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As filed with the Securities and Exchange Commission on August 7, 1997
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. 13
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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 LLP
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 Small Cap 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 High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate Money Market Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Large Cap Growth 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 eighteen 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 Small Cap Growth Fund (the "International Small
Cap 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
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Fully Discretionary Fixed Income Fund (the "Fully Discretionary Fund"),
Nicholas-Applegate Value Fund (the "Value Fund"), Nicholas-Applegate High Yield
Bond Fund (the "High Yield Bond Fund"), Nicholas-Applegate Strategic Income Fund
(the "Strategic Income Fund"), Nicholas-Applegate Money Market Fund (the "Money
Market Fund"), Nicholas-Applegate Large Cap Growth Fund (the "Large Cap Growth
Fund"), and Nicholas-Applegate International Core Growth Fund (the
"International Core Growth Fund"). The assets of the Funds are managed by
Nicholas-Applegate Capital Management (the "Investment Adviser").
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 Index"). 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 at the time of purchase). 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
are invested primarily in preferred and 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
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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 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 at the time of
purchase). 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
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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 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 or
open-end country funds. Under normal market conditions, the Fund may invest up
to 35% of its total assets in securities of U.S. companies. In addition, 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 and securities convertible into equity 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.
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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.
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 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, its agencies and instrumentalities. 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
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Fund's total assets will be invested in income-producing convertible securities
and debt securities, and a minimum of 25% of the Fund's total assets will be
invested in 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 & 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, up to 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. 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
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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, except
that the Balanced Fund currently intends to invest primarily in companies with
market capitalizations above $100 million at the time of purchase. See "Core
Growth Fund" above 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 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. Under normal market conditions, the Fund may invest up to 50% of its
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. Countries in which
investment opportunities will be sought include Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Malaysia, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, the United
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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 or
open-end country funds. An investment in such funds may result 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 "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 SMALL CAP FUND
The International Small Cap Fund seeks to maximize long-term capital
appreciation. Assets of the International Small Cap Fund are invested in the
same types of securities as the Worldwide Fund, except that the International
Small Cap Fund emphasizes companies in the bottom 75% of publicly traded
companies as measured by capitalization in each country, and may invest up to
35% of its total assets 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 small
capitalization 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.
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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
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 Small Cap Fund. 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 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
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portfolio duration (expected life) generally from three to six years. The Fund
may invest in 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 non-agency mortgage-related
securities (including collateralized mortgage obligations), domestic and foreign
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
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of mortgage pass-through securities. In such instances, the Investment Adviser
will use more 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, or equivalent ratings by other recognized rating agencies, or may
be unrated if determined by the Investment Adviser to be of comparable quality.
However, a portion (less than 20%) 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 series is
stronger than would otherwise be indicated by such low ratings or the lack
thereof. See "Income & Growth
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Fund" above and "Investment Policies and Strategies" for a discussion of the
risks associated with investment in junk bonds.
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.
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
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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. However, a portion (less than 20%) 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.
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.
HIGH YIELD BOND FUND
The investment objective of the High Yield Bond Fund is to seek income
and capital growth. The High Yield Bond Fund invests primarily in domestic and
foreign debt instruments,
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convertible securities, and common and preferred stocks. The Fund has broad
flexibility to invest in instruments of any type or quality, but the Investment
Adviser expects to invest principally in debt instruments and convertible
securities with an emphasis on lower-quality securities. 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.
The High Yield Bond Fund may invest in a broad range of fixed-income
securities denominated in the U.S. dollar and foreign currencies, including
bonds, notes, mortgage-backed securities and other real estate-related
instruments, asset-backed securities, and direct debt instruments, 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, floating or deferred basis. Under normal market conditions,
at least 65% of the Fund's total assets will be invested in high-yield bonds.
The Fund is not constrained as to the maximum maturity of its portfolio
securities. The High Yield Bond Fund may invest without limitation 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. These
debt securities, commonly referred to as "junk bonds," are speculative and
subject to greater risk of loss of income and principal than higher rate
securities, and may be in default at the time they are purchased by the Fund.
See "Income & Growth Fund" above and "Investment Policies and Strategies" for a
description of the risks associated with investment in junk bonds.
The High Yield Bond Fund may invest a portion of its assets (no more
than 35% of its total assets) in equity securities of U.S. and foreign
companies. Such companies may be in the earlier stages 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 in
investments in companies of any particular size, it currently intends to invest
principally in companies with capitalizations of at least $100 million at the
time of purchase. See "Investment Policies and Strategies" for a description of
the Fund's investment securities and techniques and associated risks.
The High Yield Bond Fund may invest in securities issued by companies
based or operating in any country, including the United States. The Fund is not
driven by allocation considerations with respect to any particular countries,
geographic regions or economic sectors. See "Worldwide Fund" above and
"Investment Policies and Strategies" for a description of the risks associated
with investment in foreign securities and emerging market countries.
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When investing in foreign securities, the High Yield Bond Fund intends
to invest principally in foreign 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).
The High Yield Bond Fund may adopt a temporary defensive position
during adverse market conditions by investing principally 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, and high quality
preferred stocks.
STRATEGIC INCOME FUND
The investment objective of the Strategic Income Fund is to seek a
high level of current income.
The Strategic Income Fund invests principally in three domestic and
foreign market sectors: convertible securities; lower-rated, high yield debt
securities; and mortgage-backed securities, including collateralized mortgage
obligations. Under normal market conditions, the Fund will invest in each of
these three sectors, but from time to time the Investment Adviser will adjust
the amount the Fund invests in each sector. By investing in all three sectors,
the Fund seeks to reduce the volatility of fluctuations in its net asset value
per share, because the overall securities price and interest rate movements in
each of the sectors are not necessarily correlated with each other. Changes in
one sector may be offset by changes in another sector that moves in a different
direction. However, the Fund may invest up to 100% of its assets in any one
sector if the Investment Adviser believes that in doing so the Fund can achieve
its objective without undue risk.
The Strategic Income Fund may invest in a broad range of fixed-income
securities, including bonds, notes and mortgage-backed securities, asset-backed
securities, and direct debt instruments, issued by domestic and foreign
corporations and other entities, and sovereign debt securities of U.S. and
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. The Fund will acquire listed or actively
traded securities of foreign issuers which are denominated in foreign currencies
considered to fully exchangeable into U.S. dollars, in the same manner as
described above for the High Yield Bond Fund. The average maturity of the
Fund's portfolio will be adjusted as the Investment Adviser determines market
conditions warrant. The Fund is not constrained as to the maturity of its
individual portfolio securities or its overall portfolio.
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The Strategic Income Fund may invest without limitation 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. These debt
securities, commonly referred to as "junk bonds," are speculative and subject to
greater risk of loss of income and principal than higher rated securities, and
may be in default at the time they are purchased by the Fund. See "Income &
Growth Fund" above and "Investment Policies and Strategies" for a description of
junk bonds.
The Strategic Income Fund may adopt a temporary defensive position
during adverse market conditions by investing principally 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.
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
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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 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.
LARGE CAP GROWTH FUND
The Large Cap Growth Fund seeks long-term capital appreciation by
investing primarily in equity securities of U.S. companies with larger market
capitalizations (above $3 billion). Equity securities include common stocks,
preferred stocks, warrants, and debt securities that are convertible into common
stocks. The portion of the Portfolio's total assets invested in common stock,
preferred stock, warrants and convertible securities will vary according to the
Investment Adviser's assessment of market and economic conditions and outlook.
The Investment Adviser's stock selection emphasizes those common stocks that the
Investment Adviser expects to grow at a rate greater than the market in general,
as measured by the S&P 500 Index.
Under normal conditions, at least 65% of the Fund's total assets will
be invested in domestic and foreign equity securities of large capitalization
companies. The remainder of the assets may be invested in investment grade
corporate debt securities, U.S. Government securities, and various other
securities and instruments described in "Investment Policies and Strategies"
below. The Fund may invest up to 30% 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 investments in foreign securities. The debt securities in which
the Fund may invest will be rated at the time of purchase "Baa" or higher by
Moody's, "BBB" or higher by S&P, or equivalent ratings by other recognized
agencies, or will be unrated if determined by the Investment Adviser to be of
comparable quality. See "Core Growth Fund" above for a discussion of investment
grade securities. The Investment Adviser will evaluate securities downgraded
below investment grade on a case by case basis to determine whether the security
continues to be an acceptable investment. If not, the Fund will sell the
security as promptly as practicable. The Fund will not apply rating limitations
to convertible debt securities.
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INTERNATIONAL CORE GROWTH FUND
The International Core Growth Fund seeks long-term capital
appreciation. Assets of the Fund are invested primarily in a diversified
portfolio of equity securities of companies throughout the world with larger
market capitalizations (generally companies in each country whose market
capitalizations are in the top 75% of publicly traded securities as measured
by capitalization in that country). Equity securities include common stocks,
preferred stocks, debt securities that are convertible into common stocks, and
warrants. The portion of the Portfolio's total assets invested in common stock,
preferred stock, warrants, and convertible securities will vary according to the
Investment Adviser's assessment of market and economic conditions and outlook.
The 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 total assets will be invested in securities
of issuers located in at least three countries other than the United States.
Under normal market conditions, the Fund may invest up to 35% of its 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. Countries in which investment
opportunities will be sought are the same as the Worldwide Fund. See
"Investment Policies and Strategies" for a discussion of the risks associated
with investing 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,
warrants and securities convertible into equity securities). The remainder of
the Fund's assets will be invested primarily 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 debt securities in which the fund
may invest will be the same as those in which the Large Cap Growth Fund may
invest. 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.
