guaranty or insurance.
Asset-backed securities can be structured in several ways, the most
common of which has been a "pass-through" model. A certificate representing a
fractional undivided beneficial interest
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in a trust or corporation created solely for the purpose of holding the trust's
assets is issued to the asset-backed security holder. The certificate entitles
the holder to receive a percentage of the interest and principal payments on the
terms and according to the schedule established by the trust instrument. A
servicing agent collects amounts due on the underlying assets for the account of
the trust, which distributes such amounts to the security holders. As an
alternative structure, the issuer of asset-backed securities effectively
transforms an asset-backed pool into obligations comprised of several different
maturities. Instead of holding an undivided interest in trust assets, the
purchaser of the asset-backed security holds a bond collateralized by the
underlying assets. The bonds are serviced by cash flows from the underlying
assets, a specified fraction of all cash received (less a fixed servicing fee)
being allocated first to pay interest and then to reduce principal.
Asset-backed securities present certain risks similar to and in
addition to those presented by mortgage-backed securities. Asset-backed
securities generally do not have the benefit of a security interest in
collateral that is comparable to mortgage assets and there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities. Asset-backed securities, however, are
not generally subject to the risks associated with prepayments of principal on
the underlying loans.
EQUITY SECURITIES OF GROWTH COMPANIES (ALL FUNDS OTHER THAN GLOBAL
GROWTH, GOVERNMENT, VALUE AND MONEY MARKET FUNDS)
Each of the Funds other than the Global Growth, Government, Value and
Money Market Funds may invest in equity securities of growth companies, cyclical
companies, companies with smaller market capitalizations ($500 million or less)
or companies believed to be undergoing a basic change in operations or markets
which could result in a significant improvement in earnings. Small companies
and new companies often have limited product lines, markets or financial
resources, and may be dependent upon one or few key persons for management. The
securities of such companies may be subject to more volatile market movements
than securities of larger, more established companies, both because the
securities typically are traded in lower volume and because the issuers
typically are more subject to changes in earnings and prospects. The Funds' net
asset values can be expected to experience above-average fluctuations, as
above-average risk is assumed by the Funds in investing in such growth companies
in seeking higher than average growth in capital.
CLOSED-END COUNTRY FUNDS (EMERGING COUNTRIES, WORLDWIDE, INTERNATIONAL
AND GLOBAL GROWTH FUNDS)
Closed-end country funds in which the Emerging Countries, Worldwide,
International and Global Growth Funds may invest are registered closed-end
investment companies with publicly traded shares and which hold portfolio
securities of issuers operated or located in a single country or geographical
region. The extent to which a Fund may invest in closed-end country funds is
limited by the Investment Company Act and various state securities or "blue
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sky" laws. Accordingly, as a fundamental policy, none of the Emerging
Countries, Worldwide, International nor Global Growth Funds will own more than
3% of the outstanding voting stock of any closed-end investment company, will
invest more than 10% of its total assets in securities issued by closed-end
investment companies nor, together with other investment companies managed by
the Investment Adviser, will own more than 10% of any closed-end investment
company. Assets of a Fund invested in closed-end country funds are subject to
advisory and other fees imposed by the closed-end country fund, as well as to
fees imposed by the Fund.
DEPOSITORY RECEIPTS (ALL FUNDS OTHER THAN GOVERNMENT AND MONEY MARKET
FUNDS)
Each of the funds other than the Government and Money Market Funds may
invest in American Depository Receipts ("ADRs"), which are receipts issued by an
American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. ADRs, in registered form, are designed for use in
U.S. securities markets. The Emerging Countries, Worldwide, International and
Global Growth Funds may also invest in European and Global Depository Receipts
("EDRs" and "GDRs"), which, in bearer form, are designed for use in European and
other foreign securities markets, and in other instruments representing
securities of foreign companies. Such depository receipts may be sponsored by
the foreign issuer or may be unsponsored. Unsponsored depository receipts are
organized independently and without the cooperation of the foreign issuer of the
underlying securities; as a result, available information regarding the issuer
may not be as current as for sponsored depository receipts, and the prices of
unsponsored depository receipts may be more volatile than if they were sponsored
by the issuers of the underlying securities.
EURODOLLAR AND YANKEE DOLLAR SECURITIES (INCOME & GROWTH, GLOBAL
GROWTH, SHORT-INTERMEDIATE AND FULLY DISCRETIONARY FUNDS)
Each of the Short-Intermediate and Fully Discretionary Funds may
invest in Eurodollar and Yankee Dollar instruments. Eurodollar instruments are
bonds that pay interest and principal in U.S. dollars held in banks outside the
United States, primarily in Europe. Eurodollar instruments are usually issued
on behalf of multinational companies and foreign governments by large
underwriting groups composed of banks and issuing houses from many countries.
Yankee dollar instruments are U.S. dollar denominated bonds issued in the U.S.
by foreign banks and corporations. These investments involve risks that are
different from investments in securities issued by U.S. issuers. See "Foreign
Considerations" below.
The Income & Growth and Global Growth Funds may invest in Eurodollar
convertible securities, which are fixed income securities of a U.S. issuer or a
foreign issuer that are issued outside the United States and are convertible
into or exchangeable for equity securities of the same or a different issuer.
Interest and dividends on Eurodollar securities are payable in U.S. dollars
outside of the United States. The Funds may invest without limitation in
Eurodollar convertible securities that are convertible into or exchangeable for
foreign equity securities listed, or represented by ADRs listed, on the New York
Stock Exchange or the American Stock
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Exchange or convertible into or exchangeable for publicly traded common stock of
U.S. companies. The Income & Growth Fund may also invest up to 15% of its total
assets in convertible securities, taken at market value, in Eurodollar
convertible securities that are convertible into or exchangeable for foreign
equity securities which are not listed, or represented by ADRs listed, on such
exchanges.
FOREIGN INVESTMENT CONSIDERATIONS (ALL FUNDS OTHER THAN GOVERNMENT
FUND)
There are special risks associated with investments in securities of
foreign companies and governments, which add to the usual risks inherent in
domestic investments. Such special risks include fluctuations in foreign
exchange rates, political or economic instability in the country of issue, and
the possible imposition of exchange controls or other laws or restrictions. In
addition, securities prices in foreign markets are generally subject to
different economic, financial, political and social factors than are the prices
of securities in United States markets. With respect to some foreign countries
there may be the possibility of expropriation or confiscatory taxation,
limitations on liquidity of securities or political or economic developments
which could affect the foreign investments of a Fund.
Moreover, securities of foreign issuers generally will not be
registered with the Securities and Exchange Commission and such issuers
generally will not be subject to the Commission's reporting requirements.
Accordingly, there is likely to be less publicly available information
concerning certain of the foreign issuers of securities held by a Fund than is
available concerning U.S. companies. Foreign companies are also generally not
subject to uniform accounting, auditing and financial reporting standards or to
practices and requirements comparable to those applicable to U.S. companies.
There may also be less government supervision and regulation of foreign broker-
dealers, financial institutions and listed companies than exists in the United
States. Settlement of transactions in some foreign markets may be delayed or
may be less frequent than in the United States, which could affect the liquidity
of the Fund's portfolio. In addition, foreign governments may withhold taxes
(typically at a rate between 10% and 35% of the gross amount paid) from
dividends or interest paid with respect to securities held by the Fund,
decreasing the net asset value of the Fund. The Funds will not invest in
securities denominated in a foreign currency unless, at the time of investment,
such currency is considered by the Investment Adviser to be fully exchangeable
into United States dollars without significant legal restriction.
EMERGING MARKETS CONSIDERATIONS (EMERGING COUNTRIES, WORLDWIDE,
INTERNATIONAL AND GLOBAL GROWTH FUNDS)
Investments in securities issued by the governments of emerging or
developing countries, and of companies within those countries, involves greater
risks than other foreign investments. The Emerging Countries Fund invests
primarily in emerging markets; the Worldwide, International and Global Growth
Funds may invest up to 10% of their assets in emerging markets. Investments in
emerging or developing markets involve exposure to economic and
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legal structures that are generally less diverse and mature (and in some cases
the absence of developed legal structures governing private and foreign
investments and private property), and to political systems which can be
expected to have less stability, than those of more developed countries. The
risks of investment in such countries may include matters such as relatively
unstable governments, higher degrees of government involvement in the economy,
the absence until recently of capital market structures or market-oriented
economies, economies based on only a few industries, securities markets which
trade only a small number of securities, restrictions on foreign investment in
stocks, and significant foreign currency devaluations and fluctuations.
Emerging markets can be substantially more volatile than both U.S. and
more developed foreign markets. Such volatility may be exacerbated by
illiquidity. The average daily trading volume in all of the emerging markets
combined is a small fraction of the average daily volume of the U.S. market.
Small trading volumes may result in the Funds being forced to purchase
securities at substantially higher prices than the current market, or to sell
securities at much lower prices than the current market.
These Funds are not restricted to investments in companies of any
particular size or market capitalization. The issuers of the equity securities
acquired by the Fund may be in the earlier stages of development, growth
companies, cyclical companies, or companies believed to be undergoing a basic
change in markets or operations which, in the opinion of the Investment Adviser,
would result in a significant improvement in earnings. Smaller companies and
new companies often have limited production lines, markets or financial
resources, and may be dependent upon a few key persons for management. The
securities of such companies may be subject to more volatile market movements
than securities of larger or more established companies.
As a result of the factors described above, the Emerging Countries
Fund's net asset value is expected to be volatile, investment in the Fund should
be considered speculative, and investors should be able to tolerate sudden,
sometimes substantial, fluctuations in the value of their investments. Because
of the risks associated with international equity investments and emerging
markets in particular, the Fund is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of speculating on short-
term market movements.
OVER-THE-COUNTER SECURITIES (ALL FUNDS OTHER THAN GOVERNMENT AND MONEY
MARKET FUNDS)
Securities owned by each of the Funds other than the Government and
Money Market Funds may be traded in the over-the-counter market or on a regional
securities exchange and may not be traded every day or in the volume typical of
securities trading on a national securities exchange. As a result, disposition
by such Funds of portfolio securities to meet redemptions by shareholders or
otherwise may require the Funds to sell these securities at a
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discount from market prices, to sell during periods when such disposition is not
desirable, or to make many small sales over a lengthy period of time.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS (ALL FUNDS)
The Funds may purchase securities on a delayed delivery or "when-
issued" basis and enter into firm commitment agreements (transactions in which
the payment obligation and interest rate are fixed at the time of the
transaction but the settlement is delayed). Delivery and payment for these
securities typically occur 15 to 45 days after the commitment to purchase. No
interest accrues to the purchaser during the period before delivery. There is a
risk in these transactions that the value of the securities at settlement may be
more or less than the agreed upon price, or that the party with which a Fund
enters into such a transaction may not perform its commitment. The Funds will
normally enter into these transactions with the intention of actually receiving
or delivering the securities. The Funds may sell the securities before the
settlement date.
To the extent a Fund engages in any of these transactions it will do
so for the purpose of acquiring securities for its portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage. The Funds will segregate liquid assets such as cash, U.S. Government
securities and other liquid, high quality debt securities in an amount
sufficient to meet their payment obligations with respect to these transactions.
A Fund may not purchase when-issued securities or enter into firm commitments
and roll transactions if, as a result, more than 15% of the Fund's net assets
would be segregated to cover such contracts.
"ROLL" TRANSACTIONS (GOVERNMENT, SHORT-INTERMEDIATE AND FULLY
DISCRETIONARY FUNDS)
Each of the Government, Short-Intermediate and Fully Discretionary
Funds may enter into "roll" transactions, which are the sale of GNMA
certificates and other securities together with a commitment to purchase
similar, but not identical, securities at a later date from the same party.
During the roll period, a Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the
event the buyer of securities under a roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the transaction may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
The Funds will engage in roll transactions for the purpose of
acquiring securities for their portfolio consistent with their investment
objectives and policies and not for investment leverage. Nonetheless, roll
transactions are speculative techniques and are considered borrowings by the
Funds for purposes of the percentage limitations applicable to borrowings. See
"Borrowings"
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below. Each Fund will establish a segregated account with its Custodian in
which it will maintain cash, U.S. Government securities and other liquid, high-
grade debt obligations in an amount sufficient to meet its payment obligations
with respect to these transactions. A Fund will not enter into roll
transactions if, as a result, more than 15% of the Fund's net assets would be
segregated to cover such contracts.
SHORT SALES (CORE GROWTH, EMERGING GROWTH, MINI-CAP, WORLDWIDE AND
INTERNATIONAL FUNDS)
The Investment Adviser believes that its growth equity management
approach, in addition to identifying equity securities the earnings and prices
of which it expects to grow at a rate above that of the S&P 500, also identifies
securities the prices of which can be expected to decline. Therefore, each of
the Core Growth, Emerging Growth, Mini-Cap, Worldwide and International Funds
is authorized to make short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities it
owns (referred to as short sales "against the box") and to make short sales of
securities which it does not own or have the right to acquire. A short sale
that is not made "against the box" is a transaction in which a Fund sells a
security it does not own in anticipation of a decline in market price. When the
Fund makes a short sale, the proceeds it receives are retained by the broker
until the Fund replaces the borrowed security. In order to deliver the security
to the buyer, the Fund must arrange through a broker to borrow the security and,
in so doing, the Fund becomes obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be.
Short sales by the Core Growth, Emerging Growth, Mini-Cap, Worldwide
and International Funds that are not made "against the box" create opportunities
to increase the Fund's return but, at the same time, involve special risk
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share, and that of the corresponding
Portfolio, will tend to increase more when the securities it has sold short
decrease in value, and to decrease more when the securities it has sold short
increase in value, than would otherwise be the case if it had not engaged in
such short sales. Short sales theoretically involve unlimited loss potential,
as the market price of securities sold short may continuously increase, although
a Fund may mitigate such losses by replacing the securities sold short before
the market price has increased significantly. Under adverse market conditions a
Fund might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales. The value of securities
of any issuer in which a Fund maintains a short position which is "not against
the box" may not exceed the lesser of 2% of the value of the Fund's net assets
or 2% of the securities of such class of the issuer.
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If the Core Growth, Emerging Growth, Mini-Cap, Worldwide or
International Fund makes a short sale "against the box", the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act, unless
the sale is "against the box" and the securities sold are placed in a segregated
account (not with the broker), or unless the Fund's obligation to deliver the
securities sold short is "covered" by placing in a segregated account (not with
the broker) cash or U.S. Government securities in an amount equal to the
difference between the market value of the securities sold short at the time of
the short sale and any cash or U.S. Government securities required to be
deposited as collateral with a broker in connection with the sale (not including
the proceeds from the short sale), which difference is adjusted daily for
changes in the value of the securities sold short. The total value of the cash
and U.S. Government securities deposited with the broker and otherwise
segregated may not at any time be less than the market value of the securities
sold short at the time of the short sale. As a matter of policy, the Trust's
Board of Trustees has determined that no Fund will make short sales of
securities or maintain a short position if to do so could create liabilities or
require collateral deposits and segregation of assets aggregating more than 25%
of the Fund's total assets, taken at market value.
A Fund's ability to enter into short sales transactions is limited by
the requirements of the Internal Revenue Code for qualification of an Investor
as a regulated investment company.
FOREIGN EXCHANGE CONTRACTS (EMERGING COUNTRIES, WORLDWIDE,
INTERNATIONAL, GLOBAL GROWTH AND FULLY DISCRETIONARY FUNDS)
Since the Emerging Countries, Worldwide, International, Global Growth
and Fully Discretionary Funds may invest primarily in securities denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the values of its portfolio securities and the unrealized
appreciation or depreciation of its investments. The rate of exchange between
the U.S. dollar and other currencies is determined by forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors.
The Emerging Countries, Worldwide, International, Global Growth and
Fully Discretionary Funds may enter into derivative positions such as foreign
exchange forward
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contracts or currency futures or options contracts for the purchase or sale of
foreign currency to "lock in" the U.S. dollar price of the securities
denominated in a foreign currency or the U.S. dollar equivalent of interest and
dividends to be paid on such securities, or to hedge against the possibility
that the currency of a foreign country in which the Fund has investments may
suffer a decline against the U.S. dollar. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund may
purchase a particular currency or enter into a forward currency contract to
preserve the U.S. dollar price of securities it intends to or has contracted to
purchase. Alternatively, the Fund might sell a particular currency on either a
spot (cash) basis at the rate then prevailing in the currency exchange market or
on a forward basis by entering into a forward contract to purchase or sell
currency, to hedge against an anticipated decline in the U.S. dollar value of
securities it intends or has contracted to sell. This method of attempting to
hedge the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. None of the Funds is obligated to engage in any such currency
hedging operations, and there can be no assurance as to the success of any
hedging operations which a Fund may implement. Although the strategy of
engaging in foreign currency transactions could reduce the risk of loss due to a
decline in the value of the hedged currency, it could also limit the potential
gain from an increase in the value of the currency. None of the Funds other
than the Fully Discretionary Fund intends to maintain a net exposure to such
contracts where the fulfillment of the Fund's obligations under such 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.
OPTIONS (ALL FUNDS OTHER THAN GOVERNMENT, VALUE AND MONEY MARKET
FUNDS)
Each of the Funds other than the Government, Value and Money Market
Funds may purchase listed covered "put" and "call" options with respect to
securities which are otherwise eligible for purchase by such Funds (and, in the
case of such Funds other than the Short-Intermediate and Fully Discretionary
Funds, with respect to various stock indices), for hedging purposes, subject to
the following restrictions: the aggregate premiums on call options purchased by
a Fund may not exceed 5% of the market value of net assets of the Fund as of the
date the call options are purchased, and the aggregate premiums on put options
may not exceed 5% of the market value of the net assets of the Fund as of the
date such options are purchased. In addition, no Fund will purchase or sell
options if, immediately thereafter, more than 25% of its net assets would be
hedged. A "put" gives a holder the right, in return for the premium paid, to
require the writer of the put to purchase from the holder a security at a
specified price. A "call" gives a holder the right, in return for the premium
paid, to require the writer of the call to sell a security to the holder at a
specified price. An option on a securities index (such as a stock index) gives
the holder the right, in return for the premium paid, to require the writer to
pay cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiplier.
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Put and call options are derivative securities traded on U.S. and
foreign exchanges, including the American Stock Exchange, Chicago Board Options
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock
Exchange. Additionally, the Core Growth, Emerging Growth, Emerging Countries,
Worldwide, International and Fully Discretionary Funds may purchase options not
traded on a securities exchange, which may bear a greater risk of nonperformance
than options traded on a securities exchange. Options not traded on an exchange
are considered dealer options and generally lack the liquidity of an exchange
traded option. Accordingly, dealer options may be subject to the Funds'
restriction on investment in illiquid securities, as described below. Dealer
options may also involve the risk that the securities dealers participating in
such transactions will fail to meet their obligations under the terms of the
option.
The Core Growth, Emerging Growth, Mini-Cap, Emerging Countries, Income
& Growth, Worldwide, International, Global Growth and Fully Discretionary Funds
may also write listed covered options on up to 25% of the value of their
respective net assets. Call options written by a Fund give the holder the right
to buy the underlying securities from the Fund at a stated exercise price; put
options written by a Fund give the holder the right to sell the underlying
security to the Fund. A call option is covered if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration upon conversion or exchange of
securities currently held by the Fund. A put option is covered if the Fund
maintains cash or cash equivalents equal to the exercise price in a segregated
amount with its Custodian. If an option written by a Fund expires unexercised,
the Fund realizes a gain equal to the premium received at the time the option
was written. If an option purchased by a Fund expires unexercised, the Fund
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option written by a
Fund may be closed out by an offsetting purchase or sale of an option of the
same series. A Fund will realize a gain from a closing purchase transaction if
the cost of the closing transaction 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 gain; if it is less, the Fund
will realize a loss.
FUTURES CONTRACTS (ALL FUNDS OTHER THAN BALANCED AND MONEY MARKET
FUNDS)
Each of the Funds other than the Balanced, Government and Money Market
Funds may purchase and sell stock index futures contracts as a hedge against
changes in market conditions. A stock index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the underlying stocks in the index is made.
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The Emerging Countries, Income & Growth, Worldwide, International,
Global Growth, Government, Short-Intermediate, Fully Discretionary and Value
Funds may also purchase and sell financial futures contracts as a hedge against
changes in interest rates. Additionally, the Emerging Countries, Worldwide,
International, Fully Discretionary and Value Funds may purchase and sell
currency futures contracts to hedge against foreign currency fluctuations, and
the Core Growth, Emerging Countries, Income & Growth, Worldwide, International,
Global Growth, Government, Fully Discretionary and Value Funds may purchase and
sell related options on futures contracts. A financial or currency futures
contract obligates the seller of the contract to deliver and the purchaser of
the contract to take delivery of the type of financial instrument or currency
called for in the contract at a specified future time (the settlement date) for
a specified price. Although the terms of a contract call for actual delivery or
acceptance of the financial instrument or currency, the contracts normally will
be closed out before the delivery date without delivery or acceptance taking
place. Futures options possess many of the same characteristics as options on
securities and indices. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified 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. A futures option may be
closed out before exercise or expiration by an offsetting purchase or sale of a
futures option of the same series.
Financial, currency and stock index futures contracts are derivative
instruments traded on U.S. commodities and futures exchanges, including the
Chicago Mercantile Exchange, the New York Futures Exchange, the Kansas City
Board of Trade, the Chicago Board of Trade and the International Monetary
Market, as well as commodity and securities exchanges located outside the United
States, including the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
Except as described below under "Non-Hedging Strategic Transactions,"
the Funds will not engage in transactions in futures contracts for speculation,
but only as a hedge against the risk of unexpected changes in the values of
securities held or intended to be held by the Funds. As a general rule, no Fund
will purchase or sell futures if, immediately thereafter, more than 25% of its
net assets would be hedged. In addition, no Fund may purchase or sell futures
or related options if, immediately thereafter, the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for such
options would exceed 5% of the market value of the Fund's net assets. In
instances involving the purchase of futures contracts by a Fund, an amount of
cash and cash equivalents equal to the market value of the futures contracts
will be deposited in a segregated account with the Fund's Custodian or with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
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INTEREST RATE AND CURRENCY SWAPS (SHORT-INTERMEDIATE AND FULLY
DISCRETIONARY FUNDS)
For hedging purposes, each of the Short-Intermediate and Fully
Discretionary Funds may enter into interest rate swap transactions and purchase
or sell interest rate caps and floors, and the Fully Discretionary Fund may
enter into currency swap cap transactions. An interest rate or currency swap
involves an agreement between a Fund and another party to exchange payments
calculated as if they were interest on a specified ("notional") principal amount
(e.g., an exchange of floating rate payments by one party for fixed rate
payments by another). An interest rate cap or floor entitles the purchaser, in
exchange for a premium, to receive payments of interest on a notional principal
amount from the seller of the cap or floor, to the extent that a specified
reference rate exceeds or falls below a predetermined level.
A Fund usually enters into such transactions on a "net" basis, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each swap is accrued on a daily basis, and
an amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess is maintained in a segregated
account by the Trust's custodian. If a Fund enters into a swap on other than a
net basis, or sells caps or floors, the Fund maintains a segregated account in
the full amount accrued on a daily basis of the Fund's obligations with respect
to the transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless
the unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). The swap
market has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents utilizing standard
swap documentation, and the Investment Adviser has determined that the swap
market has become relatively liquid. Swap transactions do not involve the
delivery of securities or other underlying assets or principal, and the risk of
loss with respect to such transactions is limited to the net amount of payments
that the Fund is contractually obligated to make or receive. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed; accordingly, they are less liquid than swaps, and caps and
floors purchased by a Fund are considered to be illiquid assets.