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
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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, the Fully Discretionary Fund, the High Yield Bond Fund
and the Strategic Income 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) will result in a
Fund paying greater brokerage commissions on equity securities (other than those
effected with dealers on a principal basis) than would otherwise be the case,
which will be borne directly by the Fund and ultimately by the Investors. High
portfolio turnover should not result in any Fund paying greater brokerage
commissions on debt securities, as most transactions in debt securities are
effected with dealers on a principal basis. However, debt securities, as well
as equity securities traded on a principal basis, are subject to a mark-up by
the dealers. High portfolio turnover 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.
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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 for all Funds except the Strategic Income Fund, which
may borrow up to 50% of the value of its net assets from banks for such purposes
or to buy securities).
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 retain cash (U.S. dollars and, in some cases,
foreign currencies or multinational currency units) and make 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 Small Cap, Core Growth, International Small
Cap and Global Growth Funds, foreign currencies or multinational currency units)
and short-term investments. 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 retain cash and make short-term investments without
restriction 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. The High Yield Bond Fund may also invest in high quality preferred
stocks for such purposes. 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
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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.
The Emerging Countries, Worldwide, International Small Cap, Global
Growth and International Core Growth Funds may invest in sovereign debt
securities of foreign 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, HIGH YIELD BOND,
STRATEGIC INCOME AND MONEY MARKET FUNDS)
The Short-Intermediate, Fully Discretionary, High Yield Bond and
Strategic Income 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, and in the case of
the High Yield Bond and Strategic Income Funds, foreign governments and their
agencies and instrumentalities. For example, U.S. 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.
The High Yield Bond and Strategic Income Funds may also invest in zero
coupon corporate securities, which are similar to U.S. Government zero coupon
securities but are issued by companies. They have an additional risk that the
issuing company may fail to pay interest or repay principal on the obligations.
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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, domestic branches of foreign
banks and domestic savings and loan associations, and in similar instruments
issued by foreign banks, foreign branches of domestic banks, and foreign
branches of foreign banks, each of which at the date of investment has capital,
surplus and undivided profits as of the date of its 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 Trust's Board of Trustees, has determined to be of minimal credit risk
and comparable quality. The High Yield Bond Fund may also invest in such
commercial paper issued by foreign entities. Commercial paper consists of
short-term, unsecured promissory notes issued to finance short-term credit
needs.
VARIABLE RATE DEMAND SECURITIES (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
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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 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)
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.
The High Yield Bond and Strategic Income Funds may also invest in
loans and other direct debt instruments, which are interests in amounts owed to
another party by a company, government, or other borrower. These investments
may be interests in, or assignments of, a
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loan and may be acquired from banks or brokers that have made the loan or are
members of a lending syndicate. No more than 5% of the net assets of either the
High Yield Bond or Strategic Income Fund will be invested in direct debt
instruments of the same borrower. In addition, such instruments are subject to
the Funds' limitations on investments in illiquid securities. Such instruments
have additional risks beyond conventional debt securities, because they may
entail less legal protection for the Fund or there may be a requirement that the
Fund supply additional cash to a borrower on demand.
CONVERTIBLE SECURITIES AND WARRANTS (ALL FUNDS OTHER THAN THE MONEY
MARKET FUND)
All Funds other than the Money Market Funds may invest in securities
which may be exchanged for, converted into, or exercised to acquire a
predetermined number of shares of the issuer's common stock at the option of the
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 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.
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.
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Warrants 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.
SYNTHETIC CONVERTIBLE SECURITIES (INCOME & GROWTH, GLOBAL GROWTH, HIGH
YIELD BOND, STRATEGIC INCOME, VALUE, LARGE CAP GROWTH AND
INTERNATIONAL CORE GROWTH FUNDS)
The Income & Growth, Global Growth, High Yield Bond, Strategic Income,
Value, Large Cap Growth and International Core Growth 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, 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 the Large Cap Growth Fund only invests in synthetic
convertibles with respect to companies whose corporate debt securities are rated
investment grade by Moody's or S&P, or an equivalent rating by any other NRSRO,
and no Fund will invest more than 15% of its net assets in such synthetic
securities and other illiquid securities. See "Illiquid Securities" below.
EURODOLLAR CONVERTIBLE SECURITIES (WORLDWIDE, INTERNATIONAL SMALL
CAP, EMERGING COUNTRIES, GLOBAL GROWTH, INCOME & GROWTH, HIGH YIELD
BOND, STRATEGIC INCOME, AND INTERNATIONAL CORE GROWTH FUNDS)
Each of the Worldwide, International Small Cap, Emerging Countries,
Global Growth, Income & Growth, High Yield Bond, Strategic Income and
International Core 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
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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 Exchange or convertible into or exchangeable for publicly traded common
stock of U.S. companies. The Income & Growth, High Yield Bond and Strategic
Income Funds may also invest up to 15% of its total assets invested 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.
JUNK BOND CONSIDERATIONS (INCOME & GROWTH, BALANCED, HIGH YIELD BOND,
STRATEGIC INCOME, FULLY DISCRETIONARY AND GLOBAL GROWTH FUNDS)
The Income & Growth, Balanced, High Yield Bond, Strategic Income,
Fully Discretionary and Global Growth Funds may invest 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. Such legislation could have a material adverse effect on the market for,
and prices of, securities.
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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 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
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follows for the year ended March 31, 1996: AA - 1.68% and 0%; A - 7.61% and
0.52%; BBB - 8.72% and 3.26%; BB - 10.53% and 4.24%; B - 1.68% and 7.22%;
CCC - 0.22% and 0.88%; nonrated - 11.49% and 1.64%.
MORTGAGE-BACKED SECURITIES (ALL FUNDS OTHER THAN THE VALUE, EMERGING
COUNTRIES, INTERNATIONAL SMALL CAP, LARGE CAP GROWTH AND INTERNATIONAL
CORE GROWTH FUNDS)
Each of the Short-Intermediate and Fully Discretionary Funds may
invest in mortgage-backed securities, and each of the High Yield Bond and
Strategic Income Funds may invest in U.S. 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, Fully Discretionary, High Yield
Bond and Strategic Income 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.
Each of the other Funds (except the Value, Emerging Countries,
International Small Cap, Large Cap Growth and International Core Growth 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
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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, FULLY DISCRETIONARY, HIGH YIELD
BOND AND STRATEGIC INCOME FUNDS)
The Government, Short-Intermediate, Fully Discretionary, High Yield
Bond and Strategic Income Funds may invest in collateralized mortgage
obligations ("CMOs"), which are multiple class mortgage-backed securities, and
the High Yield Bond and Strategic Income Funds may also invest in stripped
mortgage-back securities. Some of these securities may have a structure that
makes their reaction to interest rates and other factors difficult to predict,
making their value highly volatile. These securities may also be subject to
prepayment risk. 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).
OTHER REAL ESTATE-RELATED INSTRUMENTS (HIGH YIELD BOND AND STRATEGIC
INCOME FUNDS)
Each of the High Yield Bond and Strategic Income Funds may invest in
real estate-related instruments such as securities of real estate investment
trusts and real estate financings. Real estate-related instruments are
sensitive to factors such as changes in real estate values and property taxes,
interest rates, cash flow of underlying real estate assets, overbuilding, and
the management skill and creditworthiness of the issue. Real estate-related
instruments may also be affected by tax and regulatory requirements, such as
those relating to the environment.
ASSET-BACKED SECURITIES (SHORT INTERMEDIATE, FULLY DISCRETIONARY, HIGH
YIELD BOND AND STRATEGIC INCOME FUNDS)
The Short-Intermediate and Fully Discretionary Funds may invest in
asset-backed securities, and the High Yield Bond and Strategic Income Funds may
invest in U.S. 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
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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 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 (ALL FUNDS OTHER THAN THE GOVERNMENT AND MONEY
MARKET FUNDS)
Each of the Funds other than the Government and Money Market Funds
may invest in equity securities including common stocks, preferred stocks,
convertible securities and warrants. Common stocks, the most familiar type of
equity securities, represent an equity (ownership) interest in a corporation.
Preferred stock, unlike common stock, offers a stated dividend rate payable from
the issuer's earnings and also generally has a preference over common stock in
the event of liquidation of the issuer. See "Convertible Securities and
Warrants" for a description of convertible securities and warrants. The Fund
may invest in equity securities of growth companies, cyclical companies,
companies with small market capitalizations or companies believed to be
undergoing a basic change in operations or markets which could result in a
significant improvement in earnings. Although equity securities have a history
of long term growth in value, their prices fluctuate based on changes in the
issuer's financial condition and prospects and on overall market and economic
conditions.
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INDEX AND CURRENCY-LINKED SECURITIES (HIGH YIELD BOND AND STRATEGIC
INCOME FUNDS)
Each of the High Yield Bond and Strategic Income Funds may invest in
"index-linked" or "commodity-linked" notes, which are debt securities of
companies that call for interest payments and/or payments at maturity in
different term than the typical note where the borrower agrees to make fixed
interest payments and to pay a fixed sum at maturity. Principal and/or interest
payments on an index-linked note depend on the performance of one or more market
indices, such as the S&P 500 Index or a weighted index of commodity futures such
as crude oil, gasoline and natural gas. The Funds may also invest in "equity
linked" and "currency-linked" debt securities. At maturity, the principal
amount of an equity-linked debt security is exchanged for common stock of the
issuer or is payable in an amount based on the issuer's common stock price at
the time of maturity. Currency-linked debt securities are short-term or
intermediate term instruments having a value at maturity, and/or an interest
rate, determined by reference to one or more foreign currencies. Payment of
principal or periodic interest may be calculated as a multiple of the movement
of one currency against another currency, or against an index.
Index and currency-linked securities are derivative instruments which
may entail substantial risks. Such instruments may be subject to significant
price volatility. The company issuing the instrument may fail to pay the amount
due on maturity. The underlying investment or security may not perform as
expected by the Investment Adviser. Markets, underlying securities and indexes
may move in a direction that was not anticipated by the Investment Adviser.
Performance of the derivatives may be influenced by interest rate and other
market changes in the U.S. and abroad. Certain derivative instruments may be
illiquid. See "Illiquid Securities" below.
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 Value, International Core Growth, Emerging
Countries, Worldwide, International Small Cap, Large Cap Growth, Global Growth,
Short-Intermediate, Fully Discretionary, High Yield Bond and Strategic Income
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.
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EURODOLLAR AND YANKEE DOLLAR SECURITIES ( SHORT-INTERMEDIATE, FULLY
DISCRETIONARY, HIGH YIELD BOND AND STRATEGIC INCOME FUNDS)
Each of the Short-Intermediate , Fully Discretionary, High Yield Bond
and Strategic Income 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. Certain of the
Funds may also invest in Eurodollar convertible securities, as described above.
FOREIGN INVESTMENT CONSIDERATIONS (ALL FUNDS OTHER THAN THE LARGE CAP
GROWTH, GOVERNMENT AND MONEY MARKET FUNDS)
There are special risks associated with the Funds' 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.
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SPECIAL CONSIDERATIONS REGARDING EMERGING MARKETS INVESTMENTS
(EMERGING COUNTRIES, WORLDWIDE, INTERNATIONAL SMALL CAP, GLOBAL
GROWTH, MINI-CAP, HIGH YIELD BOND, STRATEGIC INCOME, AND INTERNATIONAL
CORE GROWTH FUNDS)
Investments by the Funds 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 High Yield Bond, Strategic
Income and International Core Growth Funds may invest without limitation in
emerging markets; and the Worldwide, International Small Cap 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 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.
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 debt or equity 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, FULLY
DISCRETIONARY, HIGH YIELD BOND AND STRATEGIC INCOME FUNDS)
Each of the Government, Short-Intermediate, Fully Discretionary, High
Yield Bond and Strategic Income 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.
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Nonetheless, roll transactions are speculative techniques and are considered
borrowings by the Funds for purposes of the percentage limitations applicable to
borrowings. See "Borrowings" below. Each Fund will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities and other liquid debt and equity securities 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,
INTERNATIONAL SMALL CAP, HIGH YIELD BOND, STRATEGIC INCOME AND
INTERNATIONAL CORE GROWTH 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, International Small Cap,
High Yield Bond, Strategic Income and International Core Growth 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,
International Small Cap, High Yield Bond, Strategic Income, and International
Core Growth 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
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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.
If the Core Growth, Emerging Growth, Mini-Cap, Worldwide,
International Small Cap, High Yield Bond, Strategic Income, or International
Core Growth 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, U.S. Government securities or other liquid debt or equity
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 such collateral
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 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. Each Fund will comply with these requirements. In
addition, 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 SMALL CAP, GLOBAL GROWTH, GOVERNMENT, FULLY
DISCRETIONARY, HIGH YIELD BOND, STRATEGIC INCOME AND INTERNATIONAL
CORE GROWTH FUNDS)
Since the Emerging Countries, Worldwide, International Small Cap,
Global Growth, Government, Fully Discretionary, High Yield Bond, Strategic
Income and International Core Growth Funds may invest 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
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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 Small Cap, Global
Growth, Government, Fully Discretionary, High Yield Bond, Strategic Income and
International Core Growth Funds may enter into derivative positions such as
foreign exchange forward 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, a
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, a 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 a 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, SHORT-INTERMEDIATE
AND MONEY MARKET FUNDS)
Each of the Funds other than the Government, Value, Short-Intermediate
and Money Market Funds may purchase listed covered "put" and "call" options with
respect to securities (in the case of the High Yield Bond and Strategic Income
Funds, debt securities and currencies) 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,
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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.
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 Small Cap, Fully Discretionary, Large Cap Growth and
International Core Growth 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 Funds (other than the Government, Value, Money Market and
Short-Intermediate 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 liquid assets such as cash, U.S. Government securities, or
other liquid high quality debt or equity securities 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.
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FUTURES CONTRACTS (ALL FUNDS OTHER THAN BALANCED AND MONEY MARKET
FUNDS)
Each of the Funds other than the Balanced 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.
The Emerging Countries, Income & Growth, Worldwide, International
Small Cap, Global Growth, Government, Short-Intermediate, Fully Discretionary,
High Yield Bond, Strategic Income, Value, Large Cap Growth and International
Core Growth Funds may also purchase and sell financial futures contracts as a
hedge against changes in interest rates. Additionally, the Emerging Countries,
Worldwide, International Small Cap, Fully Discretionary, High Yield Bond,
Strategic Income, Value, Large Cap Growth and International Core Growth Funds
may purchase and sell currency futures contracts to hedge against foreign
currency fluctuations, and the Core Growth, Emerging Countries, Income & Growth,
Worldwide, International Small Cap, Global Growth, Government, Fully
Discretionary, High Yield Bond, Strategic Income, Value, Large Cap Growth and
International Core Growth 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.
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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 or, in the case of the High
Yield Bond and Strategic Income Funds, unexpected changes in interest rates or
other matters. 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.
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 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.
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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 , FULLY
DISCRETIONARY , STRATEGIC INCOME 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 , Fully Discretionary and
Strategic Income 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, in the case of the Short-Intermediate and Fully
Discretionary Funds 1%, and in the case of the Strategic Income Fund, 5% 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 "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.
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REVERSE REPURCHASE AGREEMENTS (HIGH YIELD BOND AND STRATEGIC INCOME
FUNDS)
Each of the High Yield Bond and Strategic Income Funds may enter into
reverse repurchase agreements, which involve the sale of a security by a Fund
and its agreement to repurchase the security (or, in the case of mortgage-backed
securities, substantially similar but not identical securities) at a specified
time and price. A Fund will maintain in a segregated account with the Custodian
cash, U.S. Government securities or other appropriate liquid debt and equity
securities obligations in an amount sufficient to cover its obligations under
these agreements with broker-dealers (no such collateral is required on such
agreements with banks). Under the 1940 Act, these agreements are considered
borrowings by the Funds, and are subject to the limitations on borrowings
described below. The agreements are subject to the same types of risks as
borrowings.
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 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 Investment Adviser, pursuant to
guidelines adopted by 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
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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. The amounts
received by a Fund will be reduced by any fees and administrative expenses
associated with such loans. In addition, such loans involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, such securities lending will be made only when, in 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. In
addition, the Strategic Income Fund may borrow from banks to buy securities, so
long as its total borrowing for this and other purposes do not exceed 50% of the
value of its net assets. Purchases of portfolio securities while borrowings are
outstanding create leverage and involve special risk considerations. 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 (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"
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and roll transactions are considered borrowings for purposes of the percentage
limitations applicable to borrowings.
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 $31 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 thirteen other partners manage a staff of
approximately 350 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,
International Small Cap, and International Core Growth 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 Large Cap Growth 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 High Yield Bond and Strategic Income
Funds, 0.60% of such Fund's average net assets; 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.
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As a result of the expense limitations and fee deferrals 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,
1997 with respect to the Funds were the following percentages of the Funds'
respective average net assets: Emerging Growth Fund - 1.00%; Worldwide Fund -
0.94%; International Small Cap Fund - 0.97%; Emerging Countries Fund - 1.28%;
Core Growth Fund - 0.75%; Income & Growth Fund - 0.78% ; Balanced Fund -
0.49%; Government Fund - 0%; Global Growth Fund - 0%; Mini-Cap Fund - 1.05%;
Short-Intermediate Fund - 0%; Fully Discretionary Fund - 0%; Money Market Fund -
0%; International Core Growth Fund - 0.04%; Strategic Income Fund - 0.36%; High
Yield Bond Fund - 0.17%; Value Fund - 0%; Large Cap Growth Fund - 0%.
The following persons are primarily responsible for the Investment
Adviser's day-to-day management of the Funds' portfolios:
Equity Management - U.S.
John C. Marshall, Jr., Partner Core Growth
Chief Investment Officer - Institutional Equity Large Cap
Management
Joined firm in 1989, 8 years prior investment
experience with Pacific Century Advisers; San Diego
Trust & Savings Bank; Howard, Weil, Labouisse,
Friedrichs, Inc. M.B.A. and B.B.A. - Southern
Methodist University
Catherine Somhegyi, Partner Emerging Growth
Chief Investment Officer Balanced Growth
Joined firm in 1987. Mini Cap
M.B.A. and B.S. -- University of Southern California Income & Growth
Thomas E. Bleakley
Portfolio Manager
Joined firm in 1995; 3 years prior investment Mini Cap
experience with Twentieth Century Investors and Dell Emerging Growth
Computer Corporation
M.B.A. -- University of Texas; B.S. -- Boston
University
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<PAGE>
Sandra K. Durn Income & Growth
Portfolio Manager
Joined firm in 1994; prior experience at Science
Solutions, Inc. and San Diego State University,
Economics Department (instructor)
M.A. -- San Diego State University; B.A. --
University of Maryland
Andrew B. Gallagher Core Growth
Portfolio Manager Large Cap
Joined firm in 1992; 7 years prior investment
experience with Pacific Century Advisors and Sentinel
Asset Management, Inc.
M.B.A. -- San Diego State University; B.A. --
University of California, Irvine
Ronald J. Krystyniak, CFA Mini Cap
Portfolio Manager Emerging Growth
Joined firm in 1996; 7 years prior experience with
Pilgrim Baxter & Associates and Peterson Consulting
& Company
B.S. -- Syracuse University
Maren Lindstrom Core Growth
Portfolio Manager Income & Growth
Joined firm in 1994; 5 years prior investment
experience with Societe Generale; Banque D'Orsay;
and Prudential Asset Management
M.B.A. -- University of California, Los Angeles; B.A.
- -- University of Michigan
John C. McCraw Mini Cap
Portfolio Manager Emerging Growth
Joined firm in 1992; prior experience with Nations
Bank
M.B.A. -- University of California, Irvine; B.A.