SPECIAL HEDGING CONSIDERATIONS (ALL FUNDS OTHER THAN MONEY MARKET
FUND)
Special risks are associated with the use of options, futures
contracts and swap transactions as hedging techniques. There can be no guaranty
of a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. A lack of correlation could result in a loss
on both the hedged securities in a Fund and the hedging vehicle, so that the
Fund's return might have been better had hedging not been attempted. In
addition, a decision as to whether, when and how to use options, futures or
swaps involves the
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exercise of skill and judgment which are different from those needed to select
portfolio securities, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior, currency fluctuations or interest
rate trends. If the Investment Adviser is incorrect in its forecasts regarding
market values, currency fluctuations, interest rate trends or other relevant
factors, a Fund may be in a worse position than if the Fund had not engaged in
options, futures or swap transactions. The potential loss incurred by a Fund in
writing options on futures and engaging in futures and swap transactions is
unlimited. The Investment Adviser is experienced in the use of options, futures
contracts and swap transactions as an investment technique.
In the event of a default by the other party to an over-the-counter
option transaction or a futures or swap transaction, a Fund might incur a loss.
In addition, there can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out an option position or futures or swap contract.
Most futures exchanges and boards of trade limit the amount of fluctuation in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a Fund from liquidating an unfavorable
position and a Fund would remain obligated to meet margin requirements until the
position is closed.
A Fund's ability to enter into options, futures contracts and swap
transactions is limited by the requirements of the Internal Revenue Code for
qualification of an Investor as a regulated investment company.
NON-HEDGING STRATEGIC TRANSACTIONS (SHORT-INTERMEDIATE AND FULLY
DISCRETIONARY FUNDS)
Each Fund's options, futures and swap transactions will generally be
entered into for hedging purposes -- to protect against possible changes in the
market values of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets, currency or interest rate fluctuations, to
protect the Fund's unrealized gains in the values of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchase or
sale of particular securities. However, in addition to the hedging transactions
referred to above, each of the Short-Intermediate and Fully Discretionary Funds
may enter into options, futures and swap transactions to enhance potential gain
in circumstances where hedging is not involved. A Fund's net loss exposure
resulting from transactions entered into for such purposes is not expected to
exceed 1% of the Fund's net assets at any one time and, in the event it does
exceed such amount, the Fund will close out transactions as promptly as
practicable in order to comply with this limitation. Such transactions are
subject to the limitations described above under "Options," "Futures Contracts,"
and
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"Interest Rate and Currency Swaps," and to the same types of risks as described
above under "Special Hedging Considerations."
REPURCHASE AGREEMENTS (ALL FUNDS)
Each Fund may on occasion enter into repurchase agreements, in which
the Fund purchases securities and the seller agrees to repurchase them from the
Fund at a mutually agreed-upon time and price. The period of maturity is
usually overnight or a few days, although it may extend over a number of months.
The resale price is in excess of the purchase price, reflecting an agreed-upon
rate of return effective for the period of time the Fund's money is invested in
the security. Each Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to 102% of the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and, if the value of the instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss. If bankruptcy proceedings are commenced with respect to
the seller, realization upon the collateral by a Fund may be delayed or limited.
A Fund will only enter into repurchase agreements involving securities in which
it could otherwise invest and with selected financial institutions and brokers
and dealers which meet certain creditworthiness and other criteria.
ILLIQUID SECURITIES (ALL FUNDS)
Each Fund may invest up to 15% (10% in the case of the Money Market
Fund) of its net assets in securities that at the time of purchase have legal or
contractual restrictions on resale or are otherwise 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 ("restricted securities"), securities which are otherwise
not readily marketable such as over-the-counter, or dealer traded, options, and
repurchase agreements having a maturity of more than seven days. Mutual funds
do not typically hold a significant amount of 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 the Fund might not be able to dispose
of restricted or other securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. The Fund might also have
to register such restricted securities in order to dispose of them, resulting in
additional expense and delay.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act of 1933,
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
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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 under the
Securities Act of 1933, the Trust's Board of Trustees may determine that such
securities are not illiquid securities notwithstanding their legal or
contractual restrictions on resale, based on factors such as the frequency of
trades and quotes for the securities, the number of dealers and OTHERS wishing
to purchase and sell the securities, and the nature of the security and the
marketplace trades. In all other cases, however, securities subject to
restrictions on resale will be deemed illiquid. Investing in restricted
securities eligible for resale under Rule 144A could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers become uninterested in purchasing such securities.
SECURITIES LENDING (ALL FUNDS)
To increase its income, each Fund may lend its portfolio securities to
financial institutions such as banks and brokers if the loan is collateralized
in accordance with applicable regulatory requirements. The Trust's Board of
Trustees has adopted an operating policy that limits the amount of loans made by
a Fund to not more than 30% of the value of the total assets of the Fund.
During the time portfolio securities are on loan, the borrower pays the Fund an
amount equivalent to any dividends or interest paid on such securities, and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or secured a letter of credit. Such loans
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or even loss of rights in the collateral should the borrower
of the securities fail financially. However, such securities lending will be
made only when, in the Investment 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.
BORROWING (ALL FUNDS)
Each Fund may borrow money from banks in amounts up to 20% of its
total assets (calculated when the loan is made) only for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
Borrowing involves special risk considerations. Interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under
adverse market conditions, a Fund might have to sell portfolio securities to
meet interest or principal payments at a time when fundamental investment
considerations would not favor such sales. All borrowings by a Fund will be
made only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all borrowings.
If such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law. Short sales "not
against the box" and roll transactions are considered borrowings for purposes of
the percentage limitations applicable to borrowings.
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<PAGE>
ITEM 5. MANAGEMENT OF THE FUNDS.
The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees.
INVESTMENT ADVISER.
Nicholas-Applegate Capital Management, a California limited
partnership, 600 West Broadway, 30th Floor, San Diego, California 92101, serves
as the Investment Adviser to each of the Funds. The Investment Adviser
currently manages approximately $29 billion of discretionary assets for numerous
clients, including employee benefit plans of corporations, public retirement
systems and unions, university endowments, foundations, and other institutional
investors, and individuals. Its general partner is Nicholas-Applegate Capital
Management Holdings, L.P., a California limited partnership controlled by
Arthur E. Nicholas. Mr. Nicholas and fourteen other partners manage a staff of
approximately 300 employees.
In its advisory agreement with the Trust (the "Investment Advisory
Agreement"), the Investment Adviser has agreed to manage the Funds' assets and
to be responsible for, make decisions with respect to and place orders for all
purchases and sales of the securities held by the Funds. For the services
provided and expenses assumed pursuant to the Investment Advisory Agreement, the
Investment Adviser receives a fee at the following annual rates: for the
Emerging Countries and Mini-Cap Funds, 1.25% of average net assets; for the
Emerging Growth Fund, 1.00% of average net assets; for the Worldwide and
International Funds, 1.00% of the first $500 million of such Fund's average net
assets, 0.90% of the next $500 million, and 0.85% of the portion of such Fund's
average net assets in excess of $1 billion; for the Global Growth Fund, .85% of
average net assets; for the Value Fund, 0.75% of average net assets; for the
Core Growth, Income & Growth and Balanced Funds, 0.75% of the first $500 million
of each such Fund's average net assets, 0.675% of the next $500 million, and
0.65% of the portion of each such Fund's average net assets in excess of $1
billion; for the Government Fund, 0.40% of the first $500 million of the Fund's
average net assets, and 0.35% of the portion of the Fund's average net assets in
excess of $500 million; for the Short-Intermediate Fund, 0.30% of the first $250
million of the Fund's average net assets and 0.25% of average net assets in
excess of $250 million; for the Fully Discretionary Fund, 0.45% of the first
$500 million of the Fund's average net assets, 0.40% of the next $250 million of
the Fund's average net assets, and 0.35% of average net assets in excess of $750
million; for the Money Market Fund, 0.25% of the first $500 million of the
Fund's average net assets, and 0.2275% of the portion of the Fund's average net
assets in excess of $500 million. The advisory fees paid by most of the Funds
are higher than those paid by most other investment companies.
As a result of the expense limitations and fee waivers described below
under "Expense Limitations and Fee Waivers," the fees and expense recoupments
paid to the Investment Adviser for the fiscal year ended March 31, 1996 with
respect to the Funds were the following
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percentages of the Funds' respective average net assets: Emerging Growth Fund -
1.00%; Worldwide Fund - 0.94%; International Fund - 0.37%; Emerging Countries
Fund - 0.58%; Core Growth Fund - 0.75%; Income & Growth Fund - 0.69%; Balanced
Fund - 0.33%; Government Fund - 0%; Global Growth Fund - 0%; Mini-Cap Fund
- - 0.52%; Short-Intermediate Fund - 0%; Fully Discretionary Fund - 0%;
Money Market Fund - 0%.
The Short-Intermediate and Fully Discretionary Funds are managed under
the general supervision of Terrence S. Ellis, Chief Investment Officer -- Fixed
Income of the Investment Adviser, and John D. Wylie, the Investment Adviser's
Chief Investment Officer - Retail. The Investment Adviser's fixed income
management team headed by Fred S. Robertson III is primarily responsible for the
Investment Adviser's day-to-day management of such Funds' portfolios. Each of
them has managed similar institutional accounts for the Investment Adviser since
May 1995. Each of them managed similar institutional accounts for Criterion
Investment Management Company for more than five years prior to May 1995, when
it was acquired by the Investment Adviser.
The other Funds are managed under the general supervision of Mr.
Nicholas, who has been the Chief Investment Officer of the Investment Adviser
since its organization, and John D. Wylie, the Investment Adviser's Chief
Investment Officer - Retail. The following persons are primarily responsible
for the Investment Adviser's day-to-day management of the Funds' portfolios;
except as otherwise indicated, each of them has been primarily responsible since
the Funds began operations: Core Growth Fund - John C. Marshall, Jr.; Emerging
Growth and Mini-Cap Funds - Catherine Somhegyi; Emerging Countries and Global
Growth Funds - the Investment Adviser's global/international investment team,
headed by Lawrence S. Speidell; Income & Growth, Government and Value Funds -
John D. Wylie; Balanced Fund - John D. Wylie and (since March 1994) the
Investment Adviser's global/international investment team under the supervision
of Mr. Speidell; Worldwide Fund and International Fund - the Investment
Adviser's global/international investment team under the supervision of Mr.
Speidell (since March 1994). Each of them other than Messrs. Wylie and Speidell
has managed institutional accounts for the Investment Adviser for more than the
last five years. Mr. Wylie has managed similar institutional accounts for the
Investment Adviser since 1990; prior to that time, he worked for the Investment
Adviser in trading, investment research and client services/marketing (since
1987). Mr. Speidell has been a portfolio manager with the Investment Adviser
since March 1994; from 1983 until he joined the Investment Adviser, he was an
institutional portfolio manager with Batterymarch Financial Management.
ADMINISTRATOR.
Investment Company Administration Corporation, a Delaware corporation,
4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018, is the
Administrator of each Fund. Pursuant to an Administration Agreement with the
Trust, and subject to the supervision of the
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Board of Trustees of the Trust, the Administrator supervises the overall
administration of the Trust. Its responsibilities include preparing and filing
all documents required for compliance by the Trust with applicable laws and
regulations, arranging for the maintenance of books and records of the Trust and
supervision of other organizations that provide services to the Trust. Certain
officers of the Trust are also provided by the Administrator. The Administrator
is compensated for its services to the Emerging Growth Fund at the annual rate
of $35,000. It is compensated for its services to the other Funds at an annual
rate equal to 0.05% of the first $100 million of the Funds' aggregate net
assets, of 0.04% on the next $150 million, 0.03% on the next $300 million, 0.02%
on the next $300 million and 0.01% on the portion of the aggregate net assets in
excess of $850 million average daily net assets of each Fund, with a minimum of
$25,000 per year for each Fund.
PLACEMENT AGENT.
Nicholas-Applegate Securities (the "Placement Agent"), 600 West
Broadway, 30th Floor, San Diego, California 92101, a California limited
partnership, serves as the Placement Agent of Interests of the Funds. The
general partner of the Placement Agent is Nicholas-Applegate Capital Management
Holdings, L.P. and its limited partner is the Investment Adviser. The Placement
Agent also serves as distributor for Interests of Nicholas-Applegate Mutual
Funds and receives no separate compensation for serving as Placement Agent for
the Trust.
CUSTODIAN.
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the Trust pursuant to
a Custodian Services Agreement.
EXPENSE LIMITATIONS AND FEE WAIVERS.
The Funds each pay all of their own expenses, including taxes, fees
and expenses of Trustees and officers, administration and transfer agency fees,
certain insurance premiums, outside auditing and legal expenses, costs of
Investor reports and meetings, Securities and Exchange Commission fees, state
securities qualification (or exemption) fees, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing Investors, brokerage fees and commissions in
connection with the purchase of portfolio securities, investment advisory and
custodial fees and any extraordinary expenses.
The Investment Adviser has entered into agreements with certain
Investors under which the Investment Adviser has agreed for a period of time to
waive or defer its fees, and to absorb certain other expenses of each Fund
(including the operating expenses of the Fund, but excluding interest, taxes,
brokerage commissions and other costs incurred in connection with portfolio
securities transactions, organizational expenses and other capitalized
expenditures and
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extraordinary expenses), to ensure that the operating expenses for the Investor
do not exceed certain fixed percentages of such Investors' average daily net
assets.
In addition, each of the Funds is subject to certain limitations on
expenses imposed by state securities laws. At present, the only expense
limitation in effect is in California. Under California law, each Fund will be
subject to an annual expense limitation equal to the sum of 2.5% of the first
$30 million of the Fund's average net assets, 2.0% of the next $70 million of
average net assets, and 1.5% of the remaining average net assets. If a Fund's
expenses (excluding interest, brokerage commissions litigation expenses and
certain other items, but including an Investor's allocable share of the expenses
incurred by the Fund) were to exceed such limit in any fiscal year, the
Investment Adviser has agreed to bear the amount of such excess to the extent
required by such limitations.
The Investment Adviser may also waive fees from time to time to assist
the Funds in maintaining competitive yields.
Total Fund expenses for the fiscal year ended March 31, 1996 were the
following percentages of their respective average net assets; the amount of such
expenses prior to the expense reimbursements and fee waivers is set forth in
parentheses: Emerging Growth Fund - 1.11% (1.11%); Worldwide Fund - 1.20%
(1.25%); International Fund - 1.35% (2.00%); Emerging Countries Fund - 1.60%
(2.80%); Core Growth Fund - 0.89% (0.89%); Income & Growth Fund - 0.95% (0.95%);
Balanced Fund - 0.95% (0.98%); Government Fund - 0.63% (2.32%); Mini-Cap Growth
Fund - 1.51% (2.03%); Fully Discretionary Fund (annualized) - 0.40% (2.68%);
Short-Intermediate Fund (annualized) - 0.30% (1.36%); Money Market Fund - 0.45%
(2.95%).
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Trust was organized in December 1992 as a Delaware business trust.
The Trust's Declaration of Trust authorizes the Board of Trustees to issue
unlimited Interests and to classify and reclassify any authorized and unissued
Interests into one or more series. Pursuant to such authority, the Board of
Trustees has established each of the Funds as a separate series of the Trust.
VOTING RIGHTS.
Each Investor is entitled to vote in proportion to its Interests, and
Investors will vote by series except as required by the 1940 Act or other
applicable law or when permitted by the Board of Trustees. Investors are
entitled to participate in the net distributable assets of the Fund in which
they hold Interests on liquidation. Interests have no preemptive rights and
only such conversion and exchange rights as the Board of Trustees may grant at
its discretion. Interests do not have cumulative voting rights for the election
of Trustees.
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As used in this Registration Statement, a "vote of a majority" of the
outstanding Interests of the Trust or a Fund means the affirmative vote of the
lesser of (i) more than 50% of the outstanding Interests of the Trust or Fund,
or (ii) 67% of the Interests of the Trust or Fund present at a meeting at which
more than 50% of the outstanding Interests of the Trust or Fund are represented
in person or by proxy.
The Trust does not presently intend to hold annual meetings of
Investors for the election of trustees and other business unless and until such
time as less than a majority of the trustees holding office have been elected by
the Investors, at which time the trustees then in office will call a meeting of
Investors for the election of trustees. Under certain circumstances, however,
Investors have the right to call a meeting of Investors to consider the removal
of one or more trustees and such meetings will be called when requested by the
holders of record of 10% or more of the Trust's outstanding Interests.
As with any mutual fund, certain Investors in a Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of Interests in a Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in such Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by an Investor to approve a change in its investment
objectives and policies parallel to a change that has been approved for the
corresponding Fund (thus requiring the Investor to redeem its Interests in the
Fund) could lead to a number of adverse consequences, such as the inability of
the Investor to find another investment company in which to invest its assets or
an equivalent investment adviser to manage its assets. The policy of Investors,
and other similar investment companies, to invest their assets in trusts such as
the Trust is a relatively recent development in the mutual fund industry and,
consequently, there is a lack of substantial experience in the operation of this
policy.
As of March 31, 1996, the Trust was controlled by Nicholas-Applegate
Mutual Funds, which held substantially all of its Interests.
LIABILITIES.
Investors will be jointly and severally liable for all obligations of
the Fund in which such Investors hold Interests (with rights of contribution
INTER SE in proportion to their respective ownership interests in the Trust).
However, the risk of an Investor incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance exists
and the Fund itself is unable to meet its obligations. In the event that an
Investor becomes liable for the obligations of a Fund, the Trust will indemnify
each Investor from any claim or liability to which the Investor may become
subject solely by reason of having been an Investor, and will reimburse the
Investor for all legal and other expenses reasonably incurred by it in
connection with any such claim or liability.
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DISTRIBUTIONS.
Investors are entitled to their pro rata shares of any distributions
arising from the net investment income and net realized gains, if any, earned on
investments held by the Fund in which such Investor holds Interests. Each Fund
will allocate its investment income, expenses, and realized and unrealized gains
and losses daily. A request for distribution must be made in writing to the
Transfer Agent, State Street Bank and Trust Company, Attention: Mutual Funds
Division, Nicholas-Applegate, P.O. Box 8326, Boston, Massachusetts 02266-8326,
and will become effective after its receipt by the Trust.
FEDERAL TAXES.
The Trust intends for each Fund to be treated as a partnership rather
than as a regulated investment company or a corporation under the Internal
Revenue Code of 1986, as amended (the "Code"), as long as such qualification is
in the best interests of the Investors. As a partnership under the Code, any
interest, dividends and gains or losses of a Fund will be deemed to have been
"passed through" to the Investors in the Fund, regardless of whether such
interest, dividends or gains have been distributed by the Fund or such losses
have been realized and recognized by the Investors. Therefore, to the extent a
Fund were to accrue but not distribute any interest, dividends or gains, the
Investors would be deemed to have realized and recognized their proportionate
share of interest, dividends, gains or losses realized and recognized by the
Fund in which they hold Interests without receipt of any corresponding
distribution.
Each Investor will be taxable on its share (as determined in
accordance with the governing instruments of the Trust) of the applicable Fund's
ordinary income and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the Code and the
regulations promulgated thereunder. It is intended that each Fund's assets,
income and distributions will be managed in such a way that an Investor in the
Fund will be able to satisfy the requirements of Subchapter M of the Code,
assuming that the Investor invested all of its assets in the Fund.
Each Fund's taxable year-end is March 31. Although the Fund will not
be subject to federal income tax, it will file appropriate federal income tax
returns.
A taxable gain or loss may be realized by an Investor upon its
redemption, transfer or exchange of Interests, depending upon the tax basis of
such Interests and their price at the time of redemption, transfer or exchange.
Investors will be advised at least annually as to the federal income
tax consequences of any interest, dividends and gains or losses accrued each
year by the Fund in which the Investor holds Interests. The foregoing is only a
brief summary of some of the important federal tax considerations generally
affecting the Funds and their Investors, and is based on federal tax laws and
regulations which are in effect as of the date of this Registration Statement.
Such laws and
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regulations may be changed by legislative or administrative actions. Potential
Investors should consult their tax advisers with specific reference to their own
situations.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Interests are issued only through the Placement Agent in private
placement transactions which do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act. Investments in the Funds may
only be made by investment companies or other entities which are "accredited
investors" within the meaning of Regulation D under the Securities Act. The
Funds are prohibited by the Trust's Declaration of Trust from accepting
investments from individuals, S corporations, partnerships and grantor trusts.
An account may be opened by contacting the Placement Agent. There is
no minimum initial or subsequent purchase amount with respect to any Fund of the
Trust. The Trust reserves the right to reject any purchase order or to suspend
or modify the continuous offering of the Interests of any of the Funds. For
example, the investment opportunities in the small capitalization sector of the
securities markets may from time to time be more limited than those in other
sectors of the markets. Therefore, in order to retain adequate investment
flexibility, the Investment Adviser and the Trustees of the Trust may from time
to time recommend that Investors indefinitely discontinue some or all new
investments in the Emerging Growth Fund or the Mini-Cap Growth Fund. From
January 31 to September 1, 1994, certain Investors in the Emerging Growth Fund
discontinued sales of shares to new shareholders. The Trust may recommence the
offering of Interests in any Fund to new Investors at any time after it is
suspended if in the Board of Trustees' opinion doing so would be in the best
interests of the Fund and its Investors.
If accepted by the Trust, investments in a Fund may be made in
exchange for securities which are eligible for acquisition by the Fund as
described above in this Part A. All dividends, interest, subscription, or other
rights pertaining to such securities will become the property of the Fund and
must be delivered to the Fund by the Investor upon receipt from the issuer. The
Trust will not accept securities in exchange for Interests in a Fund unless:
(i) such securities are, at the time of the exchange, eligible for purchase by
the Fund; (ii) the Investor represents that all securities offered to be
exchanged are not subject to any transfer restrictions; (iii) the value of any
such security (except U.S. Government securities) being exchanged together with
any other securities of the same issuer owned by the Fund will not exceed 5% of
the Fund's net assets immediately after the transaction; and (iv) such
securities are consistent with the Fund's investment objective and policies.
Each Investor in a Fund may add to or reduce its investment in the
Fund on each business day. At 4:00 p.m., Eastern time, on each business day,
the value of each such Investor's Interests in a Fund will be determined by
multiplying the Fund's net asset value by the percentage, effective for that
day, which represents that Investor's share of the aggregate Interests in the
Fund. Any additions or withdrawals which are to be effected on that day will
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then be effected. The Investor's percentage of the aggregate Interests in the
Fund will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such Investor's investment in the Fund as of
4:00 p.m., Eastern time, on such day, plus or minus, as the case may be, the
amount of any additions to or withdrawals from the Investor's investment in the
Fund effected on such day, and (ii) the denominator of which is the Fund's
aggregate net asset value as of 4:00 p.m., Eastern time, on such day, plus or
minus,as the case may be, the amount of the net additions to or withdrawals from
the aggregate investments in the Fund by all Investors in the Fund. The
percentage so determined will then be applied to determine the value of the
Investor's interest in the Fund as of 4:00 p.m., Eastern time, on the following
business day. Net asset value per Interest for each Fund as of such time is
determined by dividing the total value of the Fund's assets, less any
liabilities, by 100 (the percentage which represents the aggregate Interests in
the Fund).