Flagler College
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<PAGE>
Mark W. Stuckelman Value
Portfolio Manager -- U.S. Systematic
Joined firm in 1995; 5 years prior investment
experience with Wells Fargo Bank Investment
Management Group; Fidelity Management Trust Co.;
and BARRA
M.B.A. -- University of Pennsylvania/Wharton School
B.A. -- University of California, Berkeley
Thomas J. Sullivan Core Growth
Portfolio Manager
Joined firm in 1994; 2 years prior investment
experience with Donaldson, Lufkin & Jenrette
Securities Corp.
B.S. -- Rochester Institute of Technology
Equity Management -- International/Global
Catherine Somhegyi, Partner Worldwide Growth
Chief Investment Officer -- Global Equity International Core Growth
Management International Small Cap
Joined firm in 1987; prior investment experience with Emerging Countries
Professional Asset Securities, Inc. and Pacific Century Emerging Growth
Advisers Global Growth
M.B.A. and B.S. -- University of Southern California
Larry Speidell, Partner, CFA International Core Growth
Director of Global/Systematic Portfolio Worldwide Growth
Management and Research International Small Cap
Joined firm in 1994; 23 years prior investment Emerging Countries
experience with Batterymarch Financial Management Balanced Growth
and Putnam Management Company Global Growth
M.B.A. -- Harvard University; B.E. -- Yale
University
John J. Kane, Partner Worldwide Growth
Portfolio Manager -- U.S. Systematic International Core Growth
Joined firm in 1994; 25 years prior International Small Cap
investment/economics experience with ARCO Emerging Countries
Investment Management Company and General Balanced Growth
Electric Company Value
M.A. and B.A. -- Columbia University; M.B.A. --
University of California, Los Angeles
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<PAGE>
Emerging Countries
Aaron Harris Balanced Growth
Portfolio Manager -- Emerging Countries
Joined the firm in 1995; 1 year prior investment
experience at Chemical Bank
B.A. -- Princeton University Emerging Countries
Eswar Manon Emerging Countries
Portfolio Manager -- Emerging Countries
Joined firm in 1995; 5 years prior experience with
Koeneman Capital Management and Integrated Device
Technology
M.B.A. -- University of Chicago;
M.S. -- University of California, Santa Barbara;
B.S. -- Indian Institute of Technology, Madras
Pedro V. Marcal Worldwide Growth
Portfolio Manager -- Emerging Countries Emerging Countries
Joined firm in 1994; 5 pears prior investment
experience with A.B. Laffer, V.A. Canto &
Associates; and
A-Mark Precious Metals
B.A. -- University of California, San Diego
Loretta J. Morris Worldwide Growth
Portfolio Manager -- International; International Core Growth
Joined firm in 1990; 10 year prior investment International Small cap
experience with Collins Associates
Attended California State University, Long Beach;
CFA Level II candidate
Alex Muromeow Worldwide Growth
Portfolio Manager -- International International Core Growth
Joined firm in 1996; 6 years prior investment International Small Cap
experience with Jardine Fleming Securities (Japan);
Emerging Markets Investors Corporation; Teton
Partners L.P.
M.B.A. -- Stanford University;
B.A. -- Dartmouth College
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<PAGE>
Ernesto Ramos, Ph.D. Worldwide Growth
Portfolio Manager -- International International Core Growth
Joined firm in 1994; 14 years prior investment and International Small Cap
quantitative research experience with Batterymarch
Financial Management; Bolt Beranek & Newman Inc.;
and Harvard University
Ph.D. -- Harvard University;
B.S. -- Massachusetts Institute of Technology
Fixed Income
Fred S. Robertson III, Partner Balanced Growth
Chief Investment Officer -- Fixed Income Government Income
Joined firm in 1995; 7 years prior investment Fully Discretionary
experience with Criterion Investment Management Short-Intermediate
Company; 5 years prior investment experience with High Yield Bond
DuPont Chemical Pension Fund Strategic Income
M.B.A. -- College of William and Mary; Money Market
B.S. -- Cornell University
Catherine Somhegyi, Partner Strategic Income
Chief Investment Officer -- Global Equity
Management
Joined firm in 1987; prior investment experience with
Professional Asset Securities, Inc. and Pacific Century
Advisers
M.B.A. and B.S. -- University of Southern California
James E. Kellerman, Partner Government Income
Portfolio Manager Balanced Growth
Joined firm in 1995; 4 years prior investment Money Market
experience with Criterion Investment Management
Company; 8 years prior investment experience with
Brown Brothers Harriman and Equitable Life
Insurance Co.
M.B.A. -- St. John's University;
B.B.A. -- Susquehana University
Claudia L. Bengston Money Market
Portfolio Manager
Joined firm in 1995; 18 years prior investment
experience with Criterion Investment Management
Company and Gibraltar Savings
B.S. -- University of Oklahoma
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<PAGE>
Alan J. Brochstein Strategic Income
Portfolio Manager
Joined firm in 1994; 8 years prior investment
experience with CS First Boston Investment
Management Group and Kidder Peabody & Co.
B.A. -- Northwestern University
Douglas Forsyth, CFA Strategic Income
Portfolio Manager High Yield Bond
Joined firm in 1994; 3 years prior investment
experience with AEGON USA
B.B.A. -- University of Iowa
Malcom S. Day, CFA Balanced Growth
Portfolio Manager Government Income
Joined firm in 1995; 3 years prior investment Money Market
experience with Payden & Rygel Fully Discretionary
M.B.A. -- University of California, Los Angeles; Short Intermediate
B.S. -- Northwestern University
Sandra K. Durn Strategic Income
Portfolio Manager
Joined firm in 1994; prior experience at Science
Solutions, Inc. and San Diego State University,
Economics Department
M.A. -- San Diego State University;
B.A. -- University of Maryland
Maren Lindstrom Strategic Income
Portfolio Manager
Joined firm in 1994; 5 years prior investment
experience with Societe Generale; Banque D'Orsay;
and Prudential Asset Management
M.B.A. -- University of California, Los Angeles;
B.A. -- University of Michigan
Susan Malone Government Income
Portfolio Manager Balanced Growth
Joined firm in 1996; 7 years prior investment High Yield Bond
experience with BEA Associates
M.B.A. -- New York University;
B.S. -- Carnegie Mellon University
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<PAGE>
David A. Smith Strategic Income
Portfolio Manager
Joined firm in 1986; 13 years prior investment
experience with Salomon Brothers; Goldman Sachs
and Kidder Peabody & Co.
M.B.A. -- Wharton School of Finance (University of
Pennsylvania);
B.S. and B.A. -- Brown University
Ashvin Syal, CFA Fully Discretionary
Portfolio Manager
Joined firm in 1996; six years prior investment
experience with Payden & Rygel
M.B.A. -- University of California, Los Angeles;
M.M.S. and B.S. -- University of Bombay
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 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.
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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 management fees payable by the Funds, and to absorb certain
other expenses of the Funds and Portfolios (including the operating expenses of
the Funds, but excluding interest, taxes, brokerage commissions and other costs
incurred in connection with portfolio securities transactions, organizational
expenses and other capitalized expenditures and extraordinary expenses), to
ensure that the operating expenses for the Investor do not exceed certain fixed
percentages of such Investors' average daily net assets.
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, 1997 were
the following percentages of their respective average net assets; the amount of
such expenses prior to the expense reimbursements and fee deferrals is set forth
in parentheses: Emerging Growth Fund - 1.10% (1.10%); Worldwide Fund - 1.20%
(1.26%); International Small Cap Fund - 1.35%
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(1.38%); Emerging Countries Fund - 1.60% (1.57%); Core Growth Fund - 0.88%
(0.88%); Income & Growth Fund - 0.95% (0.92%); Balanced Fund - 0.95% (1.21%);
Government Fund - 0.60% (2.07); Mini-Cap Growth Fund - 1.51% (1.71%); Fully
Discretionary Fund - 0.40% (2.27%) ; Short-Intermediate Fund - 0.30% (1.87%);
Money Market Fund - 0.45% (0.88%); Value Fund (annualized) - 0.95% (2.24%);
Large Cap Growth Fund (annualized) - 0.91% (3.32%); International Core Growth
Fund (annualized) - 1.29% (2.25%); Strategic Income Fund (annualized) - 0.70%
(1.66%); High Yield Bond Fund (annualized) - 0.70% (1.13%).
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.
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
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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, 1997, 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.
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:
Nicholas-Applegate Mutual Funds, 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
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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 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,
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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
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
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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.
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 eighteen 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 Small Cap Growth Fund (the "International Small
Cap 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"); Nicholas-Applegate High Yield Bond Fund (the "High Yield Bond Fund");
Nicholas-Applegate Strategic Income Fund (the "Strategic Income Fund");
Nicholas-Applegate Money Market Fund (the "Money Market Fund");
Nicholas-Applegate Large Cap Growth Fund (the "Large Cap Growth Fund"); and
Nicholas-Applegate International Core Growth Fund (the "International Core
Growth 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-40
Control Persons and Principal Holders of Securities B-43
Investment Advisory and Other Services B-45
Brokerage Allocation and Other Practices B-49
Capital Stock and Other Securities B-52
Purchase, Redemption and Pricing of Interests Being Offered B-53
Tax Status B-55
Underwriters B-59
Calculations of Performance Data B-59
Financial Statements B-59
<PAGE>
Appendix A: Description of Securities Ratings
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 Government 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. For the Mini-Cap Fund substantially
all of these companies will be, and for the other Funds (except the Large Cap
Growth Fund) 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 Fund (other than the Money Market Fund) may invest in
convertible securities and 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
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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.
The market value of convertible debt 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 debt securities have greater yields
than do shorter term debt securities of similar quality, they are subject to
greater price fluctuations. 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 must permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Rating
requirements do not apply to convertible debt securities purchased by the Funds.