ITEM 8. REDEMPTION OR REPURCHASE.
An Investor may redeem Interests in a Fund in any amount at any time
by sending a written or telephonic request to the Trust, 600 West Broadway, 30th
Floor, San Diego, California 92101 (telephone (619) 687-8100). Redemption
requests must be made by duly authorized representatives of each Investor and
must specify the name of the Fund, the dollar amount to be redeemed and the
Investor's name and account number.
Redemption orders are effected at the net asset value of the Interests
next determined after receipt of the order in proper form by the Trust. The
Funds ordinarily will make payment for all Interests redeemed within three
business days after receipt by the Trust of a request in proper form, except as
provided by the rules of the Securities and Exchange Commission. The Trust
imposes no charge when Interests are redeemed. The value of the Interests
redeemed may be more or less than the Investor's cost, depending on the Fund's
current net asset value.
The Trust will wire the proceeds of redemption in federal funds to the
commercial bank specified by the Investor, normally the next business day after
receiving the redemption request and all necessary documents. Wire redemptions
may be terminated or modified by the Trust at any time. An Investor should
contact its bank for information on any charges imposed by the bank in
connection with the receipt of redemption proceeds by wire. During periods of
substantial economic or market change, telephonic and wire redemptions may be
difficult to implement.
The right of any Investor to receive payment with respect to any
withdrawal may be suspended or postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on the
Exchange is restricted, or, to the extent otherwise permitted by the Investment
Company Act, if an emergency exists.
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EXCHANGE PRIVILEGE.
Investors may exchange Interests of any Fund into Interests of other
Funds by sending a written or telephonic request to the Trust, 600 West
Broadway, 30th Floor, San Diego, California 92101 (telephone (619) 687-8100).
Exchange requests must be made by duly authorized representatives of the
Investor and must specify the names of the applicable Funds, the dollar amount
to be exchanged and the Investor's name and account number.
CROSS-REINVESTMENT.
Investors may cross-reinvest dividends and/or capital gains
distributions paid by a Fund into Interests of another Fund. For more details,
Investors should contact the Placement Agent of the Trust.
ITEM 9. PENDING LEGAL PROCEEDINGS. Not applicable.
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NICHOLAS-APPLEGATE INVESTMENT TRUST
PART B
ITEM 10. COVER PAGE.
Nicholas-Applegate Investment Trust (the "Trust") is a registered,
open-end management investment company organized in December 1992 as a Delaware
business trust. The Trust offers Interests of fourteen separate series (each a
"Fund" and collectively the "Funds"): Nicholas-Applegate Core Growth Fund (the
"Core Growth Fund"); Nicholas-Applegate Emerging Growth Fund (the "Emerging
Growth Fund"); Nicholas-Applegate Mini-Cap Growth Fund (the "Mini-Cap Fund");
Nicholas-Applegate Emerging Countries Fund (the "Emerging Countries Fund");
Nicholas-Applegate Income & Growth Fund (the "Income & Growth Fund"); Nicholas-
Applegate Balanced Growth Fund (the "Balanced Fund"); Nicholas-Applegate
Worldwide Growth Fund (the "Worldwide Fund"); Nicholas-Applegate International
Growth Fund (the "International Fund"); Nicholas-Applegate Global Growth &
Income Fund (the "Global Growth Fund"); Nicholas-Applegate Government Income
Fund (the "Government Fund"), Nicholas-Applegate Short-International Fixed
Income Fund (the "Short Intermediate Fund"), Nicholas-Applegate Fully
Discretionary Fixed Income Fund (the "Fully Discretionary Fund"); Nicholas
Applegate Value Fund (the "Value Fund"); and Nicholas-Applegate Money Market
Fund (the "Money Market Fund").
This Part B is not a prospectus and should be read in conjunction with
Part A. All terms used in this Part B that are not otherwise defined herein
have the meanings assigned to them in Part A.
ITEM 11. TABLE OF CONTENTS.
Item Page
---- -----
General Information and History B-2
Investment Objectives and Policies B-2
Management of the Trust B-36
Control Persons and Principal Holders of Securities B-40
Investment Advisory and Other Services B-41
Brokerage Allocation and Other Practices B-44
Capital Stock and Other Securities B-47
Purchase, Redemption and Pricing of Interests Being Offered B-49
Tax Status B-50
Underwriters B-53
Calculations of Performance Data B-53
Financial Statements B-53
<PAGE>
Appendix A: Description of Securities Ratings
Appendix B: Unaudited Financial Statements
ITEM 12. GENERAL INFORMATION AND HISTORY. Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
PORTFOLIO TURNOVER
Each Fund's turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities of the Fund for the year by the
monthly average value of the portfolio securities of such Fund. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of Interests and by requirements which enable an Investor to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions.
EQUITY SECURITIES OF GROWTH COMPANIES
Each of the Funds other than the Global Growth, Government, Value,
Short-Intermediate, Fully Discretionary, and Money Market Funds invests in
equity securities of domestic and foreign companies, the earnings and stock
prices of which are expected by the Investment Adviser to grow at an above-
average rate. Such investments will be diversified over a cross-section of
industries and individual companies. Some of these companies will be
organizations with market capitalizations of $500 million or less or companies
that have limited product lines, markets and financial resources and are
dependent upon a limited management group. Examples of possible investments
include emerging growth companies employing new technology, cyclical companies,
initial public offerings of companies offering high growth potential, or other
corporations offering good potential for high growth in market value. The
securities of such companies may be subject to more abrupt or erratic market
movements than larger, more established companies both because the securities
typically are traded in lower volume and because the issuers typically are
subject to a greater degree to changes in earnings and prospects.
CONVERTIBLE SECURITIES AND WARRANTS
Each of the Funds other than the Short-Intermediate, Fully
Discretionary, and Money Market Funds may invest in convertible securities and
warrants. A convertible security is a fixed income security (a bond or
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar non-
convertible securities. While providing
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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 warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of Interests of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. 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 exercised, resulting in a loss of the
Fund's entire investment therein).
OTHER CORPORATE DEBT SECURITIES
The Funds invest in non-convertible debt securities of foreign and
domestic companies over a cross-section of industries. The debt securities in
which the Funds may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
The value of a longer-term debt security fluctuates more widely in response to
changes in interest rates than do shorter-term debt securities.
RISKS OF INVESTING IN DEBT SECURITIES.
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields. The market prices of
debt securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of such portfolio investments,
and a decline in interest rates will generally increase the value of such
portfolio investments. The ability of the Funds to achieve their investment
objectives also depends on the continuing ability of the issuers of the debt
securities in which the Funds invest to meet their obligations for the payment
of interest and principal when due.
RISKS OF SOVEREIGN DEBT OBLIGATIONS.
The Emerging Countries, Worldwide, International, Global Growth,
Short-Intermediate and Fully Discretionary Funds invest in sovereign debt
securities of emerging market governments and their agencies and
instrumentalities. A sovereign debtor's willingness
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or ability to repay principal and interest in a timely manner may be affected by
a number of factors, including its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the sovereign debtor's policy toward principal international lenders and
the political constraints to which it may be subject. Emerging market
governments could default on their sovereign debt. Such sovereign debtors also
may be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities abroad to reduce principal and interest
arrearages on their debt. The commitments on the part of these governments,
agencies and others to make such disbursements may be conditioned on a sovereign
debtor's implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to meet such conditions
could result in the cancellation of such third parties' commitments to lend
funds to the sovereign debtor, which may further impair such debtor's ability or
willingness to service its debt in a timely manner.
RISKS OF INVESTING IN LOWER-RATED DEBT SECURITIES
As set forth in Part A, the Income & Growth, Balanced, Global Growth,
Short-Intermediate and Fully Discretionary Funds may invest a portion (less than
35%) of their net assets in convertible and other debt securities rated below
"Baa" by Moody's or "BBB-" by S&P or in unrated securities of comparable quality
under certain circumstances. Securities with ratings below "Baa" and or "BBB-"
are commonly referred to as "junk bonds." Such bonds are subject to greater
market fluctuations and risk of loss of income and principal than higher rated
bonds for a variety of reasons, including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of
a bond defaults, the Funds may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Funds'
asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining
interest rate market, a Fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely, a
high yield bond's value will decrease in a rising interest rate market, as will
the value of the Fund's assets. If a Fund experiences unexpected net
redemptions, it may be forced to sell its high yield bonds without regard to
their investment merits, thereby decreasing the asset
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base upon which the Fund's expenses can be spread and possibly reducing the
Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact the Investment Adviser's ability to accurately value high yield bonds
and the Fund's assets and hinder the Fund's ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, the Investment Adviser must monitor the issuers of high yield
bonds in the Funds' portfolios to determine if the issuers will have sufficient
cash flow and profits to meet required principal and interest payments, and to
assure the bonds' liquidity so the Funds can meet redemption requests. The
Funds will not necessarily dispose of a portfolio security when its rating has
been changed.
SHORT-TERM INVESTMENTS
Each of the Funds may invest in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Each Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such obligations is fully insured by the U.S. Government.
A Fund holding instruments of foreign banks or financial institutions
may be subject to additional investment risks that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. See "Foreign Investment" below. Such risks include
future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
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Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that a Fund
may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in Part A, a Fund may make interest-
bearing time or other interest-bearing deposits in commercial or savings banks.
Time deposits are non-negotiable deposits maintained at a banking institution
for a specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or obligations caused by
institutions with capital, surplus and undivided profits of less than $100
million if the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Funds may invest a portion of their assets in commercial paper and short-
term notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Funds may
purchase obligations which have remaining
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maturities of one year or less from the date of purchase and which are rated
"AA" or higher by S&P or "Aa" or higher by Moody's.
MONEY MARKET FUNDS. The Funds may under certain circumstances invest
a portion of their assets in money market funds. The Investment Company Act
prohibits the Funds from investing more than 5% of the value of their total
assets in any one investment company, or more than 10% of the value of their
total assets in investment companies as a group, and also restricts their
investment in any investment company to 3% of the voting securities of such
investment company. The Investment Adviser will not impose an advisory fee on
assets of a Fund invested in a money market mutual fund. However, an investment
in a money market mutual fund will involve payment of the Funds' pro rata share
of advisory and administrative fees charged by such fund.
U.S. AND FOREIGN GOVERNMENT OBLIGATIONS. Each Fund may make
short-term investments in U.S. Government obligations. Such obligations include
Treasury bills, certificates of indebtedness, notes and bonds, and issues of
such entities as the Government National Mortgage Association ("GNMA"), Export-
Import Bank of the United States, Tennessee Valley Authority, Resolution Funding
Corporation, Farmers Home Administration, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Farm Credit Banks, Federal Land Banks,
Federal Housing Administration, Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation, and the Student Loan Marketing
Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Emerging Countries Fund may also invest in short-term obligations
of foreign governments. See "Risks of Sovereign Debt Obligations" above.
ZERO COUPON SECURITIES. The Income & Growth, Balanced, Government,
Global Growth, Fully Discretionary and Short-Intermediate Funds may each invest
in zero coupon securities issued by the U.S. Treasury on up to 35% of their
respective net assets. Zero coupon Treasury securities are U.S. Treasury notes
and bonds which have been stripped of their unmatured interest coupons and
receipts, or certificates representing interests in such stripped debt
obligations or coupons. Because a zero coupon security pays no interest to its
holder during its life or for a substantial period of time, it usually trades at
a deep discount from its face or par value and will be subject to greater
fluctuations of market value in response to
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changing interest rates than debt obligations of comparable maturities which
make current distributions of interest.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Funds may acquire
variable and floating rate instruments. Such instruments are frequently not
rated by credit rating agencies; however, unrated variable and floating rate
instruments purchased by a Fund will be determined by the Investment Adviser
under guidelines established by the Board of Trustees to be of comparable
quality at the time of the purchase and rated instruments eligible for purchase
by the Fund. In making such determinations, the Investment Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such instruments (such issuers include financial, merchandising, bank holding
and other companies) and will monitor their financial condition. An active
secondary market may not exist with respect to particular variable or floating
rate instruments purchased by the Fund. The absence of such an active secondary
market could make it difficult for the Fund to dispose of the variable or
floating rate instrument involved in the event of the issuer of the instrument
defaulted on its payment obligation or during periods in which the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
MUNICIPAL SECURITIES
The Fully Discretionary and Short-Intermediate Funds may invest in
debt obligations issued by state and local governments, territories and
possessions of the U.S., regional government authorities, and their agencies and
instrumentalities ("municipal securities"). Municipal securities include both
notes (which have maturities of less than one year) and bonds (which have
maturities of one year or more) that bear fixed or variable rates of interest.
In general, "municipal securities" debt obligations are issued to
obtain funds for a variety of public purposes, such as the construction, repair,
or improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue
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bonds are issued to finance a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges, and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds may vary, many provide additional security
in the form of a debt service reserve fund the assets of which may be used to
make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security, including partially or fully
insured mortgages, rent subsidized and collateralized mortgages, and the net
revenues from housing or other public projects. Some authorities are provided
further security in the form of a state's assurance (although without
obligation) to make up deficiencies in the debt service reserve fund.
Both Funds may purchase insured municipal debt in which scheduled
payments of interest and principal are guaranteed by a private, non-governmental
or governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the Interests of a Fund.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore,
as a result of legislation or other conditions, the power or ability of any
issuer to pay, when due, the principal of and interest on its municipal
obligations may be materially affected.
MORAL OBLIGATION SECURITIES. Municipal securities may include "moral
obligation" securities which are usually issued by special purpose public
authorities. If the issuer of moral obligation bonds cannot fulfill its
financial responsibilities from current revenues, it may draw upon a reserve
fund, the restoration of which is moral commitment but not a legal obligation of
the state or municipality which created the issuer.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. Both Funds may
invest in tax-exempt industrial development bonds and pollution control bonds
which, in most cases, are revenue bonds and generally are not payable from the
unrestricted revenues of an issuer. They are issued by or on behalf of public
authorities to raise money to finance privately operated facilities for
business, manufacturing, housing, sport complexes, and pollution control.
Consequently, the credit quality of these securities is dependent upon the
ability of the user of the facilities financed by the bonds and any guarantor to
meet its financial obligations.
MUNICIPAL LEASE OBLIGATIONS. Both Funds may invest in lease
obligations or installment purchase contract obligations of municipal
authorities or entities ("municipal
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lease obligations"). Although lease obligations do not constitute general
obligations of the municipality for which its taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payment due under the lease obligation. A Fund may
also purchase "certificates of participation," which are securities issued by a
particular municipality or municipal authority to evidence a proportionate
interest in base rental or lease payments relating to a specific project to be
made by the municipality, agency or authority. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
any year unless money is appropriated for such purpose for such year. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of default and foreclosure might prove
difficult. In addition, these securities represent a relatively new type of
financing, and certain lease obligations may therefore be considered to be
illiquid securities.
Both Funds will attempt to minimize the special risks inherent in
municipal lease obligations and certificates of participation by purchasing only
lease obligations which meet the following criteria: (1) rated A or better by
at least one nationally recognized securities rating organization; (2) secured
by payments from a governmental lessee which has actively traded debt
obligations; (3) determined by the Investment Adviser to be critical to the
lessee's ability to deliver essential services; and (4) containing legal
features which the Investment Adviser deems appropriate, such as covenants to
make lease payments without the right of offset or counterclaim, requirements
for insurance policies, and adequate debt service reserve funds.
SHORT-TERM OBLIGATIONS. Both Funds may invest in short-term municipal
obligations. These securities including the following:
TAX ANTICIPATION NOTES are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
REVENUE ANTICIPATED NOTES are issued in expectation of receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program. They also are usually general obligations of the
issuer.
BOND ANTICIPATION NOTES normally are issued to provide interim
financing until long-term financing can be arranged. The long-term bonds then
provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent
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financing through the Federal National Mortgage Association or the Government
National Mortgage Association.
SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement their
cash flow.
MORTGAGE-RELATED SECURITIES
Each of the Funds other than the International and Emerging Countries
Funds may invest in mortgage-related securities. Mortgage-related securities
are derivative 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. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Government, Fully
Discretionary and Short-Intermediate Funds may also invest in debt securities
which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. 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 Government National Mortgage Association) are described
as "modified pass-throughs." 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"). GNMA is a
wholly owned United States 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 Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a
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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/services 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 United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In periods
of falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is not
possible to predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO in
which the Government, Fully Discretionary and Short-Intermediate Funds may
invest is a hybrid between a mortgage-backed bond and a mortgage pass-through
security. Like a bond, interest is paid, in most cases, semiannually. 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 and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the first class has been retired.
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
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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,
pre-payment experience, and maturities of loans.
FOREIGN INVESTMENTS
Each of the Funds other than the Government Fund and the Value Fund
may invest in securities of foreign issuers that are not publicly traded in the
United States. Each of these Funds (other than the Money Market Fund) may also
invest in depository receipts, and the Emerging Countries, Worldwide,
International, Global Growth, Fully Discretionary and Short-Intermediate Funds
may invest in foreign currency and futures contracts.
The United States government has from time to time imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Funds. If such restrictions should be reinstituted, it
might become necessary for such Funds to invest substantially all of their
assets in United States securities. In such event, the Board of Trustees of the
Trust would consider alternative arrangements, including reevaluation of the
Funds' investment objectives and policies. However a Fund would adopt revised
investment objective and fundamental policies only after approval by the holders
of a majority (as defined in the Investment Company Act) of the Interests of the
Fund.
DEPOSITORY RECEIPTS. American Depository Receipts ("ADRs") may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in the United States dollars; the underlying
security may be denominated in a foreign currency, although the underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, diversification and balance of
payments position. The internal politics of certain foreign countries may not
be as stable as those of the United States. Governments in certain foreign
countries also 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
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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 by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
CURRENCY FLUCTUATIONS. All of the Funds other than the Money Market
Fund may 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 a Fund's assets denominated
in that currency. Such changes will also affect a Fund's income. The value of
a Fund's assets may also be affected significantly by currency restrictions and
exchange control regulations enacted from time to time.
MARKET CHARACTERISTICS. The Investment Adviser expects that most
foreign securities in which the Funds invest will be purchased in over-the-
counter markets or on 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 exchanges and 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 Funds' portfolio securities
may be less liquid and more volatile than U.S. Government 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. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions 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 a
Fund's positions may also be adversely impacted by delays in its 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 Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Investors. An
Investor otherwise subject to United States federal income taxes may, subject to
certain limitations, be entitled to claim a credit or deduction of U.S. federal
income tax purposes for his proportionate share of such foreign taxes paid by
the Funds.
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COSTS. The expense ratios of the Funds are likely to be higher than
those of investment companies investing in domestic securities, since the cost
of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics of
the particular company, differences between economic trends and the performance
of securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund (other than the International and Emerging Countries Funds) will be
invested in foreign companies and countries and depository receipts will
fluctuate from time to time within the limitations described in Part A,
depending on the Investment Adviser's assessment of prevailing market, economic
and other conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each Fund other than the Government,
Short-Intermediate, Value and Money Market Funds is authorized to purchase
covered "put" and "call" options with respect to securities which are otherwise
eligible for purchase by the Funds and with respect to various stock indices
subject to certain restrictions. Such Funds will engage in trading of such
derivative securities exclusively for hedging purposes.
If a Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Adviser perceives significant short-term
risk but substantial long-term appreciation for the underlying security. The
put option acts as an insurance policy, as it protects against significant
downward price movement while it allows full participation in any upward
movement. If the Fund is holding a stock which it feels has strong
fundamentals, but for some reason may be weak in the near term, the Fund may
purchase a put option on such security, thereby giving itself the right to sell
such security at a certain strike price throughout the term of the option.
Consequently, the Fund will exercise the put only if the price of such security
falls below the strike price of the put. The difference between the put's
strike price and the market price of the underlying security on the date the
Fund exercises the put, less transaction costs, will be the amount by which the
Fund will be able to hedge against a decline in the underlying security. If
during the period of the option the market price for the underlying security
remains at or above the put's strike price, the put will expire worthless,
representing a loss of the price the Fund paid for the put, plus transaction
costs. If the price of the underlying security increases, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for the
put option less any amount for which the put may be sold.
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If a Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Funds generally will purchase only those options for which the
Investment Adviser believes there is an active secondary market to facilitate
closing transactions.
WRITING CALL OPTIONS. The Core Growth, Emerging Growth, Mini-Cap,
Emerging Countries, Income & Growth, Worldwide, International, Global Growth and
Fully Discretionary Funds may write covered call options. A call option is
"covered" if the Fund owns the security underlying the call or has an absolute
right to acquire the security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents in such
amount as are held in a segregated account by the Trust's Custodian). The
writer of a call option receives a premium and gives the purchaser the right to
buy the security underlying the option at the exercise price. The writer has
the obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer
of an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent sale of
any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
A Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing
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transaction are more than the premium paid to purchase the option. A Fund will
realize a loss from a closing transaction if the cost of the closing transaction
is more than the premium received from writing the option or if the proceeds
from the closing transaction are less than the premium paid to purchase the
option. However, because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss to the Fund resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned by
the Fund.
STOCK INDEX OPTIONS. Each Fund (other than the Government, Value,
Fully Discretionary, Short-Intermediate and Money Market Funds) may also
purchase put and call options with respect to the S&P 500 Stock Price Index and
other stock indices. Such options may be purchased as a hedge against changes
resulting from market conditions in the values of securities which are held in a
Fund's portfolio or which it intends to purchase or sell, or when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss on the purchase or sale of an option on an index depends upon movements in
the level of stock prices in the stock market generally rather than movements in
the price of a particular stock. Accordingly, successful use by a Fund of
options on a stock index would be subject to the Investment Adviser's ability to
predict correctly movements in the direction of the stock market generally.
This requires different skills and techniques than predicting changes in the
price of individual stocks.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, the Fund would not be able
to close out options which it had purchased, and if restrictions on exercise
were imposed, the Fund might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the policy of the Funds
to purchase put or call options only with respect to an index which the
Investment Adviser believes includes a sufficient number of stocks to minimize
the likelihood of a trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain
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options; restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of option of
underlying securities; unusual or unforeseen circumstances may interrupt normal
operations on an exchange; the facilities of an exchange or clearing corporation
may not at all times be adequate to handle current trading volume; or one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
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.
The extent to which a Fund may enter into options transactions may be limited by
the Internal Revenue Code requirements for qualification of an Investor as a
regulated investment company.
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will not
be available. For example, there may be no daily price fluctuation limits in
such exchanges or markets, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, a Fund as an option writer
could lose amounts substantially in excess of its initial investment, due to the
margin and collateral requirements typically associated with such option
writing. See "Dealer Options" below.
DEALER OPTIONS. The Core Growth, Emerging Growth, Mini-Cap, Emerging
Countries, Worldwide, International, Global Growth and Fully Discretionary Funds
will engage in transactions involving dealer options as well as exchange-traded
options. Certain risks are specific to dealer options. While the Funds would
look to a clearing corporation to exercise exchange-traded options, if a Fund
were to purchase a dealer option it would need to rely on the dealer from which
it purchased the option to perform if the option were exercised. Failure by the
dealer 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 dealer options may not. Consequently, a Fund may generally be able to
realize the value of a dealer option it has purchased only by exercising or
reselling the option to the dealer who issued it. Similarly, when a Fund writes
a dealer 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
dealer to whom the Fund originally wrote the option. While the Fund will seek
to enter into dealer options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will at any time be able to
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liquidate a dealer option at a favorable price at any time prior to expiration.