As a matter of operating policy, no Fund will invest more than 5% of
its net assets in warrants. A warrant gives the holder a right to purchase at
any time during a specified period a predetermined number of shares 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.
PREFERRED STOCK
Each Fund (other than the Money Market Fund) may invest in preferred
stock. Preferred stock, unlike common stock, offers a stated dividend rate
payable from a corporation's earnings. Such preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest rate
rise, the fixed dividend on
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preferred stocks may be less attractive, causing the price of preferred stocks
to decline. Preferred stock may have mandatory sinking fund provisions, as well
as call/redemption provisions prior to maturity, a negative feature when
interest rates decline. Dividends on some preferred stock may be "cumulative,"
requiring all or a portion of prior unpaid dividends to be paid before dividends
are paid on the issuer's common stock. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks on the distribution of a
corporation's assets in the event of a liquidation are generally subordinate to
the rights associated with a corporation's debt securities.
SYNTHETIC CONVERTIBLE SECURITIES
The Large Cap Growth, Income & Growth, Value, International Core
Growth, Global Growth, Strategic Income and High Yield Bond 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, a 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, 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 Fund only invests 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.
EURODOLLAR CONVERTIBLE SECURITIES
The Income & Growth, International Core Growth, Worldwide,
International Small Cap, Global Growth, Emerging Countries, Strategic Income and
High Yield Bond 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 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 foreign equity securities listed, or represented by ADRs listed, on the New
York Stock Exchange
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or the American Stock Exchange or convertible into publicly traded common stock
of U.S. companies. Each Fund may also invest up to 15% of its total assets
invested in convertible securities, taken at market value, in Eurodollar
convertible securities that are convertible into foreign equity securities which
are not listed, or represented by ADRs listed, on such exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
The Short-Intermediate, Fully Discretionary, Strategic Income and High
Yield Bond 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 Investment Considerations."
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.
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, a Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty
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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 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 Funds' assets and hinder the Funds' 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. 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. 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 Income & Growth
and Balanced Funds will not retain more than 35% of their respective net assets
in non-investment grade debt securities, and the other Funds will not retain
more than 5% of their respective net assets in such securities.
SHORT-TERM INVESTMENTS
Each Fund may invest in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Funds 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
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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 bank obligations are 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 Investments" below. 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. Federal and state laws and regulations require domestic
banks 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 their Prospectuses, the Funds 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 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-l" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined
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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 corporate obligations which have remaining 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.
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. 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 International Core Growth, Worldwide, International Small Cap,
Global Growth, Emerging Countries, Short-Intermediate, Fully Discretionary,
Strategic Income and High Yield Bond Funds may invest in sovereign debt
obligations of foreign countries. A number of factors affect a sovereign
debtor's willingness or ability to repay principal and interest in a timely
manner , 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.
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MUNICIPAL SECURITIES
The Short-Intermediate, Fully Discretionary, High Yield Bond and
Strategic Income 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 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.
The 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 shares 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
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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. The 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. The Funds may invest in lease
obligations or installment purchase contract obligations of municipal
authorities or entities ("municipal 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.
The 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) contain 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.
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SHORT-TERM OBLIGATIONS. The Funds may invest in short-term municipal
obligations These securities include 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 ANTICIPATION 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 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.
ZERO COUPON SECURITIES
The Income & Growth, Balanced, Government, Global Growth, Money Market
Short-Intermediate, Fully Discretionary, Strategic Income and High Yield Bond
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). 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 Portfolios to make
income distributions.
PARTICIPATION INTERESTS
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The Strategic Income and High Yield Bond Funds may invest in
participation interests, subject to the limitation on investments by the Funds
in illiquid investments. Neither Fund currently intends to invest more than 5%
of its net assets in such interests. Participation interests represent an
undivided interest in or assignment of a loan made by an issuing financial
institution. No more than 5% of a Fund's net assets can be invested in
participation interests of the same issuing borrower. Participation interests
are primarily dependent upon the financial strength of the borrowing
corporation, which is obligated to make payments of principal and interest on
the loan, and there is a risk that such borrowers may have difficulty making
payments. In the event the borrower fails to pay scheduled interest or
principal payments, a Fund could experience a reduction in its income and might
experience a decline in the net asset value of its shares. In the event of a
failure by the financial institution to perform its obligation in connection
with the participation, the Fund might incur certain costs and delays in
realizing payment or may suffer a loss of principal and/or interest. The
Investment Adviser has set certain creditworthiness standards for issuers of
loan participations and monitors their creditworthiness.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may acquire variable and floating rate instruments. Credit
rating agencies frequently do not rate such instruments; however, the Investment
Adviser under guidelines established by the Trust's Board of Trustees will
determine what unrated and variable and floating rate instruments are of
comparable quality at the time of the purchase to rated instruments eligible for
purchase by the Fund. In making such determinations, the Investment Adviser
considers 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 a 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
defaulting 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.
INDEX AND CURRENCY-LINKED SECURITIES
The Strategic Income and High Yield Bond Funds may invest in
"index-linked" or "commodity-linked" notes, which are debt securities of
companies that call for interest payments and/or payment at maturity in
different terms than the typical note where the borrower agrees to make fixed
interest payments and to pay a fixed sum at maturity. Principal and/or interest
payments on an index-linked note depend on the performance of one or more market
indices, such as the S&P 500 Index or a weighted index of commodity futures such
as crude oil, gasoline and natural gas. The Funds may also invest in "equity
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linked" and "currency-linked" debt securities. At maturity, the principal
amount of an equity-linked debt security is exchanged for common stock of the
issuer or is payable in an amount based on the issuer's common stock price at
the time of maturity. Currency-linked debt securities are short-term or
intermediate term instruments having a value at maturity, and/or an interest
rate, determined by reference to one or more foreign currencies. Payment of
principal or periodic interest may be calculated as a multiple of the movement
of one currency against another currency, or against an index.
Index and currency-linked securities are derivative instruments which
may entail substantial risks. Such instruments may be subject to significant
price volatility. The company issuing the instrument may fail to pay the amount
due on maturity. The underlying investment or security may not perform as
expected by the Investment Adviser. Markets, underlying securities and indexes
may move in a direction that was not anticipated by the Investment Adviser.
Performance of the derivatives may be influenced by interest rate and other
market changes in the U.S. and abroad. Certain derivative instruments may be
illiquid. See "Illiquid Securities" below.
MORTGAGE-RELATED SECURITIES
Each Fund (other than the Value, International Core Growth ,
International Small Cap, Emerging Countries and Large Cap Growth 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 Fund 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.
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<PAGE>
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 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, Short-Intermediate, Fully Discretionary, Strategic
Income and High Yield Bond 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.
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<PAGE>
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
higher 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 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.
"ROLL" TRANSACTIONS
The Government, Short-Intermediate, Fully Discretionary, Strategic
Income and High Yield Bond 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
transactions 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.
A Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a segregated
account with its Custodian in which it will maintain liquid assets 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.
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<PAGE>
FOREIGN INVESTMENTS
Each Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. Each Fund (other than the Government and
Money Market Fund) may also invest in depository receipts.
The United States Government from time to time has 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
Portfolios' investment objectives and policies, investment of all of the
Portfolios' assets in another investment company with different investment
objectives and policies than the Funds, or hiring an investment adviser to
manage the Portfolios' assets. However, a Portfolio would adopt any revised
investment objective and fundamental policies only after approval by the
shareholders holding a majority (as defined in the Investment Company Act) of
the shares of the Portfolio.
DEPOSITORY RECEIPTS. Each of the 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
issuers. ADRs, in registered form, are designed for use in U.S. securities
markets. Such depository receipts may be sponsored by the foreign issuer or may
be unsponsored. The Value, International Core Growth, Worldwide, International
Small Cap, Global Growth, Large Cap Growth, Short-Intermediate, Fully
Discretionary, Strategic Income and High Yield Bond Funds may also invest in
European and Global Depository Receipts ("EDRs" and "GDRs"), which, in bearer
form, are designed for use in European 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 issuer of the underlying
securities. ADRs may be listed on a national securities exchange or may trade
in the over-the- counter market. ADR prices are denominated in 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:
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<PAGE>
MARKET CHARACTERISTICS. 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. In addition to nationalization,
foreign governments may take other actions that could have a significant effect
on market prices of securities and payment of interest, including restrictions
on foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
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 Portfolios'
shareholders. A shareholder 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.
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 will be invested in foreign companies and countries and depository
receipts will fluctuate from time to time within the limitations described in
the Prospectus, depending on the Investment Adviser's assessment of prevailing
market, economic and other conditions.
B-17
<PAGE>
SECURITIES SWAPS
The International Core Growth, Worldwide, International Small Cap,
Global Growth and Emerging Countries Funds may enter into securities swaps, a
technique primarily used to indirectly participate in the securities market of a
country from which a Fund would otherwise be precluded for lack of an
established securities custody and safekeeping system. The Fund deposits an
amount of cash with its custodian (or the broker, if legally permitted) in an
amount equal to the selling price of the underlying security. Thereafter, the
Fund pays or receives cash from the broker equal to the change in the value of
the underlying security.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each Fund (other than the
Government, Value, Short-Intermediate and Money Market Funds) is authorized to
purchase put and call options with respect to securities which are otherwise
eligible for purchase by the Fund and with respect to various stock indices
subject to certain restrictions. Put and call options are derivative
securities traded on United States and foreign exchanges, including the American
Stock Exchange, Chicago Board Options Exchange, Philadelphia Stock Exchange,
Pacific Stock Exchange and New York Stock Exchange. The 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 holds a stock which the Investment Adviser believes 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, is the amount by which the Fund
hedges 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 premium paid for the put option less any
amount for which the put may be sold reduces the profit the Fund realizes on the
sale of the securities.
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<PAGE>
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 a Fund purchases the call
option to hedge a short position in the underlying security and the price of
the underlying security thereafter falls, the premium paid for the call option
less any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security .