Unless the Fund, as a covered dealer 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 other party, the Fund may be unable to liquidate a
dealer 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, because 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 Securities and Exchange Commission has taken the
position that purchased dealer options are illiquid securities. A Fund may
treat the cover used for written dealer options as liquid if the dealer agrees
that the Fund may repurchase the dealer option it has written for a maximum
price to be calculated by a predetermined formula. In such cases, the dealer
option would be considered illiquid only to the extent the maximum purchase
price under the formula exceeds the intrinsic value of the option. Accordingly,
each Fund will treat dealer options as subject to the Fund's limitation on
unmarketable securities. If the Securities and Exchange Commission changes its
position on the liquidity of dealer options, each Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Emerging Countries, Worldwide, International, Global Growth and
Fully Discretionary Funds 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 Funds 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
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. Foreign currency options
are derivative securities. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of the Funds to
reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option
on foreign currency will constitute only a partial hedge, up to the amount of
the premium received. A Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of an exchange rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
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FORWARD CURRENCY CONTRACTS
The Emerging Countries, Worldwide, International, Global Growth and
Fully Discretionary Funds may enter into forward currency contracts in
anticipation of changes in currency exchange rates. A forward currency contract
is an obligation to purchase or sell a specific currency at a future date, which
may be any fix number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund
might purchase a particular currency or enter into a forward currency contract
to preserve the U.S. dollar price of securities it intends to or has contracted
to purchase. Alternatively, it might sell a particular currency on either a
spot or forward basis to hedge against an anticipated decline in the dollar
value of securities it intends to or has contracted to sell. Although this
strategy could minimize the risk of loss due to a decline in the value of the
hedged currency, it could also limit any potential gain from an increase in the
value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds other than the Balanced and Money Market Funds may
invest in futures contracts, and each of the Funds other than the Balanced,
Money Market and Short-Intermediate Funds may invest in options on futures
contracts, as a hedge against changes in market conditions or interest rates.
The Funds will trade in such derivative securities for bona fide hedging
purposes and otherwise in accordance with the rules of the Commodity Futures
Trading Commission ("CFTC"). Each Fund will segregate liquid assets in a
separate account with its Custodian when required to do so by CFTC guidelines in
order to cover its obligation in connection with futures and options
transactions.
No price is paid or received by a Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
will be required to deposit in a segregated account with its Custodian an amount
of cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the
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customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments (called
variation margin) to and from the broker will be made on a daily basis as the
price of the underlying stock index fluctuates, to reflect movements in the
price of the contract making the long and short positions in the futures
contract more or less valuable. For example, when the Fund has purchased a
stock index futures contract and the price of the underlying stock index has
risen, that position will have increased in value and the Fund will receive from
the broker a variation margin payment equal to that increase in value.
Conversely, when the Fund has purchased a stock index futures contract and the
price of the underlying stock index has declined, the position will be less
valuable and the Fund will be required to make a variation margin payment to the
broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
STOCK INDEX FUTURES. Each of the Funds other than the Balanced,
Government, Fully Discretionary, Short-Intermediate and Money Market Funds
may invest in futures contracts on stock indices. Currently, stock index
futures contracts can be purchased or sold with respect to the S&P 500 Stock
Price Index on the Chicago Mercantile Exchange, the Major Market Index on the
Chicago Board of Trade, the New York Stock Exchange Composite Index on the
New York Futures Exchange and the Value Line Stock Index on the Kansas City
Board of Trade. Foreign financial and stock index futures are traded on
foreign exchanges including the London International Financial Futures
Exchange, the Singapore International Monetary Exchange, the Sydney Futures
Exchange Limited and the Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Emerging
Countries, Income and Growth, Worldwide, International, Government, Fully
Discretionary and Short-Intermediate Funds may invest in interest rate or
financial futures contracts. Bond prices are established in both the cash
market and the futures market. In the cash market, bonds are purchased and
sold with payment for the full purchase price of the bond being made in cash,
generally within three business days after the trade. In the futures market,
a contract is made to purchase or sell a bond in the future for a set price
on a certain date. Historically, the prices for bonds established in the
futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures sale by a Fund would
create an obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for a
specified price. A futures contract purchased by a Fund
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would create an obligation by the Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. A Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments. International interest rate futures contracts are traded on the
London International Financial Futures Exchange, the Singapore International
Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock
Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The Emerging Countries,
Worldwide, International, Global Growth and Fully Discretionary funds may use
foreign currency futures contracts for hedging purposes. A foreign currency
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contacts covering several foreign currencies,
including 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. Other foreign currency futures
contracts are likely to be developed and traded in the future. The Funds will
only enter into futures contracts and futures options 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.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, a Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Adviser believes that over
time the value of a diversified portfolio will tend to move in the same
direction as the market indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and
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the imperfect correlation between movements in the cash market and the price of
securities and movements in the price of futures, a correct forecast of general
trends by the Investment Adviser may still not result in a successful hedging
transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in 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 a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
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OPTIONS ON FUTURES CONTRACTS. As described above, certain of the
Funds may purchase options on the futures contracts they can purchase or sell,
as described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder or writer of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. There is no guarantee that such closing transactions can be
effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Funds because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS.
Except as otherwise described in Part A, a Fund will not engage in transactions
in futures contracts or related options for speculation, but only as a hedge
against changes resulting from market conditions in the values of securities
held in the Fund's portfolio or which it intends to purchase and where the
transactions are economically appropriate to the reduction of risks inherent in
the ongoing management of the Funds. A Fund may not purchase or sell futures or
purchase related options if, immediately thereafter, more than 25% of its net
assets would be hedged. A Fund also may not purchase or sell futures or
purchase related options if, immediately thereafter, the sum of the amount of
margin deposits on the Fund's existing futures positions and premiums paid for
such options would exceed 5% of the market value of the Fund's net assets.
Upon the purchase of futures contracts by a Fund, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and may be changed by the Trustees of the Master
Trust if applicable law permits such a change and the change is consistent with
the overall investment objective and policies of the Fund.
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The extent to which a Fund may enter into such futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of an Investor as a regulated investment company.
INTEREST RATE AND CURRENCY SWAPS
The Short-Intermediate and Fully Discretionary Funds may enter into
interest rate and currency swaps.
INTEREST RATE SWAPS. As indicated in Part A, an interest rate swap is
a contract between two entities ("counterparties") to exchange interest payments
(of the same currency) between the parties. In the most common interest rate
swap structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional principal
amount." In most such transactions, the floating rate payments are tied to the
London Interbank Offered Rate, which is the offered rate for short-term
Eurodollar deposits between major international banks. As there is no exchange
of principal amounts, an interest rate swap is not an investment or a borrowing.
CROSS CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future transfer of foreign exchange risk). The currency
swap market convention is to use the spot rate rather than the forward rate for
the exchange at maturity. The economic difference is realized through the
coupon exchanges over the life of the swap. In contrast to single currency
interest rate swaps, cross-currency swaps involve both interest rate risk and
foreign exchange risk.
SWAP OPTIONS. Each Fund may invest in swap options. A swap option is
a contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts at some future date with specified rates. A swap option may be
structured European-style (exercisable on the pre-specified date) or American-
style (exercisable during a designated period). The right pursuant to a swap
option must be exercised by the right holder. The buyer pursuant to a swap
option is said to own a call.
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CAPS AND FLOORS. Each Fund may also invest in interest rate caps and
floors. An interest rate cap is a right to receive periodic cash payments over
the life of the cap equal to the difference between any higher actual level of
interest rates in the future and a specified strike (or "cap") level. The cap
buyer purchases protection for a floating rate move above the strike. An
interest rate floor is the right to receive periodic cash payments over the life
of the floor equal to the difference between any lower actual level of interest
rates in the future and a specified strike (or "floor") level. The floor buyer
purchases protection for a floating rate move below the strike. The strikes are
typically based on the three-month LIBOR (although other indices are available)
and are measured quarterly. Rights arising pursuant to both caps and floors are
exercised automatically if the strike is in the money. Caps and floors
eliminate the risk that the buyer fails to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate
and currency swaps and interest rate caps and floors are similar to those
described above with respect to dealer options. In connection with such
transactions, a Fund relies on the other party to the transaction to perform its
obligations pursuant to the underlying agreement. If there were a default by
the other party to the transaction, the Fund would have contractual remedies
pursuant to the agreement, but could incur delays in obtaining the expected
benefit of the transaction or loss of such benefit. In the event of insolvency
of the other party, the Fund might be unable to obtain its expected benefit. In
addition, while each Fund will seek to enter into such transactions only with
parties which are capable of entering into closing transactions with the Fund,
there can be no assurance that a Fund will be able to close out such a
transaction with the other party, or obtain an offsetting position with any
other party, at any time prior to the end of the term of the underlying
agreement. This may impair a Fund's ability to enter into other transactions at
a time when doing so might be advantageous.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Adviser, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
Trust's Custodian or in the Federal Reserve/Treasury Book-Entry System or an
equivalent foreign system. The seller under a repurchase agreement will be
required to maintain the value of the underlying securities at not less than
102% of the repurchase price under the agreement. If the seller defaults on its
repurchase obligation, the Fund holding the repurchase agreement will suffer a
loss to the extent that the proceeds from a sale of the underlying securities is
less than the repurchase price under the agreement.
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Bankruptcy or insolvency of such a defaulting seller may cause the Fund's rights
with respect to such securities to be delayed or limited. Repurchase agreements
are considered to be loans under the Investment Company Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each of the Funds may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Fund's Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
A Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When a Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in a
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
BORROWING
Each of the Funds is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of transactions
in amounts up to 20% of
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the value of its total assets at the time of such borrowings. The use of
borrowing by a Fund involves special risk considerations that may not be
associated with other funds having similar objectives and policies. Since
substantially all of a Fund's assets fluctuate in value, whereas the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund's
agreement with its lender, the asset value per share of the Fund will tend to
increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow funds. In addition, interest costs on
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
LENDING PORTFOLIO SECURITIES
Each of the Funds may lend its portfolio securities in an amount not
exceeding 30% of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demand by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund
to reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Internal Revenue Code.
SHORT SALES
The Investment Adviser's growth equity management approach is aimed
principally at identifying equity securities the earnings and prices of which it
expects to grow at a rate above that of the S&P 500 Stock Price Index. However,
the Investment Adviser believes that its approach also identifies securities the
prices of which can be expected to decline. Therefore, the Core Growth,
Emerging Growth, Mini-Cap, Worldwide and International Funds are authorized to
make short sales of securities they own or has the right to acquire at no added
cost through conversion or exchange of other securities they own (referred to as
short sales "against the box") and to make short sales of securities which they
do not own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security (generally
from the broker through which the short sale is made) in order to make delivery
to the buyer. The Fund is then obligated to replace the security
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borrowed by purchasing it at the market price at the time of replacement. The
Fund is said to have a "short position" in the securities sold until it delivers
them to the broker. The period during which the Fund has a short position can
range from one day to more than a year. Until the security is replaced, the
proceeds of the short sale are retained by the broker, and the Fund is required
to pay to the broker a negotiated portion of any dividends or interest which
accrue during the period of the loan. To meet current margin requirements, the
Fund is also required to deposit with the broker additional cash or securities
so that the total deposit with the broker is maintained daily at 150% of the
current market value of the securities sold short (100% of the current market
value if a security is held in the account that is convertible or exchangeable
into the security sold short within 90 days without restriction other than the
payment of money).
Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share will tend to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Furthermore, under adverse market conditions
the Fund might have difficulty purchasing securities to meet its short sale
delivery obligations, and might have to sell portfolio securities to raise the
capital necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, a Fund
will deposit in escrow in a separate account with the Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and, in the
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<PAGE>
case where the Fund owns convertible securities, changes in the investment
values or conversion premiums of such securities.
The extent to which a Fund may enter into short sales transactions may
be limited by the Internal Revenue Code requirements for qualification of an
Investor as a regulated investment company.
ILLIQUID SECURITIES
No Fund may invest more than 15% (10% in the case of the Money Market
Fund) 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. The
Investment Adviser will monitor the amount of illiquid securities in the Fund's
portfolio, under the supervision of the Board of Trustees, to ensure compliance
with the Fund's investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under 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 placement 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 the Fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemption within seven days.
The 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 under the Securities Act, the 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.
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<PAGE>
The Emerging Countries Fund may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions. Unless these securities are
acquired directly from the issuer or its underwriter, the Fund treats such
foreign securities whose principal market is abroad as not subject to the
investment limitation on securities subject to legal or contractual restrictions
on resale.
INVESTMENT TECHNIQUES AND PROCESSES
The Investment Adviser's investment techniques and processes, which it
has used in managing institutional portfolios for many years, are described
generally in Part A under "Investment Objectives and Policies -- Investment
Techniques and Processes." In making decisions with respect to equity
securities for the Funds, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal. It's how the Investment Adviser built its
reputation. Over the past ten years, the Investment Adviser has built a record
as one of the finest performing investment managers in the United States. It
has successfully delivered growth over time to many institutional investors,
pension plans, foundations, endowments and high net worth individuals. The
Investment Adviser's methods have proven their ability to achieve growth over
time through a variety of investment vehicles.
The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "bottoms up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is guided
by three critical questions: Is there a positive change? Is it sustainable?
Is it timely? The Investment Adviser uses these three factors because it
focuses on discovering positive developments when they first show up in an
issuer's earnings, but before they are fully reflected in the price of the
issuer's securities. The Investment Adviser is always looking for companies
that are driving change and surpassing analysts' expectations. It seeks to
identify companies poised for rapid growth. The Investment Adviser focuses on
recognizing successful companies, regardless of their capitalization or whether
they are domestic or foreign companies.
As indicated in Part A, the Investment Adviser's techniques and
processes include relationships with an extensive network of brokerage research
firms located throughout the world. These analysts are often located in the
same geographic regions as the companies they follow, have followed those
companies for a number of years, and have developed excellent sources of
information about them. The Investment Adviser does not employ in-house
analysts other than the personnel actually engaged in managing investments for
the Funds and the Investment Adviser's other clients. However, information
obtained from a brokerage research firm is confirmed with other research sources
or the Investment Adviser's computer-assisted quantitative analysis (including
"real time" pricing data) of a substantial universe of potential investments.
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<PAGE>
As indicated in Part A, the equity investments of a Fund are
diversified, as with respect to at least 75% of its total assets no Fund may
invest more than 5% of its total assets in the equity securities of any one
issuer. The equity securities of each issuer that are included in the
investment portfolio of a Fund are purchased by the Investment Adviser in
approximately equal amounts, and the Investment Adviser attempts to stay fully
invested within the applicable percentage limitations set forth in Part A. In
addition, for each issuer whose securities are added to an investment portfolio,
the Investment Adviser sells the securities of one of the issuers currently
included in the portfolio.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following investment restrictions adopted
by the Board of Trustees, which constitute fundamental policies that may not be
changed without a vote of the holders of a majority of such Fund's outstanding
Interests (as defined in the Investment Company Act).
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in the applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
A Fund may not:
1. Invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer. However, up to 25% of a Fund's total assets may be invested without
regard to this restriction, and this restriction does not apply to investments
by a Fund in securities of the U.S. Government or agencies and
instrumentalities.
2. Purchase more than 10% of the outstanding voting securities, or
of any class of securities, of any one issuer, or purchase the securities of any
issuer for the purpose of exercising control or management.
3. Invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry. This restriction does not
apply to investments by a Fund in securities of the U.S. Government or its
agencies and instrumentalities, or to investments by the Money Market Fund in
obligations of domestic branches of U.S. banks and U.S. branches of foreign
banks which are subject to the same regulation as U.S. banks.
4. Purchase or sell real estate. However, a Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.
5. Make loans of money, except that a Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. Each Fund
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<PAGE>
reserves the authority to make loans of its portfolio securities in an aggregate
amount not exceeding 30% of the value of its total assets.
6. Borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Fund will
take prompt action to reduce its borrowings as required by applicable law.
7. Pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Funds from
engaging in short sales, options, futures and foreign currency transactions.
8. Underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. Invest more than 15% (10% in the case of the Money Market Fund)
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.
10. Purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that a Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of securities.
11. Engage in short sales, except that a Fund may use such
short-term credits as are necessary for the clearance of transactions. This
restriction does not apply to the Core Growth, Emerging Growth, Mini-Cap,
Worldwide and International Funds.
12. Invest in securities of other investment companies, except in
compliance with the Investment Company Act and applicable state securities
laws or as part of a merger, consolidation, acquisition or reorganization
involving the Fund.
13. Issue senior securities, except that a Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not prohibit
the Funds from engaging in short sales, options, futures and foreign currency
transactions.
14. Enter into transactions for the purpose of arbitrage, or invest in
commodities and commodities contracts, except that a Fund may invest in stock
index, currency and financial
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<PAGE>
futures contracts and related options in accordance with any rules of the
Commodity Futures Trading Commission.
15. Purchase or write options on securities, except for hedging
purposes and then only if (i) aggregate premiums on call options purchased by
a Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put
options purchased by a Fund do not exceed 5% of its net assets, (iii) not
more than 25% of a Fund's net assets would be hedged, and (iv) not more than
25% of a Fund's net assets are used as cover for options written by the Fund.
This restriction does not apply to the Value Fund.
MONEY MARKET FUND RESTRICTIONS. Investment by the Money Market Fund
are subject to limitations imposed under regulations adopted by the Securities
and Exchange Commission. These regulations generally require the Money Market
Fund to acquire only U.S. dollar denominated obligations maturing in 397 days or
less and to maintain a dollar-weighted average portfolio maturity of 90 days or
less. In addition, the Money Market Fund may acquire only obligations that
present minimal credit risks and that are "eligible securities" which means they
are (i) rated, at the time of investment, by at least two nationally recognized
security rating organizations (or one, if it is the only organization rating
such obligation) in the highest short-term rating category or, if unrated,
determined to be of comparable quality (a "first tier security"), or (ii) rated
according to the foregoing criteria in the second highest short-term rating
category or, if unrated, determined to be of comparable quality ("second tier
security"). A security is not considered to be unrated if its issuer has
outstanding obligations of comparable priority and security that have a
short-term rating. The Investment Adviser will determine that an obligation
presents minimal credit risks or that unrated instruments are of comparable
quality in accordance with guidelines established by the Board of Trustees. The
Trustees must also approve or ratify the acquisition of unrated securities or
securities rated by only one rating organization. In addition, investments in
second tier securities are subject to the further constraints that (i) no more
than 5% of the Money Market Fund's assets may be invested in such securities in
the aggregate, and (ii) any investment in such securities of one issuer is
limited to the greater of 1% of the Fund's total assets or $1 million. In
addition, the Money Market Fund may only invest up to 25% of its total assets in
the first tier securities of a single issuer for three business days.
OPERATING RESTRICTIONS. As a matter of operating (not fundamental)
policy adopted by the Board of Trustees, no Fund:
1. May invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships, although a
Fund may invest in the securities of companies which invest in or sponsor such
programs.
2. May purchase any security if as a result of the Fund would then
have more than 5% of its total assets (taken at current value) invested in
securities of companies (including predecessors) having a record of less than
three years of continuous operation, except in
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<PAGE>
compliance with the Investment Company Act or as part of a merger,
consolidation, acquisition or reorganization involving the Fund.
3. May purchase securities of any issuer if any officer or trustee of
the Trust, or of any Investor, the Administrator, the Placement Agent, the
Investment Adviser, owning more than 1/2 of 1% of the outstanding securities of
such issuer, own in the aggregate more than 5% of the outstanding securities of
such issuer.
4. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.
5. May invest in warrants valued, at the lower of cost or market, in
excess of 5% of the market value of the Fund's net assets, or in excess of 2%
of the market value of the Fund's net assets if such warrants are not listed
on the New York Stock Exchange or the American Stock Exchange, as of the date
of investment; provided, however, that the Fully Discretionary and
Short-Intermediate Funds may not invest in warrants.
6. May purchase or write options on securities (Value Fund only).
BLUE SKY RESTRICTIONS. In order to permit the sale of Interests of a
Fund or securities of Investors in certain states, the Board of Trustees may, in
its sole discretion, adopt additional restrictions on investment policies more
restrictive than those described above. Should the Trustees determine that any
such restrictive policy is no longer in the best interests of a Fund or and its
shareholders, the Trust may cease offering Interests of a Trust in the state
involved and the Board of Trustees may revoke such restrictive policy.
Moreover, if the states involved no longer require any such restrictive policy,
the Board of Trustees may, in its sole discretion, revoke such policy.
The Trust has agreed, in connection with certain undertakings given by
Nicholas-Applegate Mutual Funds to the State of South Dakota, that (i) no Fund
will invest more than 10% of its total assets in interests in real estate
investment trusts, and (ii) the Trust will provide adequate notice to such
Investor of changes in certain of the International Fund's non-fundamental
investment restrictions to enable such Investor to provide at least 30 days
advance notice of such changes to its shareholders.
The Trust has agreed, in connection with certain undertakings given by
Nicholas-Applegate mutual Funds to the State of Texas, that the International
Fund will not make short
B-36
<PAGE>
sales of securities or maintain a short position if to do so could create
liabilities or require collateral deposits and segregation of assets aggregating
more than 25% of the Fund's net assets.
The Trust has agreed, in connection with certain undertakings given by
Nicholas-Applegate Mutual Funds to the State of Ohio, that no Fund will invest
more than 50% of its total assets in the securities of issuers which together
with any predecessors have a record of less than three years continuous
operation or securities of issuers which are restricted as to disposition
(including without limitation securities issued pursuant to Rule 144A under the
Securities Act of 1933).
ITEM 14. MANAGEMENT OF THE TRUST.
The names and addresses of the trustees and officers of the Trust,
their positions and offices with the Trust, and their principal occupations
during the past five years are set forth below (except as indicated below, the
business address of all such persons is 600 West Broadway, 30th Floor, San
Diego, California 92101):
ARTHUR E. NICHOLAS, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.*/
Managing Partner and Chief Investment Officer, Nicholas-Applegate Capital
Management, since 1984. Director and Chairman of the Board of Directors of
Nicholas-Applegate Fund, Inc., a registered investment company, since 1987.
DANN V. ANGELOFF, TRUSTEE. 727 West Seventh Street, Los Angeles,
California. President, The Angeloff Company, corporate financial advisers
(since 1976); Director Nicholas-Applegate Fund, Inc. (since 1987); Trustee
(1979 to 1987) and University Counselor to the President (since 1987),
University of Southern California; Director, Public Storage, Inc., a real
estate investment trust (since 1980), Storage Properties, a real estate
investment trust (since 1989), Datametrics Corporation, a producer of
computer peripherals and communication products (since 1993), SEDA Specialty
Packaging, Inc. (since 1993), and Bonded Motors, Inc., an automotive engine
remanufacturer (since 1996).
WALTER E. AUCH, TRUSTEE. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio communications
company (since 1987); Express America Corporation, a mortgage banking company
(since 1992); Fort Dearborn Fund (since 1987); Brinson Funds (since 1994), and
Smith Barney Trak Fund (since 1992), registered investment companies; Pimco
L.P., an investment manager (since 1994); and Banyan Realty Fund (since 1987),
Banyan Strategic Land Fund (since 1987), Banyan Strategic Land Fund II (since
1988), and Banyan Mortgage Fund (since 1988), real estate investment trusts.
Formerly Chairman and Chief Executive Officer, Chicago Board Options Exchange
(1979 to 1986) and Senior Executive Vice President, Director and Member of the
Executive Committee, PaineWebber, Inc. (until 1979).
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<PAGE>
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991), and student, Harvard Divinity School and Harvard Graduate School of
Education (since September 1991); Director, Nicholas-Applegate Fund, Inc. (since
1987), Emerging Germany Fund (since 1991), Premiere Radio Networks, Inc. (since
1991), Sage Analytics International (since 1991), Tonight's Feature Ltd. (since
1995). Formerly Managing Director of Global Equity Transactions Group and
member of the Board of Directors, Prudential Securities (from 1986 to June
1991).
DARLENE DEREMER, TRUSTEE.*/ 155 South Street, Wrentham,
Massachusetts. President and Founder, DeRemer Associates, a marketing
consultant for the financial services industry (since 1987); formerly Vice
President and Director, Asset Management Division, State Street Bank and
Trust Company (from 1982 to 1987), and Vice President, T. Rowe Price &
Associates (1979 to 1982). Director, Jurika & Voyles Fund Group (since
1994), Nicholas-Applegate Strategic Opportunities, Ltd. (since 1994),
Nicholas-Applegate Securities International (since 1994) and King's Wood
Montesori School (since 1995); Member of Advisory Board, Financial Women's
Association (since 1995). Ms. DeRemer is considered to an "interested
person" of the Trust under the 1940 Act because DeRemer Associates received
$100,778 in 1995 and $54,247 in 1994 from the Investment Adviser as
compensation for consulting services provided in connection with its
institutional business.
GEORGE F. KEANE, TRUSTEE.*/ 450 Post Road East, Westport,
Connecticut. President Emeritus and Senior Investment Adviser, The Common Fund,
a non-profit investment management organization representing educational
institutions (since 1993), after serving as its President (from 1971 to 1992);
Member of Investment Advisory Committee, New York State Common Retirement Fund
(since 1982); Director and Chairman of the Investment Committee, United Negro
College Fund (since 1987); Director, United Educators Risk Retention Group
(since 1989); Director, RCB Trust Company (since 1991); Director, School,
College and University Underwriters Ltd. (since 1986); Director, Universal
Stainless & Alloy Products Inc. (since 1994); formerly, President, Endowment
Advisers, Inc. (from August 1987 to December 1992). Mr Keane is considered to
be an "interested person" of the Trust under the 1940 Act because he is a
registered representative of a broker-dealer.
JOHN D. WYLIE, PRESIDENT. Partner (since January 1994), Chief
Investment Officer-Investor Services Group (since December 1995), and Portfolio
Manager (since January 1990), Nicholas-Applegate Capital Management.
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<PAGE>
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER. Partner (since January
1996) and Chief Financial Officer, Nicholas-Applegate Capital Management (since
January 1993), and Chief Financial Officer, Nicholas-Applegate Securities (since
January 1993); Chief Financial Officer, Nicholas-Applegate Mutual Funds (since
March 1993); formerly Chief Financial Officer, Aurora Capital Partners/WSGP
Partners L.P., an investment partnership (from November 1988 to January 1993),
and Vice President and Controller, Security Pacific Merchant Banking Group (from
November 1986 to November 1988). Mr. Pindelski is also the Chief Financial
Officer of the Master Trust.
PETER J. JOHNSON, VICE PRESIDENT. Partner and Director-Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992);
Vice President, Nicholas-Applegate Mutual Funds (since March 1993); formerly,
Marketing Director Pacific Financial Asset Management Company, an investment
management firm (from July 1989 to December 1991), and Senior Marketing
Representative, Fidelity Investments Institutional Services (from August 1987 to
July 1989). Mr. Johnson is also the Vice President of the Master Trust.
ASHLEY T. RABUN, VICE PRESIDENT. Partner (since January 1996) and
Director - Investor Services Group, Nicholas-Applegate Capital Management (since
May 1992) and Senior Vice President, Nicholas-Applegate Securities (since
December 1992); formerly Vice President - Marketing, Interinvest Corporation, an
asset management firm (from December 1990 to May 1992), and Vice President, Dean
Witter (from 1984 to 1990). Ms Rabun is also the President of the Master Trust.
E. BLAKE MOORE, JR., SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities (since
1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989 to 1993).
Each Trustee who is not an officer or affiliate of the Trust, the
Investment Adviser or the Distributor receives an aggregate annual fee of
$10,000 for services rendered as a Trustee of the Trust, and $1,000 for each
meeting attended. Each Trustee is also reimbursed for out-of-pocket expenses
incurred as a Trustee. The Trustees and officers of the Trust, as a group, own
less than 1% of the outstanding Interests of the Trust.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1996, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that all other funds in the
"Trust complex" (as defined in Schedule 14A under the Securities Exchange Act of
1934):
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<PAGE>
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Estimated Annual Total Compensation
Compensation from Benefits Accrued Benefits Upon from Trust and Trust
Name Trust as Part of Trust Retirement Complex Paid to
Expenses Trustee
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Dann V. Angeloff $ 15,500 None N/A $ 32,500 (13*)
Walter E. Auch $ 15,000 None N/A $ 15,000 (12*)
Theodore J. Coburn $ 15,000 None N/A $ 29,000 (13*)
Darlene DeRemer $ 15,000 None N/A $ 15,000 (12*)
George F. Keane $ 15,000 None N/A $ 15,000 (12*)
</TABLE>
* Indicates total number of funds in Trust complex, including the Funds.
The Declaration of Trust of the Trust provides that obligations of the
Trust are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the Trust or its Investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the Trust or its Investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declaration of Trust also provides that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Fund shall be enforceable against the assets and property of such
Fund and its Investors and not against the assets or property of any other Fund
or the Investors therein.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of March 31, 1996, there were issued and outstanding the
following beneficial interests in the Funds: $420,510,770 of the Core Growth
Fund, of which 18.4% were owned by Nicholas-Applegate Core Growth Portfolio
A, 2.7% were owned by Nicholas-Applegate Core Growth Portfolio B, 42.3% were
owned by Nicholas-Applegate Core Growth Portfolio C, 35.7% were owned by
Nicholas-Applegate Core Growth Institutional Portfolio, and 1.0% were owned
by Nicholas-Applegate Core Growth Qualified Portfolio; $111,441,528 of the
Income & Growth Fund, of which 24.7% were owned by Nicholas-Applegate Income
& Growth Portfolio A, 2.9% were owned by Nicholas-Applegate Income & Growth
Portfolio B, 69.8% were
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<PAGE>
owned by Nicholas-Applegate Balanced Growth Portfolio C, 2.7% were owned by
Nicholas-Applegate Balanced Growth Institutional Portfolio and 1.0% were
owned by Nicholas-Applegate Income & Growth Qualified Portfolio; $23,759,043
of the Balanced Fund, of which 24.7% were owned by Nicholas-Applegate
Balanced Growth Portfolio A, 2.9% were owned by Nicholas-Applegate Balanced
Growth Portfolio B, 69.8% were owned by Nicholas-Applegate Balanced Growth
Portfolio C, and 2.7% were owned by Nicholas-Applegate Balanced Growth
Institutional Portfolio; $100,340,877 of the Worldwide Fund, of which 23.4%
were owned by Nicholas-Applegate Worldwide Growth Portfolio A, 1.9% were
owned by Nicholas-Applegate Worldwide Growth Portfolio B, 71.0% were owned by
Nicholas-Applegate Worldwide Growth Portfolio C and 3.6% were owned by
Nicholas-Applegate Worldwide Growth Institutional Portfolio; $23,726,875 of
the International Growth Fund, of which 4.5% were owned by Nicholas-Applegate
International Growth Portfolio A, 6.2% were owned by Nicholas-Applegate
International Growth Portfolio B, 4.0% were owned by Nicholas-Applegate
International Growth Portfolio C, 85.3% were owned by Nicholas-Applegate
International Growth Institutional Portfolio and 0.1% were owned by
Nicholas-Applegate International Qualified Portfolio; $19,872,034 of the
Emerging Countries Fund, of which 23.9% were owned by Nicholas-Applegate
Emerging Countries Portfolio A, 17.9% were owned by Nicholas-Applegate
Emerging Countries Portfolio B, 21.9% were owned by Nicholas-Applegate
Emerging Countries Portfolio C, 34.6% were owned by Nicholas-Applegate
Emerging Countries Institutional Portfolio and 1.8% were owned by
Nicholas-Applegate Emerging Countries Qualified Portfolio; $4,470,136 of
Nicholas-Applegate Government Income Fund, of which 29.2% were owned by
Nicholas-Applegate Government Income Portfolio A, 2.9% were owned by
Nicholas-Applegate Government Income Portfolio B and 67.9% were owned by
Nicholas-Applegate Government Income Portfolio C; $594,345,790 of the
Emerging Growth Fund, of which 23.5% were owned by Nicholas-Applegate
Emerging Growth Portfolio A, 2.3% were owned by Nicholas-Applegate Emerging
Growth Fund Portfolio B, 34.9% were owned by Nicholas-Applegate Emerging
Growth Portfolio C and 39.2% were owned by Nicholas-Applegate Emerging Growth
Institutional Portfolio; $3,214,255 of the Money Market Fund, of which 99.1%
were owned by Nicholas-Applegate Money Market Portfolio and 0.9% were owned
by Nicholas-Applegate Profit Sharing Plan; $25,187,325 of the Mini-Cap Fund,
of which 99.9% were owned by Nicholas-Applegate Mini-Cap Institutional
Portfolio and 0.1% were owned by Nicholas-Applegate Profit Sharing Plan;
$4,440,035 of the Fully Discretionary Income Fund, of which 99.4% were owned
by Nicholas-Applegate Fully Discretionary Income
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<PAGE>
Institutional Portfolio and 0.6% were owned by Nicholas-Applegate Profit Sharing
Plan; and $4,781,223 of the Short-Intermediate Fixed Income Fund, of which is
99.5% were owned by Nicholas-Applegate Short-Intermediate Fixed Income
Institutional Portfolio and 0.5% were owned by Nicholas-Applegate Profit Sharing
Plan.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISER
The Investment Adviser was organized in August 1984 to manage
discretionary accounts investing primarily in publicly traded equity securities
and securities convertible into or exercisable for publicly traded equity
securities, with the goal of capital appreciation. Its general partner is
Nicholas-Applegate Capital Management, Holdings, L.P., a California limited
partnership of which the general partner is Nicholas-Applegate Capital
Management Holdings Inc., a California corporation owned by Mr. Nicholas. The
Investment Adviser currently has fifteen partners (including Mr. Nicholas) who
manage approximately 300 employees, including 28 portfolio managers.
Under the Investment Advisory Agreement between the Trust and the
Investment Adviser, the Trust retains the Investment Adviser to manage the
Funds' investment portfolios, subject to the direction of the Board of Trustees.
The Investment Adviser is authorized to determine which securities are to be
bought or sold by the Funds and in what amounts.
The amounts of the advisory fees paid to the Investment Advisor for
the fiscal year ended March 31, 1996, and the amounts of the reductions in fees
(or recoupment of fees previously deferred) as a result of the expense
limitations and fee waivers, were as follows:
<TABLE>
<CAPTION>
Fund Advisory Fees Fee Reductions
- ---- ------------- --------------
<S> <C> <C>
Core Growth Fund $2,563,061 -0-
Emerging Growth Fund $5,190,853 -0-
Income & Growth Fund $ 723,032 ($ 4,263)
Balanced Growth Fund $ 75,048 $ 94,371
Worldwide Growth Fund $ 922,328 $ 58,228
International Growth Fund $ 69,849 $117,278
Government Fund -0- $ 80,735
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Money Market Fund -0- $ 93,976
Emerging Countries Fund $ 49,827 $ 57,853
Mini-Cap Fund $ 57,094 $ 40,723
Fully Discretionary Fund -0- $ 16,120
Short Intermediate Fund -0- $ 14,974
</TABLE>
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by a Fund
or the Trust in connection with the matters to which the Investment Advisory
Agreement relates, except for liability resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of the
Investment Adviser's reckless disregard of its duties and obligations under the
Investment Advisory Agreement. The Trust has agreed to indemnify the Investment
Adviser against liabilities, costs and expenses that the Investment Adviser may
incur in connection with any action, suit, investigation or other proceeding
arising out of or otherwise based on any action actually or allegedly taken or
omitted to be taken by the Investment Adviser in connection with the performance
of its duties or obligations under the Investment Advisory Agreement or
otherwise as an investment adviser of the Trust. The Investment Adviser is not
entitled to indemnification with respect to any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or of its reckless disregard of its duties and
obligations under the Investment Advisory Agreement.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated by the Trust (by the Board of
Trustees or vote of a majority of the outstanding voting securities of the
Trust, as defined in the Investment Company Act) or the Investment Adviser upon
60 days' written notice, without payment of any penalty. The Investment
Advisory Agreement provides that it will continue in effect for a period of more
than two years from its execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.
ADMINISTRATOR
The Administrator of the Trust is Investment Company Administration
Corporation, 4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, the
Administrator is responsible for performing all administrative services required
for the daily business operations of the Trust, subject to the supervision of
the Board of Trustees of the Trust. The Administrator has no
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<PAGE>
supervisory responsibility over the investment operations of the Funds. The
management or administrative services of the Administrator for the Trust are not
exclusive under the terms of the Administration Agreement and the Administrator
is free to, and does, render management and administrative services to others.
The Administrator also provides an assistant treasurer and an assistant
secretary for the Trust.
In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel and
pays all expenses incurred in connection with managing the ordinary course of
the business of the Trust, other than expenses assumed by the Trust as described
below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with the
Administrator, the Investment Adviser, (c) out-of-pocket travel expenses for the
officers and Trustees of the Trust and other expenses of Board of Trustees'
meetings, (d) the fees and certain expenses of the Trust's Custodian, (e) the
fees and expenses of the Transfer and Dividend Disbursing Agent that relate to
the maintenance of each shareholder account, (f) the charges and expenses of the
Trust's legal counsel and independent accountants, (g) brokerage commissions and
any issue or transfer taxes chargeable to Trustees and officers of the Trust in
connection with securities transactions, (h) all taxes and corporate fees
payable by the Trust to federal, state and other governmental agencies, (i) the
fees of any trade association of which the Trust may be a member, (j) the cost
of maintaining the Trust's existence, taxes and interest, (k) the cost of
fidelity and liability insurance, (l) allocable communication expenses with
respect to Investor services and all expenses of Investors' and Board of
Trustees' meetings and of preparing, printing and mailing prospectuses and
reports to Investors, (m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the business of
the Trust, and (n) expenses assumed by the Trust in connection with private
placement transactions regarding Interests of the Funds.
The Administration Agreement provides that the Administrator will not
be liable for any error of judgment or for any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from the Administrator's willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties. The Administration
Agreement may be terminated without penalty by either the Administrator or the
Trust (by the Board of Trustees or vote of a majority of the outstanding voting
securities of the Trust, as defined in the Investment Company Act), upon 60
days' written notice. The Administration Agreement will continue in effect only
so long as such continuance is specifically approved at least annually in
conformity with the Investment Company Act.
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<PAGE>
CUSTODIAN
PNC Bank acts as Custodian of the Funds pursuant to a Custodian
Services Agreement. The Custodian (i) maintains a separate account or accounts
in the name of each Fund, (ii) holds and disburses portfolio securities on
account of each Fund, (iii) makes receipts and disbursements of money on behalf
of each Fund, (iv) collects and receives all income and other payments and
distributions on account of the Funds' portfolio securities held by the
Custodian, (v) responds to correspondence from security brokers and others
relating to its duties and (vi) makes periodic reports to the Board of Trustees
concerning its duties thereunder. Under the Custodian Services Agreement, the
Funds will reimburse the Custodian for its costs and expenses in providing
services thereunder.
COUNSEL
Paul, Hastings, Janofsky & Walker, 555 South Flower Street, Los
Angeles, California 90071, serves as counsel to the Trust and will pass on the
legality of the Interests offered hereby and has reviewed the portions of Part A
and Part B concerning taxes. It also acts as legal counsel for the Investment
Adviser and Placement Agent, and for Nicholas-Applegate Mutual Funds.
INDEPENDENT ACCOUNTANTS
Ernst & Young, L.L.P., independent accountants, has been selected as
auditor of the Funds for the fiscal years ended March 31, 1996 and 1997, and
will provide audit services, tax return preparation, and assistance with respect
to the preparation of filings with the Securities and Exchange Commission. Its
principal business address is 515 South Flower Street, Los Angeles, California
90071.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
Subject to policies established by the Board of Trustees, the
Investment Adviser is primarily responsible for the execution of the Funds'
portfolio transactions and the allocation of the brokerage business. In
executing such transactions, the Investment Adviser will seek to obtain the best
price and execution for the Funds, taking into account such factors as price,
size of order, difficulty and risk of execution and operational facilities of
the firm involved. Securities in which the Funds invest may be traded in the
over-the-counter markets, and the Funds deal directly with the dealers who make
markets in such securities except in those circumstances where better prices and
execution are available elsewhere. Commission rates are established pursuant to
negotiation with brokers or dealers based on the quality or quantity of services
provided in light of generally prevailing rates, and while the Investment
Adviser generally seeks reasonably competitive commission rates, the Funds do
not necessarily pay the lowest commissions available. The allocation of
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<PAGE>
orders among brokers and the commission rates paid are reviewed periodically by
the Board of Trustees.
The Funds have no obligation to deal with any broker or group of
brokers in executing transactions in portfolio securities. Subject to obtaining
the best price and execution, brokers who provide supplemental research, market
and statistical information and other research services and products to the
Investment Adviser may receive orders for transactions by the Funds. Such
information, services and products are those which brokerage houses customarily
provide to institutional investors, and include items such as statistical and
economic data, research reports on particular companies and industries, and
computer software used for research with respect to investment decisions.
Information, services and products so received are in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement and the expenses of the Investment Adviser are
not necessarily reduced as a result of the receipt of such supplemental
information, services and products. Such information, services and products may
be useful to the Investment Adviser in providing services to clients other than
the Trust, and not all such information, services and products are used by the
Investment Adviser in connection with the Funds. Similarly, such information,
services and products provided to the Investment Adviser by brokers and dealers
through whom other clients of the Investment Adviser effect securities
transactions may be useful to the Investment adviser in providing services to
the Funds. The Investment Adviser is authorized to pay higher commission on
brokerage transactions for the Funds to brokers in order to secure the
information, services and products described above, subject to review by the
Board of Trustees from time to time as to the extent and continuation of this
practice.
Although investment decisions for the Trust are made independently
from those of the other accounts managed by the Investment Adviser, investments
of the kind made by the Funds may often also be made by such other accounts.
When a purchase or sale of the same security is made at substantially the same
time on behalf of the Funds and one or more other accounts managed by the
Investment Adviser, available investments are allocated in the discretion of the
Investment Adviser by such means as, in its judgment, result in fair treatment.
The Investment Adviser aggregates orders for purchases and sales of securities
of the same issuer on the same day among the Funds and its other managed
accounts, and the price paid to or received by the Funds and those accounts is
the average obtained in those orders. In some cases, such aggregation and
allocation procedures may affect adversely the price paid or received by the
Funds or the size of the position purchased or sold by the Funds.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's commission or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid.
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<PAGE>
During the fiscal year ended March 31, 1996, the following Funds
acquired securities of their regular brokers or dealers (as defined in Rule 10b-
1 under the Investment Company Act) or their parents, including repurchase
agreements, the holdings of which were as follows as of March 31, 1996: Core
Growth Fund - $8,197,548; Balanced Growth Fund - $440,075; Worldwide Growth Fund
- - $20,600; Governmental Income Fund - $103,846; Money Market Fund - $1,962,750.
The aggregate dollar amount of brokerage commissions paid by the Funds
during the last three fiscal years of the Trust were as follows:
<TABLE>
<CAPTION>
Year Ended
March 31, March 31, March 31,
1996 1995 1994
<S> <C> <C> <C>
Worldwide Fund $ 484,310 $ 344,167 $ 390,163
International Growth Fund 116,735 69,187 3,146
Core Growth Fund 862,396 728,347 698,807
Emerging Growth Fund 1,038,140 649,053 525,555
Income & Growth Fund 83,459 174,247 131,675
Balanced Fund 51,038 44,386 51,142
Government Fund 3 0 516
Money Market Fund 0 0 0
Emerging Countries Fund 169,728 20,701 N/A
Fully Discretionary Fund 0 N/A N/A
Short-Intermediate Fund 0 N/A N/A
Mini-Cap Fund 40,185 N/A N/A
Global Growth Fund 0 0 N/A
</TABLE>
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<PAGE>
Of the total commissions paid during the fiscal year ended March 31,
1996, $2,136,382 (75.1%) were paid to firms which provided research, statistical
or other services to the Investment Adviser.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
DESCRIPTION OF INTERESTS
Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding
Interests of each Fund of the Trust affected by the matter. A Fund is not
affected by a matter unless it is clear that the interests of such Fund in the
matter are substantially identical or that the matter does not affect any
interest of such Fund. Under Rule 18f-2, the approval of an investment advisory
agreement or Rule 12b-1 distribution plan or any change in a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding Interests of such Fund. However, the
rule also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts and the election of directors may
be effectively acted upon by Investors of the Trust voting without regard to
Fund.
Unless otherwise provided by law (for example, by Rule 18f-2 discussed
above) or by the Trust's Declaration of Trust, the Trust may take or authorize
any action upon the favorable vote of the holders of more than 50% of the
outstanding Interests of the Trust voting without regard to any particular Fund.
REPORTS
Investors will receive unaudited semi-annual reports describing the
Trust's investment operations and annual financial statements audited by
independent accountants.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including exhibits filed
therewith, may be examined at the office of the Securities and Exchange
Commission in Washington, D.C. Statements contained in Part A or Part B of such
Registration Statement as to the contents of any contract or other document
referred to therein are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
such Registration Statement, such statement being qualified in all respects by
such reference.
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<PAGE>
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF INTERESTS BEING OFFERED.
REDEMPTION IN KIND
The Trust intends to pay in cash for all Interests of a Fund redeemed,
but reserves the right to make payment wholly or partly in readily marketable
investment securities. In such cases, an Investor may incur brokerage costs in
converting such securities to cash. However, the Trust has elected to be
governed by the provisions of Rule 18f-1 under the Investment Company Act,
pursuant to which it is obligated to pay in cash all requests for redemptions by
any Investor of record, limited in amount with respect to each Investor during
any 90-day period to the lesser of $250,000 or 1% of the net asset value of the
Trust at the beginning of such period.