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. Each Fund (other than the Value, Balanced,
Government, Money Market and Short-Intermediate Funds) may write covered call
options. A call option is "covered" if a 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
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 allows 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 realizes 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 transaction are more than the premium paid to
purchase the option. A Fund realizes a loss
B-19
<PAGE>
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, appreciation of the
underlying security owned by the Fund generally offsets, in whole or in part,
any loss to the Fund resulting from the repurchase of a call option .
STOCK INDEX OPTIONS. Each Fund (other than the Government, Money
Market, Value, Balanced, Short-Intermediate and Fully Discretionary Funds) may
also purchase put and call options with respect to the S&P 500 and other stock
indices. The Funds may purchase such options as a hedge against changes in
the values of portfolio securities or securities which it intends to purchase
or sell, or to reduce risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks not found in 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 depends on 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 circumstances disrupt trading of
certain stocks included in the index, such as if trading were halted in a
substantial number of stocks included in the index. If this happens, the Fund
could 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. The
Funds 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 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
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<PAGE>
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 the corresponding
Portfolio as a regulated investment company. See "Dividends, Distributions and
Taxes."
In addition, foreign options exchanges do not afford to participants
many of the protections available in United States option exchanges . 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. Each Fund (other than the Value, Income & Growth,
Balanced, Government, Money Market and Short-Intermediate Funds) may engage in
transactions involving dealer options as well as exchange-traded options.
Certain risks are specific to dealer options. While the Funds might look to a
clearing corporation to exercise exchange-traded options, if a Fund purchases a
dealer option it must rely on the selling dealer to perform if the Fund
exercises the option. 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 can realize the value of a
dealer option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when a Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into
dealer options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists that the Fund will at any time
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Unless the Fund, as a covered dealer call option writer, can 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
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<PAGE>
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 Portfolio's ability to sell portfolio securities at a time when
such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
takes 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.
With that exception, however, the Fund will treat dealer options as subject to
the Fund's limitation on illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The International Core Growth, Worldwide, International Small Cap,
Global Growth, Emerging Countries, Fully Discretionary, Strategic Income, High
Yield Bond and Large Cap Growth 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 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, writing options on
foreign currency constitutes only a partial hedge, up to the amount of the
premium received. The Funds 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 exchange rate
movements adverse to a 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 International Core Growth, Worldwide, International Small Cap,
Global Growth, Emerging Countries, Fully Discretionary, Strategic Income, High
Yield Bond and Large Cap Growth 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,
a 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 (other than the Balanced and Short-Intermediate
Funds ) in options on futures contracts as a hedge against changes in market
conditions or interest rates . Such Funds 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 such Fund segregates
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.
A Fund does not pay or receive funds upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
deposits in a segregated account with its Custodian liquid assets 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 differs from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the 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 it satisfies all contractual obligations .
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 purchases a stock index futures contract and the price of the
underlying stock index rises, that position will have increased in value and
the Fund will receive from the
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broker a variation margin payment equal to that increase in value. Conversely,
when the Fund purchases a stock index futures contract and the price of the
underlying stock index declines, the position will be less valuable requiring
the Fund 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. The Fund either pays or
receives cash, thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. Each Fund (other than the Balanced
and Money Market Funds) may invest in futures contracts on stock indices. A
stock index futures contracts is a bilateral agreement pursuant to which the
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value at the close of the
last trading day of the contract and the price at which the contract is
originally struck. No physical delivery of the underlying stocks in the index
is made. 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. Each Fund (other than
the Core Growth, Mini-Cap, Emerging Growth, Balanced and Money Market 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 five 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
obligates 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 obligates 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.
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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. A Fund closes out a futures contract sale by 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 receives 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 Fund
closes out a futures contract purchase by 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; Government National Mortgage
Association (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 Government, Value,
International Core Growth, Worldwide, International Small Cap, Global Growth,
Emerging Countries, Fully Discretionary, Strategic Income, High Yield Bond and
Large Cap Growth Funds may use foreign currency futures contracts for hedging
purposes. A foreign currency futures 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
contracts 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 ("ECU"). 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.
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
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<PAGE>
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,
a 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.
When futures are purchased to hedge against a possible increase in
the price of securities before a 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 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.
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<PAGE>
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 depends on the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund hedges 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.
OPTIONS ON FUTURES CONTRACTS. 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
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<PAGE>
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 are 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 described below under "Non-Hedging Strategic Transactions," 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 Fund. 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, a Fund will deposit an amount
of cash or liquid debt or equity securities, equal to the market value of the
futures contracts, 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 the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of a Fund.
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The extent to which a Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment company.
See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
For hedging purposes, the Strategic Income and High Yield Bond Funds
may enter into interest rate and currency swap transactions and purchase or
sell interest rate and currency caps and floors. 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 the other). 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.
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<PAGE>
INTEREST RATE SWAPS. As indicated above, 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. The Strategic Income and High Yield Bond Funds 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 of the right to receive fixed pursuant to a swap option is
said to own a call.
CAPS AND FLOORS. The Strategic Income and High Yield Bond Funds may
invest in interest rate and currency 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.
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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.
NON-HEDGING STRATEGIC TRANSACTIONS
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, the Fully Discretionary, Short-Intermediate and Strategic
Income Funds may enter into options, futures and swap transactions to enhance
potential gain in circumstances where hedging is not involved. The Fund's net
loss exposure resulting from transactions entered into for each purposes will
not exceed 5% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. Such transactions are subject to the limitations described above
under "Options," "Futures Contracts," and "Interest Rate and Currency Swaps."
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
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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 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. 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.
REVERSE REPURCHASE AGREEMENTS
The Strategic Income and High Yield Bond Funds may enter into reverse
repurchase agreements, which involve the sale of a security by a Fund and its
agreement to repurchase the security (or, in the case of mortgage-backed
securities, substantially similar but not identical securities) at a specified
time and price. A Fund will maintain in a segregated account with the Custodian
cash, U.S. Government securities or other appropriate liquid securities in an
amount sufficient to cover its obligations under these agreements with
broker-dealers (no such collateral is required on such agreements with banks).
Under the 1940 Act, these agreements are considered borrowings by the Funds, and
are subject to the percentage limitations on borrowings described below. The
agreements are subject to the same types of risks as borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund 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 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 a 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.
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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
Short sales "not against the box" and roll transactions are
considered borrowings for purposes of the percentage limitations applicable to
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 remain fixed by the
terms of the Fund's agreement with its lender, the asset value per share of the
Fund tends to increase more when its portfolio securities increase in value and
to decrease more when its portfolio assets decrease in value than would
otherwise be the case if the Fund 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
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 demanded by the Fund if the demand
meets the terms of the letter. Such terms and the issuing bank must satisfy
the Fund. Any loan might be secured by any one or more of the three types of
collateral. The terms of the
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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 Core Growth, Mini-Cap, Emerging Growth, International Core
Growth, Worldwide, International Small Cap, Strategic Income and High Yield
Bond Funds may make short sales of securities they own or have 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 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 must replace the security 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 Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must 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 must deposit with
the broker additional cash or securities so that it maintains with the broker
a total deposit equal to 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 tends 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. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
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 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.
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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 case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
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 short 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, U.S. Government securities or other liquid
debt or equity 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
such collateral required to be deposited 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, U.S. Government securities or other liquid debt or equity
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. Each Fund will comply with these requirements. In addition, 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.
The extent to which a Fund may enter into short sales transactions may
be limited by the Internal Revenue Code requirements for qualification of the
corresponding Portfolio as a regulated investment company. See "Dividends,
Distributions and Taxes."
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ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private 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 Commission under the Securities
Act, the Trust's Board of Trustees has determined 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. 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.
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 foreign
securities whose principal market is abroad as not subject to the investment
limitation on securities subject to legal or contractual restrictions on resale.
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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.
In addition to the advisory and other fees paid by a Fund, 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.
PARTICIPATION INTERESTS
The High Yield Bond and Strategic Income Funds may invest in
participation interests, subject to the limitation on investments by the Funds
in illiquid investments. Participation interests represent an undivided
interest in or assignment of a loan made by an issuing financial institution.
No more than 5% of a Fund's net assets can be invested in participation interest
of the same issuing borrower. Participation interests are primarily dependent
upon the financial strength of the borrowing corporation, which is obligated to
make payments of principal and interest on the loan, and there is a risk that
such borrowers may have difficulty making payments. In the event the borrower
fails to pay scheduled interest or principal payments, a Fund could experience a
reduction in its income and might experience a decline in its net asset value.
In the event of a failure by the financial institution to perform its obligation
in connection with the participation agreement, the Fund might incur certain
costs and delays in realizing payment or may suffer a loss of principal and/or
interest. The Investment Adviser has set certain creditworthiness standards for
issuers of loan participations and monitors their creditworthiness.
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, and the Investment Adviser emphasizes
growth over time through investment in securities of companies with earnings
growth potential. Its investment techniques focus 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.
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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.
DIVERSIFICATION
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.
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<PAGE>
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 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, or, in the case of the Strategic Income Fund, except
for temporary, extraordinary or emergency purposes, for the clearance of
transactions, or to purchase securities, in amounts not in excess of 50% of the
value of its net assets. 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, except as set forth in restriction 6
above, 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,
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<PAGE>
Emerging Growth, Mini-Cap, Worldwide, High Yield Bond, Strategic Income,
International Small Cap, and International Core Growth 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 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 (except in the case of the Short-Intermediate, Fully Discretionary and
Strategic Income Funds, which may do so for non-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
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<PAGE>
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 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.
3. May purchase or write options on securities (Value Fund only).
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, and Chairman, Nicholas-Applegate Securities. 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 Leslies Poolmart, a distributor of swimming pool services and
Products (since 1996).
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WALTER E. AUCH, TRUSTEE*/. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio communications
company (since 1987); Brinson Funds (since 1994), and Smith Barney Trak Fund
(since 1992), registered investment companies; Pimco Advisors 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). Mr. Auch is considered to be an
"interested person" of the Trust under the 1940 Act because he is on the board
of a company a subsidiary of which is a broker-dealer.
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991), and research associate, Harvard Graduate School of Education (since
1996); Director, Nicholas-Applegate Fund, Inc. (since 1987), Emerging Germany
Fund (since 1991), Moovies, Inc. (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); Vice President,
PBNG Funds, Inc. (since 1995); 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 Montessori 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 material compensation from the Investment Adviser 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, Investor Responsibility Research Center (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); Trustee, Fairfield University (since 1993); Director, The Bramwell Funds
(since 1994); Chairman of the Board, Trigen Energy Corporation (since 1994);
Director, Universal Stainless & Alloy Products Inc. (since 1994). Formerly
President, Endowment Advisers, Inc. (from August 1987 to December 1992).
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<PAGE>
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.
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).
PETER J. JOHNSON, VICE PRESIDENT. Partner and Director-Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992)
and Vice President, Nicholas-Applegate Securities (since December 1995);
formerly, Marketing Director Pacific Financial Asset Management Company, an
investment management firm (from July 1989 to December 1991).
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
$14,000 for services rendered as a Trustee of the Trust, and $1,000 for each
meeting attended ($2,000 per Committee for Committee chairmen). 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, 1997, 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>
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued as Benefits from Trust and
Compensation Part of Upon Trust Complex
Name from Trust Trust Retirement Paid to
Expenses Trustee
- --------------------------------------------------------------------------------
Dann V. Angeloff $10,635 None N/A $36,750 (16*)
Walter E. Auch $ 9,827 None N/A $18,250 (15*)
Theodore J. $ 9,827 None N/A $34,250 (16*)
Coburn
Darlene DeRemer $ 9,558 None N/A $17,250 (15*)
George F. Keane $ 9,827 None N/A $18,250 (15*)
* 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, 1997, there were issued and outstanding the
following beneficial interests in the Funds: $432,773,931 of the Core Growth
Fund, of which 17.62% were owned by Nicholas-Applegate Core Growth Portfolio A,
6.72% were owned by Nicholas-Applegate Core Growth Portfolio B, 36.47% were
owned by Nicholas-Applegate Core Growth Portfolio C, 36.16% were owned by
Nicholas-Applegate Core Growth Institutional Portfolio, and 3.03% were owned by
Nicholas-Applegate Core Growth Qualified Portfolio; $130,651,402 of the Income
& Growth Fund, of which 24.67% were owned by Nicholas-Applegate Income & Growth
Portfolio A, 9.85% were owned by Nicholas-Applegate Income & Growth Portfolio
B, 47.91% were owned by Nicholas-Applegate Income Growth, Portfolio C, 14.04%
were owned by Nicholas-Applegate Income and Growth Institutional Portfolio, and
3.53% were owned by Nicholas-Applegate Income & Growth Qualified Portfolio;
$25,011,970 of the Balanced Fund, of which 19.77% were owned by
Nicholas-Applegate Balanced Growth Portfolio A, 8.66% were owned by
Nicholas-Applegate Balanced Growth Portfolio B, 68.40% were owned by
Nicholas-Applegate Balanced Growth Portfolio C, and
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2.88% were owned by Nicholas-Applegate Balanced Growth Institutional Portfolio,
and 0.29% were owned by Nicholas-Applegate Balanced Growth Qualified Portfolio;
$103,815,376 of the Worldwide Fund, of which 23.17% were owned by
Nicholas-Applegate Worldwide Growth Portfolio A, 5.78% were owned by
Nicholas-Applegate Worldwide Growth Portfolio B, 67.87% were owned by
Nicholas-Applegate Worldwide Growth Portfolio C and 2.56% were owned by
Nicholas-Applegate Worldwide Growth Institutional Portfolio and 0.62% were
owned by Nicholas-Applegate Worldwide Growth Qualified Portfolio; $62,886,544
of the International Small Cap Growth Fund, of which 8.88% were owned by
Nicholas-Applegate International Small Cap Growth Portfolio A, 8.14% were
owned by Nicholas-Applegate International Small Cap Growth Portfolio B, 5.78%
were owned by Nicholas-Applegate International Small Cap Growth Portfolio C,
77.12% were owned by Nicholas-Applegate International Small Cap Growth
Institutional Portfolio, 0.07% were owned by Nicholas-Applegate International
Small Cap Qualified Portfolio, and 0.01% were owned by Nicholas-Applegate
Capital Management Profit Sharing Plan; $158,336,884 of the Emerging Countries
Fund, of which 24.44% were owned by Nicholas-Applegate Emerging Countries
Portfolio A, 15.54% were owned by Nicholas-Applegate Emerging Countries
Portfolio B, 18.60% were owned by Nicholas-Applegate Emerging Countries
Portfolio C, 35.95% were owned by Nicholas-Applegate Emerging Countries
Institutional Portfolio and 5.47% were owned by Nicholas-Applegate Emerging
Countries Qualified Portfolio; $6,253,605 of Nicholas-Applegate Government
Income Fund, of which 18.39% were owned by Nicholas-Applegate Government Income
Portfolio A, 21.72% were owned by Nicholas-Applegate Government Income
Portfolio B, 59.87% were owned by Nicholas-Applegate Government Income
Portfolio C, and 0.02% were owned by Nicholas-Applegate Government Income
Qualified Portfolio; $501,562,533 of the Emerging Growth Fund, of which 24.31%
were owned by Nicholas-Applegate Emerging Growth Portfolio A, 5.60% were owned
by Nicholas-Applegate Emerging Growth Fund Portfolio B, 36.54% were owned by
Nicholas-Applegate Emerging Growth Portfolio C, 33.35% were owned by
Nicholas-Applegate Emerging Growth Institutional Portfolio, and 0.20% were
owned by Nicholas-Applegate Emerging Growth Qualified Portfolio; $36,348,591
of the Money Market Fund, of which 99.79% were owned by Nicholas-Applegate
Money Market Portfolio and 0.21% were owned by Nicholas-Applegate Profit
Sharing Plan; $28,988,415 of the Mini-Cap Fund, of which 99.11% were owned by
Nicholas-Applegate Mini-Cap Institutional Portfolio and 0.89% were owned by
Nicholas-Applegate Profit Sharing Plan; $15,918,385 of the Fully Discretionary
Income Fund, of which 99.68% were owned by Nicholas-Applegate Fully
Discretionary Income Institutional Portfolio and 0.32% were owned by
Nicholas-Applegate Profit Sharing Plan; $5,422,639 of the Short-Intermediate
Fixed Income Fund, of which is 99.06% were owned by Nicholas-Applegate
Short-Intermediate Fixed Income Institutional Portfolio and 0.94% were owned by
Nicholas-Applegate Profit Sharing Plan; $3,091,433 of the Value Fund, of which
99.10% were owned by Nicholas-Applegate Value Institutional Portfolio and 0.90%
were owned by Nicholas-Applegate Profit Sharing Plan; $1,319,158 of the Large
Cap Growth Fund, of which 98.03% were owned by Nicholas-Applegate Large Cap
Growth Institutional Portfolio and 1.97% were owned by Nicholas-Applegate Profit
Sharing Plan; $4,668,876 of the International Core Growth Fund, of which 0.04%
were owned by Nicholas-Applegate International Core Growth Portfolio A,
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0.02% were owned by Nicholas-Applegate International Core Growth Portfolio B,
0.92% were owned by Nicholas-Applegate International Core Growth Portfolio C,
98.39% were owned by Nicholas-Applegate International Core Growth Institutional
Portfolio, 0.02% were owned by Nicholas-Applegate Core Growth Qualified
Portfolio and 0.61% were owned by Nicholas-Applegate Profit Sharing Plan;
$4,252,549 of the Strategic Income Fund, of which 99.38% were owned by
Nicholas-Applegate Strategic Income Institutional Portfolio and 0.62% by
Nicholas-Applegate Profit Sharing Plan; and $4,661,054, of the
Nicholas-Applegate High Yield Bond Fund, of which 99.43% were owned by
Nicholas-Applegate High Yield Bond Institutional Portfolio and 0.57% 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 fourteen partners (including Mr. Nicholas) who
manage approximately 325 employees, including 28 portfolio managers.
Personnel of the Investment Adviser may invest in securities for their
own accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Funds, establishes
procedures for personal investing, and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance, and
participation in initial public offerings is prohibited. In addition,
restrictions on the timing of personal investing in relation to trades by the
Funds and on short-term trading having been adopted.
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, 1997, and the amounts of the deferrals in fees
and reimbursement of expenses by the Investment Adviser (or recoupment of fees
previously deferred and expenses previously reimbursed) as a result of the
expense limitations and fee waivers, were as follows:
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FEE REDUCTIONS AND
EXPENSE
FUND REIMBURSEMENTS
REIMBURSEMENTS ADVISORY FEES (AND RECOUPMENTS)
Large Cap Growth Fund $2,359 $ 7,907
Core Growth Fund $3,594,196 -0-
Value Fund $17,527 $30,135
Emerging Growth Fund $5,836,182 -0-
Income & Growth Fund $ 902,615 ($39,067)
Balanced Growth Fund $ 196,321 $68,056
International Core Growth Fund $ 5,726 $ 5,696
Worldwide Growth Fund $1,028,250 $62,497
International Small Cap Fund $ 477,212 $13,583
Global Growth Fund N/A N/A
Government Fund $ 23,112 $84,903
Money Market Fund $ 44,318 $76,932
Emerging Countries Fund $ 915,695 ($22,429)
Mini-Cap Fund $ 376,577 $59,756
Fully Discretionary Fund $ 20,207 $83,987
Short Intermediate Fund $ 15,497 $81,090
Strategic Income Fund $ 15,811 $25,167
High Yield Bond Fund $ 17,627 $19,182
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
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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 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
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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.