PRICING OF INTERESTS
The value of the investments and assets of a Fund is determined each
business day. Investment securities, including ADRs and EDRs, that are traded
on a domestic or foreign stock exchange or on the NASDAQ National Market System
are valued at the last sale price as of the close of business on the New York
Stock Exchange (normally 4:00 P.M. New York time) on the day the securities are
being valued, or lacking any sales, at the mean between the closing bid and
asked prices. Securities listed or traded on certain foreign exchanges whose
operations are similar to the United States over-the-counter market are valued
at the price within the limits of the latest available current bid and asked
prices deemed by the Investment Adviser best to reflect fair value. A security
which is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security by the
Investment Adviser. Listed securities that are not traded on a particular day
and other over-the-counter securities are valued at the mean between the closing
bid and asked prices.
In the event that the New York Stock Exchange adopts different trading
hours on either a permanent or temporary basis, the Board of Trustees will
reconsider the time at which net asset value is computed. In addition, the
asset value of the Fund may be computed as of any time permitted pursuant to any
exemption, order or statement of the Securities and Exchange Commission or its
staff.
Long-term debt obligations are valued at the mean of representative
quoted bid and asked prices for such securities (quoted bid prices in the case
of the Fully Discretionary and Short-Intermediate Funds) or, if such prices are
not available, at prices for securities of comparable maturity, quality and
type; however, when the Investment Adviser deems it appropriate, prices obtained
for the day of valuation from a bond pricing service will be used, as discussed
below. Debt securities with maturities of 60 days or less are valued at
amortized cost if their term to maturity from date of purchase is less than 60
days, or by amortizing, from the sixty-first day prior to maturity, their value
on the sixty-first day prior to maturity if their term to maturity from date
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<PAGE>
of purchase by the Fund is more than 60 days, unless this is determined by the
Board of Trustees not to represent fair value. Repurchase agreements are valued
at cost plus accrued interest.
U.S. Government securities are traded in the over-the-counter market
and are valued at the mean between the last available bid and asked prices (last
available bid prices in the case of the Fully Discretionary and Short-
Intermediate Funds), except that securities with a demand feature exercisable
within one to seven days are valued at par. Such valuations are based on
quotations of one or more dealers that make markets in the securities as
obtained from such dealers, or on the evaluation of a pricing service. Futures
contracts and options thereon, which are traded on exchanges, are valued at
their last sale or settlement price as of the close of such exchanges or, if no
sales are reported, at the mean between the last reported bid and asked prices.
The individual securities which make up a synthetic convertible security are
valued separately. If a futures exchange closes later than 4:00 p.m. New York
time, the futures traded on it are valued based on the sale price, or on the
mean between the bid and ask prices, as the case may be, as of 4:00 p.m. New
York time.
Trading in securities on foreign securities exchanges and over-the-
counter markets is normally completed well before the close of business day in
New York. In addition, foreign securities trading may not take place on all
business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the New
York Stock Exchange will not be reflected in the calculation of net asset value
unless the Board of Trustees deems that the particular event would materially
affect net asset value, in which case an adjustment will be made. Assets or
liabilities initially expressed in terms of foreign currencies are translated
prior to the next determination of the net asset value into U.S. dollars at the
spot exchange rates at 1:00 p.m. New York time or at such other rates as the
Investment Adviser may determine to be appropriate in computing net asset value.
Securities and assets for which market quotations are not readily
available, or for which the Board of Trustees or persons designated by the Board
determine that the foregoing methods do not accurately reflect current market
value, are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.
The Trust may use a pricing service approved by the Board of Trustees.
Prices provided by such a service represent evaluations of the mean between
current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers, and other market data. Such services may use electronic
data processing techniques and/or a matrix system to determine valuations. The
procedures of such services are reviewed periodically by the officers of
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<PAGE>
the Trust under the general supervision and responsibility of its Board of
Trustees, which may replace a service at any time if it determines that it is in
the best interests of the Trust to do so.
MONEY MARKET FUND
The calculation of the net asset value per share of the Money Market
Fund is based upon Rule 2a-7 under the Investment Company Act. Under the Rule,
the Money Market Fund must maintain a dollar-weighted average portfolio maturity
of 90 days or less, purchase instruments having remaining maturities of 13
months or less only (25 months or less in the case of U.S. Government
securities), and invest only in securities determined by the Board of Trustees
to be of high quality with minimal credit risks. The net asset value per share
of Investors in the Money Market Fund will normally remain constant at $1.00.
The Money Market Fund determines the value of its portfolio securities
by the amortized cost method. This method involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Fund would receive if it sold
the instrument. During these periods, the yield to an Investor may differ
somewhat from that which could be obtained from a similar fund which marks its
portfolio securities to market each day.
ITEM 20. TAX STATUS.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by an Investor
from a Fund provided that certain conditions are satisfied. Interest received
on repurchase agreements collateralized by U.S. Government obligations normally
is not exempt from state taxation. The Trust will inform Investors annually of
the percentage of income and distributions derived from direct U.S. Government
obligations. Investors should consult their tax advisers to determine whether
any portion of the income dividends received from the Fund is considered tax
exempt in their particular states.
With respect to investments in zero coupon Treasury securities,
including STRIPS and CUBES made by the Money Market Fund, that are sold at
original issue discount and thus do not make periodic cash interest payments,
the Fund will be required to include as part of its current income the imputed
interest on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because the Fund may have to
sell portfolio securities to distribute such imputed income, which may occur at
a time when the Investment Adviser would not have chosen to sell such securities
and which may result in a taxable gain or loss.
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<PAGE>
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Funds are "Section 1256 contracts." Any gains or losses
on Section 1256 contracts are generally credited 60% long-term and 40% short-
term capital gains or losses ("60/40") although gains and losses from hedging
transactions, certain mixed straddles and certain foreign currency transactions
from such contracts may be treated as ordinary in character. Also, Section 1256
contracts held by the Funds at the end of each taxable year are "marked to
market" with the result 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.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Funds and
their Investors. In addition, losses realized by the Funds and their Investors
on positions 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
Funds and their Investors are not entirely clear. The transactions may increase
the amount of short-term capital gain realized by the Funds which is taxed as
ordinary income when distributed to their Investors.
The Funds may make one or more of the elections available under the
Code which are applicable to straddles. If the Funds make 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 election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because applications 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 the 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 the Investors' assets may
limit the extent to which the Funds will be able to engage in transactions in
futures contracts or forward contracts.
SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures 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
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<PAGE>
"Section 988" gains or losses, may increase or decrease the amount of an
Investor's investment company taxable income to be distributed to its
shareholders.
FOREIGN TAX. Income received by a Fund 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 Investment Adviser intends to manage the
Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of an Investor's total assets at the
close of its taxable year consists of securities of foreign corporations
(including its pro rata share of foreign securities held by a Fund), the
Investor may be eligible to elect to "pass through" to its shareholders the
Investor's pro rata share of foreign income and similar taxes paid by the Fund.
Each Investor will be notified within 60 days after the close of the Fund's
taxable year the amount of the foreign taxes paid by the Fund for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed an Investor's U.S. tax attributable to its total foreign
source taxable income. The limitation on the foreign tax credit is applied
separately to foreign source passive income, and to certain other types of
income. Investors 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 alternative minimum tax and can
be used to offset only 90% of the alternative minimum tax, and foreign taxes
generally are not deductible in computing alternative minimum taxable income.
ORIGINAL ISSUE DISCOUNT. 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 the Funds 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 corporation 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 from the date of issuance) that may be acquired by the Funds 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, 1994 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 Funds may make one or more of the
elections applicable to debt securities having market discount, which could
affect the character and timing the 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 the Funds may be treated
as having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, a Fund 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. The Fund
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<PAGE>
may make one or more of the elections applicable to the debt securities having
acquisition discount, or OID, which could affect the character and timing of
recognition of income.
OTHER TAX INFORMATION
The Funds may be required to withhold for U.S. federal income taxes
31% of all taxable distributions payable to Investors who fail to provide the
Funds 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 Investors and certain other
Investors 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.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of Investors of a Fund
with respect to distributions by the Investors may differ from federal tax
treatment. Distributions to Investors may be subject to additional state and
local taxes. Investors should consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
ITEM 21. UNDERWRITERS. Not applicable.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA. Not applicable.
ITEM 23. FINANCIAL STATEMENTS. The financial statements in the Trust's Annual
Reports are incorporated in this Part B by reference. Such financial statements
have been audited by the Fund's independent auditors, Coopers & Lybrand, whose
reports thereon also appear in such Annual Reports and are incorporated herein
by reference. Such financial statements have been included herein in reliance
upon such reports given upon their authority as experts in accounting and
auditing. Copies of the Trust's 1995 Annual Reports may be obtained at no
charge by writing or telephoning the Trust at 600 West Broadway, 30th Floor, San
Diego, California 92101 (phone 619-687-8000).
The Trust's unaudited financial statements as of March 31, 1996 with
respect to the Funds are attached as Appendix B.
B-54
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION. An S&P 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 following summarizes the rating
categories used by S&P for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
MOODY'S INVESTORS SERVICES, INC. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions have a superior
ability for repayment of short-term promissory obligations. Repayment ability
will often be evidenced by the following characteristics: leading market
positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above 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 alternative liquidity is maintained.
APP-1
<PAGE>
"Prime-3" - Issuer or related supporting institutions have an acceptable
ability for repayment of short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
DUFF & PHELPS. The three rating categories of Duff & Phelps for
investment grade commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff &
Phelps employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the
highest rating category. The following summarizes the rating categories used by
Duff & Phelps for commercial paper:
"Duff 1+" - Debt possesses 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" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - Debt possesses 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.
"Duff 3" - Debt possesses 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.
"Duff 4" - Debt possesses speculative investment characteristics.
"Duff 5" - Issuer has failed to meet scheduled principal and/or interest
payments.
FITCH INVESTORS SERVICE, INC. Fitch short-term ratings apply to debt
obligations that are payable on demand or have original maturities of up to
three years. The following summarizes the rating categories used by Fitch for
short-term obligations:
"F-1+" - Exceptionally strong credit quality. Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for timely
payment.
"F-1" - Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
"F-1+."
APP-2
<PAGE>
"F-2" - Good credit quality. Commercial paper assigned this rating has
a satisfactory degree of assurance for timely payment, but the margin of safety
is not as great as for issues assigned the "F-1+" and "F-1" ratings.
"F-3" - Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below investment grade.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
THOMSON BANKWATCH. Thomson BankWatch commercial paper ratings assess
the likelihood of an untimely payment of principal or interest of debt having a
maturity of one year or less which is issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA. IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations are supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by a strong capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
APP-3
<PAGE>
"A3" - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
"B" - Obligations' capacity for timely repayment is susceptible to
adverse changes in business, economic, or financial conditions.
"C" - Obligations have an inadequate capacity to ensure timely
repayment.
"D" - Obligations have a high risk of default or are currently in
default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
STANDARD & POOR'S CORPORATION. The following summarizes the ratings
used by S&P for corporate and municipal debt:
"AAA" - Debt has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from higher rated issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest
and repay principal. Whereas such issues 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
debt in this category than in higher-rated categories.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
APP-4
<PAGE>
"CCC" - Debt has currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
MOODY'S INVESTORS SERVICES, INC. The following summarizes the ratings used
by Moody's for corporate and municipal long-term debt:
"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 edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered 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 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.
APP-5
<PAGE>
"B" - Bonds generally lack characteristics of the 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.
"Ca" - Bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcoming.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B." The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
DUFF & PHELPS. The following summarizes the ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
APP-6
<PAGE>
FITCH INVESTORS SERVICES, INC. The following summarizes the highest
four ratings used by Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds 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 have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA. IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
APP-7
<PAGE>
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
THOMSON BANKWATCH. Thomson BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and broker-dealers.
The following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
APP-8
<PAGE>
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include
a plus or minus sign designation which indicates where within the respective
category the issue is placed.
APP-9
<PAGE>
APPENDIX B
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES FOR NICHOLAS-APPLEGATE INVESTMENT TRUST
MARCH 31, 1996
<TABLE>
<CAPTION>
EMERGING CORE INCOME & BALANCED
GROWTH GROWTH GROWTH GROWTH
FUND FUND FUND FUND
-----------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value
(Cost $429,286,396, $336,068,123,
$97,317,276, $20,629,674
$21,714,669, $4,480,597, and
$3,188,035 respectively) $589,916,573 $424,821,797 $111,582,468 $23,374,270
Cash 6,624 104,687 1,068,976 1,215
Receivables:
Dividends 79,939 63,712 111,346 3,164
Interest 4,265 8,701 799,241 177,304
Investment securities sold 8,892,675 6,485,822 1,054,430 232,027
Interests sold 1,781,237 1,065,892 435,420 105,206
Due from advisor 48
Deferred organization costs 22,962 31,883 15,812 11,280
Other assets 8,958 2,990 730
-----------------------------------------------------------
Total assets 600,713,233 432,585,484 115,068,423 23,904,514
-----------------------------------------------------------
LIABILITIES:
Payables:
Dividend -- -- -- --
Investment securities purchased 4,605,614 11,360,399 3,052,126 --
Interests repurchased 11,374,104 303,649 131,446 30,270
Due to advisor -- -- 192 --
Accrued expenses 647,133 378,833 126,723 29,693
-----------------------------------------------------------
Total liabilities 16,626,851 12,042,881 3,310,487 59,963
-----------------------------------------------------------
NET ASSETS $584,086,382 $420,542,603 $111,757,936 $23,844,551
-----------------------------------------------------------
-----------------------------------------------------------
COMPOSITION OF NET ASSETS
Paid-in capital and realized transactions $405,315,616 $313,544,763 $82,905,884 $18,981,131
Accumulated net investment income (deficit) (6,202,213) (683,173) 11,637,836 1,409,039
Accumulated net realized gain (loss) 24,342,802 18,927,339 2,949,024 709,785
Net unrealized appreciation (depreciation) on
investments 160,630,177 88,753,674 14,265,192 2,744,596
-----------------------------------------------------------
Net assets $584,086,382 $420,542,603 $111,757,936 $23,844,551
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MINI-CAP GOVERNMENT MONEY
GROWTH INCOME MARKET
FUND FUND FUND
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost $429,286,396, $336,068,123,
$97,317,276, $20,629,674
$21,714,669, $4,480,597, and
$3,188,035 respectively) $24,874,920 $4,406,839 $3,188,035
Cash 822 804 925
Receivables:
Dividends 591,227
Interest 233 82,891 831
Investment securities sold 121,190
Interests sold 5,416 30,831
Due from advisor 16,215 18,467
Deferred organization costs 10,375 9,491
Other assets 143 120
---------------------------------------
Total assets 25,593,951 4,547,955 3,217,869
---------------------------------------
LIABILITIES:
Payables:
Dividend -- -- --
Investment securities purchased 284,115 -- --
Interests repurchased 4,112 22,974 --
Due to advisor -- -- --
Accrued expenses 41,755 46,987 44,022
---------------------------------------
Total liabilities 329,982 69,961 44,022
---------------------------------------
NET ASSETS $25,263,969 $4,477,994 $3,173,847
---------------------------------------
---------------------------------------
COMPOSITION OF NET ASSETS
Paid-in capital and realized transactions $22,232,904 $3,797,724 $3,174,172
Accumulated net investment income (deficit) (73,292) 755,564 --
Accumulated net realized gain (loss) (55,894) (1,536) (325)
Net unrealized appreciation (depreciation) on
investments 3,160,251 (73,758) --
---------------------------------------
Net assets $25,263,969 $4,477,994 $3,173,847
---------------------------------------
---------------------------------------
</TABLE>
See Accompanying Notes to the Financial Statements.
APP-10
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE NICHOLAS-APPLEGATE INVESTMENT TRUST
FOR THE PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
EMERGING CORE INCOME & BALANCED MINI-CAP GOVERNMENT MONEY
GROWTH GROWTH GROWTH GROWTH GROWTH INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 1,179,992 $ 1,114,996 $ 1,152,827 $ 112,176 $ 13,951 -- --
Interest 1,620,601 1,157,351 3,989,027 741,327 30,882 $321,658 $217,637
-----------------------------------------------------------------------------------
Total income 2,800,593 2,272,347 5,141,854 853,503 44,833 321,658 217,637
-----------------------------------------------------------------------------------
Expenses:
Advisory fee 5,190,853 2,563,061 789,222 169,416 97,817 20,408 9,402
Accounting fee 172,731 138,472 76,569 75,000 17,500 75,000 75,000
Administration fee 35,001 118,532 36,632 7,859 2,638 1,663 1,311
Audit fee 136,316 93,588 26,856 6,295 2,489 1,207 954
Custodian fee 151,066 64,667 31,624 27,384 28,682 15,220 16,346
Insurance 9,983 9,416 2,796 681 178 158 112
Legal fee 8,636 8,990 2,913 617 118 135 105
Miscellaneous 24,391 3,943 10,451 7,746 3,289 3,773 3,673
Organization costs 8,539 15,585 7,730 5,516 -- 5,073 4,924
Trustees' fee 8,450 8,450 8,450 8,450 6,137 8,451 8,421
-----------------------------------------------------------------------------------
Total expense 5,745,966 3,024,704 993,243 308,964 158,848 131,088 120,248
Less: Reimbursement from advisor -- -- 6,439 (94,370) (40,723) (101,143) (103,378)
-----------------------------------------------------------------------------------
Net expenses 5,745,966 3,024,704 999,682 214,594 118,125 29,945 16,870
-----------------------------------------------------------------------------------
Net investment income (deficit) (2,945,373) (752,357) 4,142,172 638,909 (73,292) 291,713 200,767
-----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from security
transactions 78,797,996 50,587,998 10,319,301 2,837,068 (55,894) 363,388 (325)
Change in net unrealized appreciation
(depreciation) of investments 91,635,716 52,583,826 10,732,341 742,010 3,160,251 (175,424) --
Net gain (loss) on investments 170,433,712 103,171,824 21,051,642 3,579,078 3,104,357 187,964 (325)
-----------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $167,488,339 $102,419,467 $25,193,814 $4,217,987 $3,031,065 $479,677 $200,442
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to the Financial Statements.
APP-11
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE NICHOLAS-APPLEGATE INVESTMENT TRUST
<TABLE>
<CAPTION>
EMERGING GROWTH FUND CORE GROWTH FUND INCOME & GROWTH FUND
-------------------------- ----------------------- --------------------------
For the For the For the For the For the For the
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31,
1996 1995 1996 1995 1996 1995
-------------------------- ----------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (deficit) ($2,945,373) ($2,224,592) ($752,357) $136,431 $4,142,172 $5,103,250
Net realized gain (loss) from
security transactions 78,797,996 (48,388,925) 50,587,998 (27,617,865) 10,319,301 (13,408,682)
Change in net unrealized appreciation
(depreciation) of investments 91,635,716 88,372,950 52,583,826 36,375,233 10,732,341 5,539,419
-------------------------- ------------------------ --------------------------
Net increase (decrease) in net assets
from operations 167,488,339 37,759,433 102,419,467 8,893,799 25,193,814 (2,766,013)
-------------------------- ------------------------ --------------------------
DISTRIBUTIONS TO PARTNERS
Net investment income -- -- -- -- -- --
-------------------------- ------------------------- --------------------------
TRANSACTIONS IN INTERESTS:
Contributions by partners 107,044,506 77,212,401 113,757,799 76,785,761 15,608,507 32,875,977
Withdrawals by partners (161,495,614) (57,696,150) (79,489,585) (91,624,360) (35,130,807) (42,582,471)
-------------------------- ------------------------- --------------------------
Net increase (decrease) in net assets
from transactions in interests (54,451,108) 19,516,251 34,268,214 (14,838,599) (19,522,300) (9,706,494)
-------------------------- ------------------------- --------------------------
Total increase (decrease)
in net assets 113,037,231 57,275,684 136,687,681 (5,944,800) 5,671,514 (12,472,507)
NET ASSETS:
Beginning of period 471,049,151 413,773,467 283,854,922 289,799,722 106,086,422 118,558,929
-------------------------- ------------------------ --------------------------
End of period $584,086,382 $471,049,151 $420,542,603 $283,854,922 $111,757,936 $106,086,422
-------------------------- ------------------------- --------------------------
-------------------------- ------------------------- --------------------------
</TABLE>
- ---------------------------------
* Commencement of operations on July 12,1995
See Accompanying Notes to the Financial Statements.
APP-12
<PAGE>
<TABLE>
<CAPTION>
MINI-CAP
BALANCED GROWTH FUND GROWTH FUND GOVERNMENT INCOME FUND
-------------------------- ----------- ------------------------
For the For the For the For the For the
Year Year Period Period Year
Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31,
1996 1995 1996* 1996 1995
-------------------------- ----------- ------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (deficit) $638,909 $477,083 ($73,292) $291,713 $365,015
Net realized gain (loss) from
security transactions 2,837,068 (1,500,269) (55,894) 363,388 (447,930)
Change in net unrealized appreciation
(depreciation) of investments 742,010 1,850,658 3,160,251 (175,424) 305,693
-------------------------- ----------- ------------------------
Net increase (decrease) in net assets
from operations 4,217,987 827,472 3,031,065 479,677 222,778
-------------------------- ----------- ------------------------
DISTRIBUTIONS TO PARTNERS
Net investment income -- -- -- -- --
-------------------------- ----------- ------------------------
TRANSACTIONS IN INTERESTS:
Contributions by partners 4,914,004 4,819,959 22,441,390 3,577,045 10,057,391
Withdrawals by partners (7,102,941) (6,527,607) (208,486) (4,912,231) (13,048,663)
Net increase (decrease) in net assets
from transactions in interests (2,188,937) (1,707,648) 22,232,904 (1,335,186) (2,991,272)
-------------------------- ----------- ------------------------
Total increase (decrease)
in net assets 2,029,050 (880,176) 25,263,969 (855,509) (2,768,494)
NET ASSETS:
Beginning of period 21,815,501 22,695,677 -- 5,333,503 8,101,997
-------------------------- ----------- ------------------------
End of period $23,844,551 $21,815,501 $25,263,969 $4,477,994 $5,333,503
-------------------------- ----------- ------------------------
-------------------------- ----------- ------------------------
</TABLE>
<TABLE>
<CAPTION>
Money Market Fund
--------------------------
For the For the
Period Year
Ended Ended
March 31, March 31,
1996 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (deficit) $200,767 $179,428
Net realized gain (loss) from
security transactions (325) 17
Change in net unrealized appreciation
(depreciation) of investments -- --
--------------------------
Net increase (decrease) in net assets
from operations 200,442 179,445
--------------------------
DISTRIBUTIONS TO PARTNERS
Net investment income (200,767) (179,428)
--------------------------
TRANSACTIONS IN INTERESTS:
Contributions by partners 22,251,491 13,398,906
Withdrawals by partners (22,108,039) (10,440,597)
Net increase (decrease) in net assets
from transactions in interests 143,452 2,958,309
--------------------------
Total increase (decrease)
in net assets 143,127 2,958,326
NET ASSETS:
Beginning of period 3,030,720 72,394
--------------------------
End of period $3,173,847 $3,030,720
--------------------------
--------------------------
</TABLE>
See Accompanying Notes to the Financial Statements.
APP-13
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified,
open-end management investment company organized as a Delaware business
trust, is comprised of twelve investment vehicles (each a "Fund" and
collectively the "Funds") as of March 31, 1996. Each Fund has up to five
Portfolios which have invested in the respective series of the Master Trust
to achieve their investment objective.