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.
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COUNSEL
Paul, Hastings, Janofsky & Walker LLP, 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 AUDITORS
Ernst & Young, L.L.P., served as the independent auditors of the Funds
for the fiscal year ended March 31, 1997, and in the capacity provided 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 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
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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.
During the fiscal year ended March 31, 1997, 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: Large Cap Growth
Fund -- J.P. Morgan & Co.; Core Growth Fund -- Merrill Lynch & Co., UBS
Securities, Inc., Household Finance Co., J.P. Morgan & Co., American Express
Credit Corp.; Emerging Growth Fund -- J.P. Morgan & Co., Associates Corp. of
North America, Merrill Lynch & Co., UBS Securities, Inc., Everen Securities,
Hambrecht & Quist Group, Household Finance Co., American Express Credit Corp.;
Income & Growth Fund -- Merrill Lynch & Co., Associates Corp. of North America,
First Chicago NBD Corp., Morgan Stanley Group, Inc. , American Express Credit
Corp.; Balanced Growth Fund -- Bear, Stearns, Inc., Morgan Stanley Group, Inc.,
Salomon Bros. Inc., Associates Corp of North America; Government Fund -- Lehman
Bros., UBS Securities, Inc., Merrill Lynch & Co.; Money Market Fund - Associates
Corp. of North America, General Electric Credit Corp., Norwest Corp., J.P.
Morgan & Co., American
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Express Capital Corp., Chevron Corp.; International Core Growth Fund --
Associates Corp. of North America, Merrill Lynch & Co.; Worldwide Growth Fund --
Morgan Stanley Group, Inc., Merrill Lynch & Co.; International Small Cap Growth
Fund -- Merrill Lynch & Co.; Emerging Countries Fund -- Associates Corp. of
North America, Merrill Lynch & Co., Rashid Hussain Berhad Securities, Peregrine
Brokerage; Mini-Cap Growth Fund -- Associates Corp. of North America, Merrill
Lynch & Co., Chevron Corp., UBS Securities, Inc., J.P. Morgan & Co., American
Express Credit Corp.; Fully Discretionary Fixed Income Fund -- J.P. Morgan &
Co.; Value Fund -- Salomon Bros., Goldman Sachs; Strategic Income Fund --
Merrill Lynch & Co., Associates Corp of North America, Chevron Corp., UBS
Securities, Inc., J.P. Morgan & Co.; and High Yield Bond Fund -- J.P. Morgan &
Co., UBS Securities. The holdings of securities of such brokers and dealers were
as follows as of March 31, 1997: Large Cap Growth Fund -- J.P. Morgan & Co.
($176,000); Emerging Growth Fund -- J.P. Morgan & Co. ($22,666,000); Income &
Growth Fund -- Merrill Lynch & Co. ($1,244,500), Associates Corp. of North
America ($5,742,000); Balanced Growth Fund -- Bear, Stearns, Inc. ($118,650),
Associates Corp of North America ($860,000); Government Fund -- Lehman Bros.
($139,392); Money Market Fund - Associates Corp. of North America ($999,706),
General Electric Credit Corp. ($999,704), Norwest Corp. ($998,678), J.P. Morgan
& Co. ($12,158,000); International Core Growth Fund -- Associates Corp. of North
America ($130,000), Merrill Lynch & Co. ($194,000); Emerging Countries Fund --
Associates Corp. of North America ($3,036,000); Mini-Cap Growth Fund --
Associates of North America ($934,000), Merrill Lynch & Co. ($1,479,000); Fully
Discretionary Fixed Income Fund -- J.P. Morgan & Co. ($78,271); Value Fund --
Salomon Bros. ($49,875); and Strategic Income Fund -- Merrill Lynch & Co.
($132,000).
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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, 1997 MARCH 31, 1996 MARCH 31, 1995
<S> <C> <C> <C>
International Core Growth Fund $ 24,643 N/A N/A
Worldwide Fund 970,564 $ 484,310 $344,167
International Small Cap Fund 692,326 116,735 69,187
Global Growth Fund 0 N/A N/A
Mini-Cap Fund 90,844 40,185 N/A
Emerging Countries Fund 1,427,861 169,728 20,701
Large Cap Growth Fund 4,620 0 0
Core Growth Fund 1,139,938 862,396 728,347
Value Fund 8,996 N/A N/A
Emerging Growth Fund 987,245 1,038,140 649,053
Income & Growth Fund 114,523 83,459 174,247
Balanced Fund 35,105 51,038 44,386
Government Fund 0 3 0
Short-Intermediate Fund 0 0 N/A
Fully Discretionary Fund 0 0 N/A
Strategic Income Fund 2,556 N/A N/A
High Yield Bond Fund 200 N/A N/A
</TABLE>
Of the total commissions paid during the fiscal year ended March 31, 1997,
$1,971,176 (36.52%) were paid to firms which provided research, statistical or
other services to the Investment Adviser. The Investment Adviser has not
separately identified a portion of such commissions as applicable to the
provision of such research, statistical or otherwise.
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
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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.
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
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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 quoted bid price for such
securities 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 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 last available bid price, 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. Options, 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 an options or futures
exchange closes later than 4:00 p.m. New York time, the options or 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
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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 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
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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.
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
B-57
<PAGE>
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 "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.
SHORT SALES. Generally, capital gain or loss realized by a Fund in a
short sale may be long-term or short-term depending on the holding period of the
short position. Under a special rule, however, the capital gain will be
short-term gain if (1) as of the date of the short sale, the Fund owned property
for the short-term holding period that was substantially identical to that which
the Fund used to close the sale or (2) after the short sale and on or before its
closing, the Fund acquired substantially similar property. Similarly, if
property substantially identical to that sold short was held by the Fund for the
long-term holding period as of the date of the short sale, any loss on closing
the short position will be long-term capital loss. These special rules do not
apply to substantially similar property to the extent such property exceeds the
property used by the Fund to close its short position.
B-58
<PAGE>
SWAPS. No definitive guidance currently exists with respect to the
classification of interest rate swaps and cross-currency swaps as securities or
foreign currencies for purposes of certain of the tests described above.
Accordingly, to avoid the possibility of disqualification as a regulated
investment company, each Fund will limit its positions in swaps to transactions
for the purpose of hedging against interest rate or currency fluctuation risks,
and will treat swaps as excluded assets for purposes of determining compliance
with the diversification test.
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
B-59
<PAGE>
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 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 1997
Annual Reports are incorporated in this Part B by reference. Such financial
statements have been audited by Ernst & Young, L.L.P., and have been included
herein in reliance upon such reports given upon their authority as experts in
accounting and auditing.
Copies of the Trust's 1997 Annual Report 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).
B-60
<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
APP-1
<PAGE>
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.
"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:
APP-2
<PAGE>
"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+."
"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:
APP-3
<PAGE>
"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.
"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.
APP-4
<PAGE>
"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.
"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
APP-5
<PAGE>
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.
"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"
APP-6
<PAGE>
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.
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.
APP-7
<PAGE>
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.
"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.
APP-8
<PAGE>
"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.
"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>
NICHOLAS-APPLEGATE INVESTMENT TRUST
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
Not Applicable.
(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.
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 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.
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<PAGE>
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 -- filed as
Exhibit 1.9 to Amendment 10 to Registrant's Form N-1A
Registration Statement ("Amendment No. 10") on May 2, 1996 and
incorporated herein by reference.
1.10 Certificate of Trustees establishing High Yield Bond and
Strategic Income Funds -- filed as Exhibit 1.20 to Amendment No.
11 to Registrant's Form N-1A Registration Statement ("Amendment
No. 11") on August 2, 1996 and incorporated herein by reference.
1.11 Form of Certificate of Trustees establishing Large Cap Growth and
International Core Growth Funds -- filed as Exhibit 1.11 to
Amendment No. 12 to Registrant's Form N-1A Registration Statement
("Amendment No. 12") on December 27, 1996 and incorporated herein
by reference.
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
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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 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 -- filed as Exhibit 5.8 to Amendment No. 10 on May 2,
1996 and incorporated herein by reference.
5.9 Letter agreement between Registrant and Nicholas-Applegate
Capital Management adding High Yield Bond and Strategic Income
Funds to Investment Advisory Agreement -- filed as Exhibit 5.9 to
Amendment No. 11 on August 2, 1996 and incorporated herein by
reference.
5.10 Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management adding Large Cap Growth and
International Core Growth Funds to Investment Advisory
Agreement -- filed as Exhibit 5.10 to Amendment No. 12 on
December 27, 1996 and incorporated herein by reference.
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
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<PAGE>
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 Small Cap 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 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.
8.5 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., 11 on
August 2, 1996 and incorporated herein by reference.
8.6 Letter agreement between Registrant and PNC Bank adding Value
Fund to Custodian Services Agreement -- filed as Exhibit 8.6 to
Amendment No., 11 on August 2, 1996 and incorporated herein by
reference.
8.7 Form of letter agreement between Registrant and PNC Bank adding
High Yield Bond and Strategic Income Funds to Custodian Services
Agreement -- filed as Exhibit 8.7 to Amendment No. 11 on August
2, 1996 and incorporated herein by reference.
8.8 Form of letter agreement between Registrant and PNC Bank adding
Large Cap Growth and International Core Growth Funds to Custodian
Services Agreement.
8.9 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.
8.10 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.
8.11 Letter agreement among Registrant, PNC Bank and Chase Manhattan
Bank, N.A., adding International Growth Fund to Sub-Custodian
Agreement -- filed
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<PAGE>
as Exhibit 8.8 to Amendment No. 9 on July 31, 1995 and
incorporated herein by reference.
8.12 Letter agreement among Registrant, PNC Bank and Chase Manhattan
Bank, N.A., adding