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
SECURITIES TRANSACTIONS
Equity securities are valued at the last sale price (for exchange-listed
securities) or the mean between the last bid and asked price (if lacking any
sales and for over-the-counter securities). Debt securities generally are
valued at the mean between the last bid and asked prices. Securities with 60
days or less remaining to maturity are valued on an amortized cost basis
which approximates market value.
Securities for which market quotations are not readily available are
valued at fair value determined in good faith by or under the direction of
the Master Trust's Board of Trustees.
Securities transactions are recognized on the trade date. Realized gains
and losses from securities transactions are calculated using the first-in,
first-out method. Dividend income is recognized on the ex-dividend date, and
interest income is recorded on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective
securities. The prospectus for the Nicholas-Applegate Mutual Funds describes
each Fund's policies with respect to declaration and payment of dividends and
distribution of capital gains.
FEDERAL INCOME TAXES
The Funds are treated as partnerships for federal income tax purposes.
Any interest, dividends and gains or losses of a Fund will be deemed to have
been "passed through" to the Portfolios.
DEFERRED ORGANIZATION COSTS
Organization costs incurred by the Master Trust have been allocated to
the various Funds based upon management's best estimate of the costs
applicable to each Fund. These costs have been deferred and will be
amortized over a period of 60 months from the date the Funds commenced
operations.
B. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate") The advisory fee is computed daily for the
Funds based upon the following percentages of each Fund's average daily net
assets:
<TABLE>
<CAPTION>
First $500 Next $500 Excess of
Fund Million Million $1 Billion
- ---- ---------- --------- ----------
<S> <C> <C> <C>
Emerging Growth Fund . . . . . . . . 1.00% 1.00% 1.00%
Core Growth Fund . . . . . . . . . . .75% .675% .65%
Income & Growth Fund . . . . . . . . .75% .675% .65%
Balanced Growth Fund . . . . . . . . .75% .675% .65%
Government Income Fund . . . . . . . .40% .55% .55%
Money Market Fund. . . . . . . . . . .25% .2275% .2275%
Mini-Cap Growth Fund . . . . . . . . 1.25% 1.25% 1.25%
</TABLE>
APP-14
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
Nicholas-Applegate advanced certain organization costs discussed in Note 1.
As of March 31, 1996, the following Funds have amounts due to Nicholas-Applegate
for organizational costs advanced:
Government Income Fund . . . . . . . . . $24,688
Money Market Fund . . . . . . . . . . 24,668
C. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investment securities, other than
short-term obligations, for the period ended March 31, 1996, were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---- --------- ---------
<S> <C> <C>
Emerging Growth Fund . . . . . . . . $641,002 $681,363
Core Growth Fund . . . . . . . . . . 396,795 369,702
Income & Growth Fund . . . . . . . . 141,652 155,568
Balanced Growth Fund . . . . . . . . 36,996 38,861
Government Income Fund . . . . . . . 8,677 9,831
Mini-Cap Growth Fund . . . . . . . . 32,553 11,554
</TABLE>
At March 31, 1996, the net unrealized appreciation (depreciation) based on
the cost of investments for Federal income tax purposes was as
follows (in 000's):
<TABLE>
<CAPTION>
Tax Gross Gross Net
Cost of Unrealized Unrealized Unrealized
Fund Investments Appreciation Depreciation Appreciation
- ---- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Emerging Growth Fund . . . . . . . . $429,286 $170,380 $9,830 $160,550
Core Growth Fund . . . . . . . . . . 336,068 92,924 4,175 88,749
Income & Growth Fund . . . . . . . . 97,317 14,509 244 14,265
Balanced Growth Fund . . . . . . . . 20,630 3,296 552 2,744
Government Income Fund . . . . . . . 4,481 38 112 (74)
Money Market Fund. . . . . . . . . . 3,188 49 578 (529)
Mini-Cap Growth Fund . . . . . . . . 21,715 3,509 373 3,136
</TABLE>
APP-15
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES FOR NICHOLAS-APPLEGATE INVESTMENT TRUST
MARCH 31, 1996
<TABLE>
<CAPTION>
WORLDWIDE INTERNATIONAL EMERGING
GROWTH GROWTH COUNTRIES
FUND FUND FUND
-------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost $83,192,589, $21,228,473,
$19,073,877, respectively) $ 98,325,840 $23,764,098 $20,452,408
Foreign currency
(Cost $1,820,308, $738,051,
$30,774, respectively) 1,820,893 739,804 29,062
Cash 110,721 3,917 22,419
Receivables:
Dividends 282,917 66,466 19,845
Interest -- 352 --
Investment securities sold 2,328,956 860,105 382,934
Interests sold 188,918 44,576 184,515
Due from advisor -- 27,007 29,500
Deferred organization costs 12,927 829 --
Other assets 663 191 2,806
-------------------------------------------
Total assets 103,071,835 25,507,345 21,123,489
-------------------------------------------
LIABILITIES:
Payables:
Investment securities purchased 2,277,497 1,649,877 1,159,097
Interests repurchased 261,296 9,049
Accrued expenses 190,016 51,840 56,357
-------------------------------------------
Total liabilities 2,728,809 1,701,717 1,224,503
-------------------------------------------
NET ASSETS $100,343,026 $23,805,628 $19,898,986
-------------------------------------------
-------------------------------------------
COMPOSITION OF NET ASSETS
Paid-in capital $ 76,264,978 $21,186,125 $18,753,381
Accumulated net investment income 545,343 110,388 48,405
Accumulated net realized gain (loss) 7,494,440 (189,498) (256,470)
Accumulated net realized foreign exchange gain (loss) 907,863 165,204 (24,857)
Net unrealized foreign exchange gain (loss) (2,849) (2,216) 6
Net unrealized appreciation on investments 15,133,251 2,535,625 1,378,521
-------------------------------------------
Net assets $100,343,026 $23,805,628 $19,898,986
-------------------------------------------
-------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
APP-16
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE NICHOLAS-APPLEGATE INVESTMENT TRUST
FOR THE PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
WORLDWIDE INTERNATIONAL EMERGING
GROWTH GROWTH COUNTRIES
FUND FUND FUND
------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 1,303,881 $ 291,589 $ 115,314
Interest 171,883 34,048 48,637
------------------------------------------
Total income 1,475,764 325,637 163,951
------------------------------------------
Expenses:
Advisory fee 980,556 187,128 107,680
Accounting fee 75,052 75,000 69,519
Administration fee 34,149 6,507 2,940
Audit fee 27,488 4,777 2,331
Custodian fee 65,994 57,911 34,923
Insurance 2,381 458 233
Legal fee 1,731 514 179
Miscellaneous 32,555 28,856 15,349
Organization costs 6,313 300 --
Trustees' fee 8,411 8,450 8,450
------------------------------------------
Total expense 1,234,630 369,901 241,604
Less: Reimbursement from advisor (58,228) (117,279) (103,775)
------------------------------------------
Net expenses 1,176,402 252,622 137,829
------------------------------------------
Net investment income (deficit) 299,362 73,015 26,122
------------------------------------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions 8,223,209 61,956 (35,846)
Foreign exchanges 792,348 197,499 (25,318)
Change in net unrealized appreciation of investments
and foreign currencies 9,091,917 2,584,830 1,751,439
------------------------------------------
Net gain (loss) on investments 18,107,474 2,844,285 1,690,275
------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $18,406,836 $2,917,300 $1,716,397
------------------------------------------
------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
APP-17
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE NICHOLAS-APPLEGATE INVESTMENT TRUST
<TABLE>
<CAPTION>
WORLDWIDE GROWTH FUND INTERNATIONAL GROWTH FUND EMERGING COUNTRIES FUND
---------------------------------------------------------------------------------
For the For the For the For the For the For the
Year Year Year Year Year Period
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, March 31,
1996 1995 1996 1995 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $299,362 $240,302 $73,015 $33,806 $26,122 $22,283
Net realized gain (loss) from
security transactions 9,015,557 (1,521,055) 259,455 (323,554) (61,164) (220,163)
Change in net unrealized appreciation of
investments and foreign currencies 9,091,917 277,524 2,584,830 (270,042) 1,751,439 (372,912)
---------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 18,406,836 (1,003,229) 2,917,300 (559,790) 1,716,397 (570,792)
---------------------------------------------------------------------------------
TRANSACTIONS IN INTERESTS:
Contributions by partners 17,650,729 39,169,871 6,044,445 15,092,291 14,432,911 5,244,412
Withdrawals by partners (33,276,911) (30,285,996) (2,768,514) (609,534) (545,565) (1,393,542)
Net increase (decrease) in net
assets from transactions in
interests (15,626,182) 8,883,875 3,275,931 14,482,757 13,887,346 3,850,870
---------------------------------------------------------------------------------
Total increase (decrease) in net
assets 2,780,654 7,880,646 6,193,231 13,922,967 15,603,743 3,280,078
NET ASSETS:
Beginning of period 97,562,372 89,681,726 17,612,397 3,689,430 3,280,078 --
---------------------------------------------------------------------------------
End of period $100,343,026 $97,562,372 $23,805,628 $17,612,397 $18,883,821 $3,280,078
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
APP-18
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified,
open-end management investment company organized as a Delaware business
trust, is comprised of twelve investment vehicles (each a "Fund" and
collectively the "Funds") as of September 30, 1995. Each Fund has up to five
Portfolios which have invested in the respective series of the Master Trust
to achieve their investment objective.
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
SECURITIES TRANSACTIONS
Equity securities are valued at the last sale price (for exchange-listed
securities) or the mean between the last bid and asked price (if lacking any
sales and for over-the-counter securities). Debt securities generally are
valued at the mean between the last bid and asked prices. Securities with 60
days or less remaining to maturity are valued on an amortized cost basis
which approximates market value.
Securities for which market quotations are not readily available are
valued at fair value determined in good faith by or under the direction of
the Master Trust's Board of Trustees.
Securities transactions are recognized on the trade date. Realized gains
and losses from securities transactions are calculated using the first-in,
first-out method. Dividend income is recognized on the ex-dividend date, and
interest income is recorded on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective
securities. The prospectus for the Nicholas-Applegate Mutual Funds describes
each Fund's policies with respect to declaration and payment of dividends and
distribution of capital gains.
FOREIGN CURRENCY TRANSLATION
Foreign currency balances of the Worldwide Growth Fund, International
Growth Fund and Emerging Countries Fund other than the cost of investments,
are translated into U.S. dollar values at the bid price of such currency
against the U.S. dollar last quoted on the valuation date.
Gains and losses on securities transactions resulting from fluctuations
in foreign currency exchange rates are not isolated. The Funds report these
foreign currency related transactions as components of realized and
unrealized gains for financial reporting purposes, whereas such components
are treated as ordinary income for Federal income tax purposes.
FEDERAL INCOME TAXES
The Funds are treated as partnerships for federal income tax purposes.
Any interest, dividends and gains or losses of a Fund will be deemed to have
been "passed through" to the Portfolios.
DEFERRED ORGANIZATION COSTS
Organization costs incurred by the Master Trust have been allocated to
the various Funds based upon management's best estimate of the costs
applicable to each Fund. These costs have been deferred and will be amortized
over a period of 60 months from the date the Funds commenced operations.
APP-19
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
B. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate") The advisory fee is computed daily for the
Funds based upon the following percentages of each Fund's average daily net
assets:
<TABLE>
<CAPTION>
First $500 Next $500 Excess of
Fund Million Million $1 Billion
- ---- ---------- --------- ----------
<S> <C> <C> <C>
Worldwide Growth Fund. . . . . 1.00% 0.90% 0.85%
International Growth Fund. . . 1.00% 0.90% 0.85%
Emerging Countries Fund. . . . 1.25% 1.25% 1.25%
</TABLE>
C. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investment securities, other than
short-term obligations, for the fiscal year ended March 31, 1996, were as
follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---- --------- --------
<S> <C> <C>
Worldwide Growth Fund. . . . . $122,939 $138,332
International Growth Fund. . . 27,846 25,013
Emerging Countries Fund. . . . 23,033 9,294
</TABLE>
At March 31, 1996, the net unrealized appreciation (depreciation) based on
the cost of investments for Federal income tax purposes was as follows
(in 000's):
<TABLE>
<CAPTION>
Tax Gross Gross Net
Cost of Unrealized Unrealized Unrealized
Fund Investments Appreciation Depreciation Appreciation
- ---- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Worldwide Growth Fund. . . . . $83,193 $16,965 $1,831 $15,134
International Growth Fund. . . 21,228 2,765 227 2,538
Emerging Countries Fund. . . . 19,074 1,905 528 1,377
</TABLE>
D. OFF BALANCE SHEET RISKS
The Worldwide Growth, International Growth and Emerging Countries Funds'
investment in foreign securities may entail risks due to the potential of
political and economic instability in the countries where the securities are
being offered. In addition, foreign exchange fluctuations could affect the
value of positions held. It is the Funds' policy to continuously monitor its
exposure to these risks.
APP-20
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES FOR NICHOLAS-INVESTMENT TRUST
MARCH 31, 1996
<TABLE>
<CAPTION>
FULLY SHORT
DISCRETIONARY INTERMEDIATE
FIXED INCOME FIXED INCOME
FUND* FUND*
---------------------------
<S> <C> <C>
ASSETS:
Investments, at value
(Cost $4,520,176 and $4,941,050, respectively) $4,390,611 $4,910,442
Cash 3,974 1,342
Receivables:
Interest accrued 42,197 54,902
Due from advisor 7,381 10,043
Investment securities sold -- 202,125
Other assets 8,975 17,671
Deferred organization costs 1,954 1,954
---------------------------
Total assets 4,455,092 5,198,479
---------------------------
LIABILITIES:
Payable:
Investment securities purchased -- 423,614
Accrued expenses and other liabilities 15,007 13,642
---------------------------
Total liabilities 15,007 437,256
---------------------------
NET ASSETS $4,440,085 $4,761,223
---------------------------
---------------------------
COMPOSITION OF NET ASSETS
Paid-in capital $4,534,476 $4,671,581
Accumulated net investment income 56,158 114,124
Accumulated net realized gain (loss) (21,828) 6,126
Accumulated realized foreign exchange gain 862 --
Net unrealized depreciation on foreign exchange (18) --
Net unrealized depreciation on investments (129,565) (30,608)
---------------------------
Net Assets $4,440,085 $4,761,223
---------------------------
---------------------------
</TABLE>
- ---------------------------------
* Commenced operations on August 31, 1995.
See Accompanying Notes to Financial Statements.
APP-21
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR NICHOLAS-INVESTMENT TRUST
FOR THE PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
FULLY SHORT
DISCRETIONARY INTERMEDIATE
FIXED INCOME FIXED INCOME
FUND* FUND*
---------------------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $59,680 $120,029
---------------------------
Total income 59,680 120,029
---------------------------
Expenses:
Advisory fee 3,962 5,905
Administration fee 290 662
Accounting fee 9,375 9,375
Audit fee 252 590
Custodian fee 3,000 2,853
Insurance 4 49
Legal fee 12 26
Miscellaneous 1,586 2,200
Organization costs 285 286
Trustees' fee 4,838 4,838
Reimbursement from advisor (20,082) (20,879)
---------------------------
Total expenses 3,522 5,905
---------------------------
Net investment income 56,158 114,124
---------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) from security transactions (21,828) 6,126
Net realized gain from foreign exchange 862 --
Change in net unrealized depreciation on foreign exchange (18) --
Change in net unrealized depreciation of investments (129,565) (30,608)
---------------------------
Net loss on investments (150,549) (24,482)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ($94,391) $89,642
---------------------------
---------------------------
</TABLE>
- --------------------------------
* Commenced operations on August 31, 1995.
See Accompanying Notes to Financial Statements.
APP-22
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS CHANGES IN NET ASSETS FOR NICHOLAS-INVESTMENT TRUST
FOR THE PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
FULLY SHORT
DISCRETIONARY INTERMEDIATE
FIXED INCOME FIXED INCOME
FUND* FUND*
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $56,158 $114,124
Net realized gain (loss) on investments (20,966) 6,126
Change in net unrealized depreciation of investments
and foreign currency (129,583) (30,608)
---------------------------
Net increase (decrease) in net assets resulting from operations (94,391) 89,642
---------------------------
Transactions in Interests:
Contributions by partners 4,542,991 4,708,688
Withdrawals by partners (8,515) (37,107)
---------------------------
Net increase in net assets from interest transactions 4,534,476 4,671,581
---------------------------
Total increase in net assets 4,440,085 4,761,223
NET ASSETS:
Beginning of period -- --
---------------------------
End of period $4,440,085 $4,761,223
---------------------------
---------------------------
</TABLE>
- ---------------------------------
* Commenced operations on August 31, 1995.
See Accompanying Notes to Financial Statements.
APP-23
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified,
open-end management investment company organized as a Delaware business
trust, is comprised of twelve investment vehicles (each a "Fund" and
collectively the "Funds") as of March 31, 1996. Each Fund has up to five
Portfolios which have invested in the respective series of the Master Trust
to achieve their investment objective.
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
SECURITIES TRANSACTIONS
Equity securities are valued at the last sale price (for exchange-listed
securities) or the mean between the last bid and asked price (if lacking any
sales and for over-the-counter securities). Debt securities generally are
valued at the mean between the last bid and asked prices. Securities with 60
days or less remaining to maturity are valued on an amortized cost basis
which approximates market value.
Securities for which market quotations are not readily available are
valued at fair value determined in good faith by or under the direction of
the Master Trust's Board of Trustees.
Securities transactions are recognized on the trade date. Realized gains
and losses from securities transactions are calculated using the first-in,
first-out method. Dividend income is recognized on the ex-dividend date, and
interest income is recorded on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective
securities. The prospectus for the Nicholas-Applegate Mutual Funds describes
each Fund's policies with respect to declaration and payment of dividends and
distribution of capital gains.
FEDERAL INCOME TAXES
The Funds are treated as partnerships for federal income tax purposes.
Any interest, dividends and gains or losses of a Fund will be deemed to have
been "passed through" to the Portfolios.
DEFERRED ORGANIZATION COSTS
Organization costs incurred by the Master Trust have been allocated to
the various Funds based upon management's best estimate of the costs
applicable to each Fund. These costs have been deferred and will be
amortized over a period of 60 months from the date the Funds commenced
operations.
B. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate"). Nicholas Applegate is compensated for its
services to the Funds in the form of monthly fees at the following annual
rates: for the Short-Intermediate Fund, 0.30% of the first $250 million of
the Fund's average net assets and 0.25% of average net assets in excess of
$250 million for the Fully Discretionary Fund, 0.45% of the first $500
million of the Fund's average net assets, 0.40% of the next $250 million of
average net assets, and 0.35% of average net assets in excess of $750
million.
APP-24
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
Nicholas-Applegate advanced certain organization costs discussed in
Note 1. As of March 31, 1996, the following Funds have amounts due to
Nicholas-Applegate for organizational costs advanced:
Fully Discretionary Institutional Fixed Income Fund. . . . . . $ 2,240
Short-Intermediate Institutional Fixed Income Fund . . . . . . $ 2,240
C. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investment securities, other than
short-term obligations, for the fiscal year ended March 31, 1996, were as
follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---- --------- -------
<S> <C> <C>
Fully Discretionary Institutional Fixed Income Fund. . . . $11,834 $ 993
Short-Intermediate Institutional Fixed Income Fund . . . . $ 8,394 $3,801
</TABLE>
At March 31, 1996, the net unrealized appreciation (depreciation) based on
the cost of investments for Federal income tax purposes was as
follows (in 000's):
<TABLE>
<CAPTION>
Tax Gross Gross Net
Cost of Unrealized Unrealized Unrealized
Fund Investments Appreciation Depreciation Appreciation
- ---- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fully Discretionary Institutional Fixed Income Fund. . . . $ 4,520 $ 2 132 $ (130)
Short-Intermediate Institutional Fixed Income Fund . . . . 4,941 4 35 (31)
</TABLE>
APP-25
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
Registrant's Statements of Investments as of March 31, 1995,
Statements of Assets and Liabilities as of March 31, 1995, Statements
of Operations for the period ended March 31, 1995, Statements of
Changes in Net Assets for the period ended March 31, 1995, related
Notes, and Independent Accountants' Report dated May 12, 1995, are
included as part of Registrant's Annual Reports for the year ended
March 31, 1995, and are incorporated herein by reference.
Registrant's unaudited Statements of Investments as of March 31, 1996,
Statements of Assets and Liabilities as of March 31, 1996, Statements
of Operations for the period ended March 31, 1996, Statement of
Changes in Operations for the period ended March 31, 1996, and related
notes, are included in Part B.
(b) Exhibits.
1.1 Certificate of Trust of Registrant - filed as Exhibit 1.1 to
Amendment No. 1 to Registrant's Form N-1A Registration Statement
("Amendment No. 1") on March 17, 1993 and incorporated herein by
reference.
1.2 Certificate of Amendment of Certificate of Trust of Registrant -
filed as Exhibit 1.2 to Amendment No. 1 on March 17, 1993 and
incorporated herein by reference.
1.3 Declaration of Trust of Registrant - filed as Exhibit 1 to
Registrant's Form N-1A Registration Statement on December 31,
1992 and incorporated herein by reference.
1.4 Amended and Restated Declaration of Trust of Registrant - filed
as Exhibit 1.4 to Amendment No. 1 on March 17, 1993 and
incorporated herein by reference.
1.5 Certificate of Trustees dated August 6, 1993 establishing
Emerging Growth Fund -- filed as Exhibit 1.5 to Amendment No. 4
to Registrant's Form N-1A Registration Statement ("Amendment No.
4") on September 1, 1993 and incorporated herein by reference.
C-1
<PAGE>
1.6 Certificate of Trustees establishing International Growth Fund --
filed as Exhibit 1.6 to Amendment No. 6 to Registrant's Form N-1A
Registration Statement ("Amendment No. 6") on August 1, 1994 and
incorporated herein by reference.
1.7 Certificate of Trustees establishing Emerging Countries Fund,
Global Growth & Income Fund and Mini-Cap Fund -- filed as Exhibit
1.7 to Amendment No. 7 to Registrant's Form N-1A Registration
Statement ("Amendment No. 7") on December 5, 1994 and
incorporated herein by reference.
1.8 Certificate of Trustees establishing Short-Intermediate and Fully
Discretionary Funds -- filed as Exhibit 1.8 to Amendment No. 9 to
Registrant's Form N-1A Registration Statement ("Amendment No. 9")
on July 31, 1995 and incorporated herein by reference.
1.9 Certificate of Trustees establishing Value Fund.
2 Amended Bylaws of Registrant - filed as Exhibit 2 to
Amendment No. 2 on April 6, 1993 and incorporated herein by
reference.
3 Not applicable.
4 Not applicable.
5.1 Investment Advisory Agreement between Registrant and Nicholas-
Applegate Capital Management dated April 19, 1993 -- filed as
Exhibit 5.1 to Amendment No. 6 on August 1, 1994 and incorporated
herein by reference.
5.2 Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated February 11, 1994, correcting Government
Income Fund fees -- filed as Exhibit 5.2 to Amendment No. 6 on
August 1, 1994 and incorporated herein by reference.
5.3 Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated May 17, 1993 adding Emerging Growth Fund
to Investment Advisory Agreement -- filed as Exhibit 5.3 to
Amendment No. 6 on August 1, 1994 and incorporated herein by
reference.
5.4 Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated December 15, 1993 adding International
Growth Fund to Investment Advisory Agreement -- filed as Exhibit
5.4 to Amendment No. 6 on August 1, 1994 and incorporated herein
by reference.
C-2
<PAGE>
5.5 Letter agreement between Registrant and Nicholas-Applegate
Capital Management adding Emerging Countries, Global Growth &
Income and Mini-Cap Funds to Investment Advisory Agreement --
filed as Exhibit 5.5 to Amendment No. 9 on July 31, 1995 and
incorporated herein by reference.
5.6 Letter agreement between Registrant and Nicholas-Applegate
Capital Management adding Short-Intermediate and Fully
Discretionary Funds to Investment Advisory Agreement -- filed as
Exhibit 5.6 to Amendment No. 9 on July 31, 1995 and incorporated
herein by reference.
5.7 Letter agreement between Registrant and Nicholas-Applegate
Capital Management amending fees paid with respect to Government
Income Fund under Investment Advisory Agreement -- filed as
Exhibit 5.7 to Amendment No. 9 on July 31, 1995 and incorporated
herein by reference.
5.8 Letter Agreement between Registrant and Nicholas-Applegate
Capital Management adding Value Fund to Investment Advisory
Agreement.
6 Not applicable.
7 None.
8.1 Custodian Services Agreement between Registrant and PNC Bank
dated April 1, 1993 -- filed as Exhibit 8.1 to Amendment No. 6 on
August 1, 1994 and incorporated herein by reference.
8.2 Letter agreement between Registrant and PNC Bank dated August 20,
1993 adding Emerging Growth Fund to Custodian Services Agreement
-- filed as Exhibit 8.2 to Amendment No. 5 to Registration
Statement on December 20, 1993 and incorporated herein by
reference.
8.3 Letter agreement between Registrant and PNC Bank adding
International Fund to Custodian Services Agreement -- filed as
Exhibit 8.3 to Amendment No. 1 on August 1, 1994 and incorporated
herein by reference -- filed as Exhibit 8.3 to Amendment No. 6 on
August 1, 1994 and incorporated herein by reference.
8.4 Letter agreement between Registrant and PNC Bank adding Emerging
Countries, Global Growth & Income and Mini-Cap Fund to Custodian
Services Agreement -- filed as Exhibit 8.4 to Amendment No. 9 on
July 31, 1995 and incorporated herein by reference.
C-3
<PAGE>
8.5 Form of letter agreement between Registrant and PNC Bank adding
Short-Intermediate and Fully Discretionary Funds to Custodian
Services Agreement -- filed as Exhibit 8.5 to Amendment No. 9 on
July 31, 1995 and incorporated herein by reference.
8.6 Form of letter agreement between Registrant and PNC Bank adding
Value Fund to Custodian Services Agreement.
8.7 Sub-Custodian Agreement among Registrant, PNC Bank and Chase
Manhattan Bank, N.A. dated April 1, 1993 -- filed as Exhibit 8.5
to Amendment No. 6 on August 1, 1994 and incorporated herein by
reference.
8.8 Letter agreement among Registrant, PNC Bank and Chase Manhattan
Bank, N.A. dated August 20, 1993 adding Emerging Growth Fund to
Sub-Custodian Agreement -- filed as Exhibit 8.6 to Amendment No.
6 on August 1, 1994 and incorporated herein by reference.
8.9 Letter agreement among Registrant, PNC Bank and Chase Manhattan
Bank, N.A., adding International Growth Fund to Sub-Custodian
Agreement -- filed as Exhibit 8.8 to Amendment No. 9 on July 31,
1995 and incorporated herein by reference.
8.10 Letter agreement among Registrant, PNC Bank and Chase Manhattan
Bank, N.A., adding Emerging Countries, Global Growth & Income and
Mini-Cap Funds to Sub-Custodian Agreement -- filed as Exhibit 8.9
to Amendment No. 9 on July 31, 1995 and incorporated herein by
reference.
8.11 Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, adding Short-Intermediate and Fully Discretionary
Funds to Sub-Custodian Agreement -- filed as Exhibit 8.10 to
Amendment No. 9 on July 31, 1995 and incorporated herein by
reference.
8.12 Form of letter agreement among Registrant, PNC Bank, and Chase
Manhattan Bank, adding Value Fund to Sub-Custodian Agreement.
9.1 Administration Agreement between Registrant and Investment
Company Administration Corporation dated April 1, 1993 -- filed
as Exhibit 9.1 to Amendment No. 6 on August 1, 1994 and
incorporated herein by reference.
C-4
<PAGE>
9.2 Accounting Services Agreement between Registrant and PFPC Inc
dated April 1, 1993 -- filed as Exhibit 9.2 to Amendment No. 6 on
August 1, 1994 and incorporated herein by reference.
9.3 Letter agreement between Registrant and PFPC, Inc. dated July 28,
1993 adding Emerging Growth Fund to Accounting Services Agreement
-- filed as Exhibit 9.3 to Amendment No. 6 on August 1, 1994 and
incorporated herein by reference.
9.4 Letter agreement between Registrant and PFPC Inc. dated December
15, 1993 adding International Growth Fund to Accounting Services
Agreement -- filed as Exhibit 9.4 to Amendment No. 6 on August 1,
1994 and incorporated herein by reference.
9.5 Letter agreement between Registrant and PFPC Inc., adding
Emerging Countries Fund to Accounting Services Agreement -- filed
as Exhibit 9.5 to Amendment No. 9 on July 31, 1995 and
incorporated herein by reference.
9.6 Form of letter agreement between Registrant and PRPC Inc. adding
Short-Intermediate and Fully Discretionary Funds to Accounting
Services Agreement -- filed as Exhibit 9.6 to Amendment No. 9 on
July 31, 1995 and incorporated herein by reference.
9.7 Form of letter agreement between Registrant and PFPC Inc. adding
Mini-Cap Fund to Accounting Services Agreement -- filed as
Exhibit 9.7 to Amendment No. 9 on July 31, 1995 and incorporated
herein by reference.
9.8 Form of letter agreement between Registrant and PFPC Inc. adding
Value Fund to Accounting Services Agreement.
9.9 License Agreement between Registrant and Nicholas-Applegate
Capital Management dated December 17, 1992 -- filed as Exhibit
9.6 to Amendment No. 6 on August 1, 1994 and incorporated herein
by reference.
10 Not applicable.
11 Not applicable.
12 Not applicable.
13 None.
14 None.
C-5
<PAGE>
15 None.
16 None.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Substantially all of the outstanding Interests of the Funds are owned
by various series of Nicholas-Applegate Mutual Funds, a Delaware business trust,
as listed in Item 26 below.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1996, the Trust had 39 investors of record, as set
forth in item 15 of Part B.
ITEM 27. INDEMNIFICATION.
Article V of Registrant's Declaration of Trust, included as Exhibit 2
hereto and incorporated herein by reference, provides for the indemnification of
Registrant's trustees, officers, employees and agents.
Indemnification of the Registrant's Investment Adviser and Placement
Agent is provided for, respectively, in Section 8 of the Investment Advisory
Agreement, included as Exhibit 5.1 hereto and incorporated herein by reference,
and Section 5 of the Placement Agent Agreement, included as Exhibit 6 hereto and
incorporated herein by reference.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions. In
no event will Registrant indemnify any of its trustees, officers, employees or
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith or gross negligence in the
C-6
<PAGE>
performance of his duties or by reason of his reckless disregard of the duties
involved in the conduct of his office or under his agreement with Registrant.
Registrant will comply with Rule 484 under the Securities Act of 1933 and
Release 11330 under the Investment Company Act in connection with any
indemnification.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Nicholas-Applegate Capital Management, the Investment Adviser to the
Trust, is a California limited partnership, the general partner of which is
Nicholas-Applegate Capital Management Holdings, L.P. During the two fiscal
years ended December 31, 1995, the Investment Adviser has engaged principally in
the business of providing investment services to institutional and other
clients. All of the additional information required by this Item 28 with
respect to the Investment Adviser is set forth in the Form ADV, as amended, of
Nicholas-Applegate Capital Management (File No. 801-21442), which is
incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
Nicholas-Applegate Securities acts as the exclusive Placement Agent of
Interests of the Trust. The Placement Agent receives no additional compensation
for serving as Placement Agent. The Placement Agent is a California limited
partnership and its general partner is Nicholas-Applegate Capital Holdings,
L.P., a California limited partnership (the "General Partner"). Information is
furnished below with respect to the officers, partners and directors of the
Placement Agent (or its General Partner). The principal business address of
such persons is 600 West Broadway, 30th Floor, San Diego, California 92101,
except as otherwise indicated below.
Name and Principal Positions and Offices with Positions in Offices
Business Address Principal Underwriter with Registrant
- ------------------ ------------------------- --------------------
Arthur E. Nicholas Chairman and President Chairman of the
Board of Trustees
John D. Wylie -- President
Ashley T. Rabun Senior Vice President and Vice President
Assistant Secretary
Thomas Pindelski Chief Financial Officer Chief Financial
Officer
E. Blake Moore, Jr. General Counsel and Secretary
Secretary
C-7
<PAGE>
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 and the rules promulgated thereunder
will be maintained either at the offices of the Registrant (600 West
Broadway, 30th Floor, San Diego, California 92101); the Investment Adviser,
Nicholas-Applegate Capital Management (600 West Broadway, 30th Floor, San Diego,
California 92101); the Administrator, Investment Company Administration
Corporation (4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018); or
the Custodian, PNC Bank (Airport Business Center, International Court 2, 200
Stevens Drive, Lester, Pennsylvania 19113); or the Sub-Custodian, Chase
Manhattan Bank, N.A. (1211 Avenue of the Americas, 33rd Floor, New York, New
York 10036, Attention: Global Custody Division).
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 Interests 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.
Registrant hereby undertakes to furnish each person to whom this
Registration Statement is delivered with a copy of Registrant's latest annual
report to Investors, upon request and without charge.
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Diego, State of California, on the 29th day of April, 1996.
NICHOLAS-APPLEGATE INVESTMENT TRUST
By /S/ E. BLAKE MOORE, JR.
--------------------------------
E. Blake Moore, Jr.
Secretary
C-8
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE INVESTMENT TRUST
AMENDMENT NO. 10 TO
FORM N-1A REGISTRATION STATEMENT
File No. 811-7384
EXHIBIT NO. TITLE OF EXHIBIT
- ----------- ----------------
1.1 Certificate of Trust of Registrant - filed as Exhibit 1.1 to
Amendment No. 1 on March 17,1993 and incorporated herein by
reference.
1.2 Certificate of Amendment of Certificate of Trust of Registrant - filed
as Exhibit 1.2 to Amendment No. 1 on March 17, 1993 and incorporated
herein by reference.
1.3 Declaration of Trust of Registrant - filed as Exhibit 1 to
Registrant's Form N-1A Registration Statement on December 31,
1992 and incorporated herein by reference.
1.4 Amended and Restated Declaration of Trust of Registrant - filed as
Exhibit 1.4 to Amendment No. 1 on March 17, 1993 and incorporated
herein by reference.
1.5 Certificate of Trustees dated August 6, 1993 establishing Emerging
Growth Fund -- filed as Exhibit 1.5 to Amendment No. 4 to Registrants
Form N-1A Registration Statement ("Amendment No. 4") on September 1,
1993 and incorporated herein by reference.
C-9
<PAGE>
1.6 Certificate of Trustees establishing International Growth Fund -
- filed as Exhibit 1.6 to Amendment No. 6 to Registrant's Form N-1A
Registration Statement ("Amendment No. 6") on August 1, 1994 and
incorporated herein by reference.
1.7 Certificate of Trustees establishing Emerging Countries Fund, Global
Growth & Income Fund and Mini-Cap Funds -- filed as Exhibit 1.7 to
Amendment No. 7 on December 5, 1994 and incorporated herein by
reference.
1.8 Certificate of Trustees establishing Short-Intermediate and Fully
Discretionary Fund -- filed as Exhibit 1.8 to Amendment No. 9 to
Registrant's Form N-1A Registration Statement ("Amendment No. 9") on
July 31, 1995 and incorporated herein by reference.
1.9 Certificate of Trustees establishing Value Fund.
2 Amended Bylaws of Registrant - filed as Exhibit 2 to Amendment No. 2
on April 6, 1993 and incorporated herein by reference.
3 Not applicable.
4 Not applicable.
5.1 Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management dated April 19, 1993 -- filed as
Exhibit 5.1 to Amendment No. 6 on August 1, 1994 and incorporated
herein by reference.
5.2 Letter agreement between Registrant and Nicholas-Applegate Capital
Management dated February 11, 1994, correcting Government Income Fund
fees -- filed as Exhibit 5.2 to Amendment No. 6 on August 1, 1994 and
incorporated herein by reference.
5.3 Letter agreement between Registrant and Nicholas-Applegate Capital
Management dated May 17, 1993 adding Emerging Growth Fund to
Investment Advisory Agreement -- filed as Exhibit 5.3 to Amendment No.
6 on August 1, 1994 and incorporated herein by reference.
C-10
<PAGE>
5.4 Letter agreement between Registrant and Nicholas-Applegate Capital
Management dated December 15, 1993, adding International Growth Fund
to Investment Advisory Agreement-- filed as Exhibit 5.4 to Amendment
No. 6 on August 1, 1994 and incorporated herein by reference.
5.5 Letter agreement between Registrant and Nicholas-Applegate Capital
Management adding Emerging Countries, Global Growth & Income and
Mini-Cap Funds to Investment Advisory Agreement -- filed as Exhibit
5.5 to Amendment No. 9 on July 31, 1995 and incorporated herein by
reference.
5.6 Letter agreement between Registrant and Nicholas-Applegate Capital
Management adding Short-Intermediate and Fully Discretionary Funds to
Investment Advisory Agreement -- filed as Exhibit 5.6 to Amendment No.
9 on July 31, 1995 and incorporated herein by reference.
5.7 Letter agreement between Registrant and Nicholas-Applegate Capital
Management amending fees paid with respect to Government Income Fund
under Investment Advisory Agreement -- filed as Exhibit 5.7 to
Amendment No. 9 on July 31, 1995 and incorporated herein by reference.
5.8 Letter agreement between Registrant and Nicholas-Applegate Capital
Management adding Value Fund to Investment Advisory Agreement.
6 Not Applicable.
C-11
<PAGE>
7 None.
8.1 Custodian Services Agreement between Registrant and PNC Bank dated
April 1, 1993 -- filed as Exhibit 8.1 to Amendment No. 6 on August 1,
1994 and incorporated herein by reference.
8.2 Letter agreement between Registrant and PNC Bank dated August 20, 1993
adding Emerging Growth to Custodian Services Agreement -- filed as
Exhibit 8.2 to Amendment No. 5 to Registration Statement on December
20, 1993 and incorporated herein by reference.
8.3 Letter agreement between Registrant and PNC Bank adding International
Fund to Custodian Services Agreement -- filed as Exhibit 8.3 to
Amendment No. 6 on August 1, 1994 and incorporated herein by
reference.
8.4 Letter agreement between Registrant and PNC Bank
C-12
<PAGE>
adding Emerging Countries, Global Growth & Income and Mini-Cap Funds
to Custodian Services Agreement -- filed as Exhibit 8.4 to Amendment
No. 9 on July 31, 1995 and incorporated herein by reference.
8.5 Form of Letter agreement between Registrant and PNC Bank adding
Short-Intermediate and Fully Discretionary Funds to Custodian Services
Agreement -- filed as Exhibit 8.5 to Amendment No. 9 on July 31, 1995
and incorporated herein by reference.
8.6 Form of letter agreement between Registrant and PNC Bank adding Value
Fund to Custodian Services Agreement.
C-13
<PAGE>
8.7 Sub-Custodian Agreement among Registrant, PNC Bank and Chase Manhattan
Bank, N.A. dated April 1, 1993 -- filed as Exhibit 8.5 to Amendment
No. 6 on August 1, 1994 and incorporated herein by reference.
8.8 Letter agreement among Registrant, PNC Bank and Chase Manhattan Bank,
N.A. dated August 20, 1993 adding Emerging Growth Fund to
Sub-Custodian Agreement -- filed as Exhibit 8.6 to Amendment No. 6 on
August 1, 1994 and incorporated herein by reference.
8.9 Letter agreement among Registrant, PNC Bank and Chase Manhattan Bank,
N.A., adding International Growth Fund to Sub-Custodian Agreement --
filed as Exhibit 8.8 to Amendment No. 9 on July 31, 1995 and
incorporated herein by reference.
8.10 Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, N.A., adding Emerging Countries, Global Growth &
Income and Mini-Cap Funds to Sub-Custodian Agreement -- filed as
Exhibit 8.8 to Amendment No. 7 on December 5, 1994 and incorporated
herein by reference.
8.11 Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, adding Short-Intermediate and Fully Discretionary
Funds to Sub-Custodian Agreement -- filed as Exhibit 8.10 to Amendment
No. 9 and incorporated herein by reference.
8.12 Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, adding Value Fund to Sub-Custodian Agreement.
9.1 Administration Agreement between Registrant and Investment Company
Administration Corporation dated April 1, 1993 -- filed as Exhibit 9.1
to Amendment No. 6 on August 1, 1994 and incorporated herein by
reference.
9.2 Accounting Services Agreement between Registrant and PFPC Inc dated
April 1, 1993 -- filed as Exhibit 9.2 to Amendment No. 6
C-14
<PAGE>
on August 1, 1994 and incorporated herein by reference.
9.3 Letter agreement between Registrant and PFPC, Inc. dated July 28, 1993
adding Emerging Growth Fund to Accounting Services Agreement -- filed
as Exhibit 9.3 to Amendment No. 6 on August 1, 1994 and incorporated
herein by reference.
9.4 Letter agreement between Registrant and PFPC Inc. dated December 15,
1993 adding International Growth Fund to Accounting Services Agreement
-- filed as Exhibit 9.4 to Amendment No. 6 on August 1, 1994 and
incorporated herein by reference.
9.5 Letter agreement between Registrant and PFPC Inc. adding Emerging
Countries Fund to Accounting Services Agreement -- filed as Exhibit
9.5 to Amendment No. 9 on July 31, 1995 and incorporated herein by
reference.
9.6 Form of letter agreement between Registrant and PFPC Inc., adding
Short-Intermediate and Fully Discretionary Funds to Accounting
Services Agreement --filed as Exhibit 9.6 to Amendment No. 9 on July
31, 1995 and incorporated herein by reference.
9.7 Form of letter agreement between Registrant and PFPC Inc. adding
Mini-Cap Fund to Accounting Services Agreement -- filed as Exhibit 9.7
to Amendment No. 9 on July 31, 1995 and incorporated herein by
reference.
9.8 Form of letter agreement between Registrant and PFPC Inc. adding Value
Fund to Accounting Services Agreement.
9.9 License Agreement between Registrant, and Nicholas-Applegate Capital
Management dated December 17, 1992 -- filed as Exhibit 9.6 to
Amendment No. 6 on August 1, 1994 and incorporated herein by
reference.
C-15
<PAGE>
10 Not applicable.
11 Not applicable.
12 Not applicable.
13 None.
14 None.
15 None.
16 None.
C-16
<PAGE>
Exhibit 1.9
NICHOLAS-APPLEGATE INVESTMENT TRUST
ESTABLISHMENT OF ADDITIONAL SERIES
The undersigned, constituting a majority of the Trustees of Nicholas-
Applegate Investment Trust, a Delaware business trust, hereby establish the
following additional series of Interests of the Trust pursuant to Section 9.8 of
the Amended and Restated Declaration of Trust:
Value Fund
IN WITNESS WHEREOF, the undersigned have executed this instrument as
of February 23, 1996.
s/Arthur E. Nicholas
____________________________
Arthur E. Nicholas
s/Dann V. Angeloff
_____________________________
Dann V. Angeloff
s/Walter E. Auch
_____________________________
Walter E. Auch
s/Darlene T. DeRemer
_____________________________
Darlene T. DeRemer
____________________________
George F. Keane
s/Theodore J. Coburn
____________________________
Theodore J. Coburn
C-17
<PAGE>
Exhibit 5.8
March 31, 1996
Nicholas-Applegate Investment Trust
600 West Broadway, 30th Floor
San Diego, California 92101
Nicholas-Applegate Capital Management
600 West Broadway, 30th Floor
San Diego, California 92101
Ladies and Gentlemen:
This will confirm our agreement that the Investment Advisory Agreement
between us dated April 19, 1993, as amended, is further amended by adding the
Value Fund series as a Fund thereunder. The annual advisory fee with respect to
the Value Fund series shall be 0.75% of the Fund's average daily net assets.
In all other respects, the Investment Advisory Agreement, as
previously amended, will remain in full force and effect. Please sign this
letter below to confirm your agreement with this amendment.
Very truly yours,
-----------------------
E. Blake Moore, Jr.
Secretary
AGREED:
Nicholas-Applegate Capital Management
By: Nicholas-Applegate Capital
Management Holdings, L.P., its
General Partner
By: Nicholas-Applegate Capital
Management Holdings, Inc., its
General Partner
By:
------------------------------
E. Blake Moore, Jr.
C-18
<PAGE>
Secretary
C-19
<PAGE>
Exhibit 8.6
March 31, 1996
Nicholas-Applegate Investment Trust
600 West Broadway, 30th Floor
San Diego, California 92101
PNC Bank, National Association
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Custodian Services Agreement between us dated
April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, this will confirm that we wish
to appoint you to provide custodian services under the Agreement to our newly
established Value Fund.
Please indicate your acceptance of this appointment by signing the
letter below and returning a copy to us. Thank you for your assistance
regarding this matter.
Very truly yours,
E. Blake Moore, Jr.
Secretary
APPOINTED ACCEPTED:
PNC BANK, NATIONAL ASSOCIATION
By:
------------------------------
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<PAGE>
Title:
---------------------------
C-21
<PAGE>
Exhibit 8.12
March 31, 1996
Nicholas-Applegate Investment Trust
600 West Broadway, 30th Floor
San Diego, California 92101
The Chase Manhattan Bank, N.A.
1211 Avenue of the Americas, 32nd Floor
New York, New York 10036
Attention: Global Custody Division
PNC Bank, National Association
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Sub-Custodian Agreement dated as of April 1,
1993 among Nicholas-Applegate Investment Trust and you (the "Agreement").
Pursuant to Appendix A to the Agreement, we wish to add the Value Fund
to the Agreement. Please indicate your acceptance of this addition by signing
two copies of this letter below and returning them to us. Thank you for your
assistance regarding this matter.
Very truly yours,
E. Blake Moore, Jr.
Secretary
AGREED:
PNC BANK, NATIONAL ASSOCIATION
By:
------------------------------
Title:
---------------------------
(SIGNATURES CONTINUED ON NEXT PAGE)
C-22
<PAGE>
THE CHASE MANHATTAN BANK, N.A.
By:
------------------------------
Title:
---------------------------
C-23
<PAGE>
Exhibit 9.8
March 31, 1996
Nicholas-Applegate Investment Trust
600 West Broadway, 30th Floor
San Diego, California 92101
PFPC INC.
103 Bellevue Parkway
Wilmington, Delaware 19809
Ladies and Gentlemen:
Reference is made to the Accounting Services Agreement between us
dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, we wish to add the Value Fund
to the Agreement.
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Very truly yours,
E. Blake Moore, Jr.
Secretary
APPOINTED ACCEPTED:
PFPC, INC.
By:
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Title:
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C-24
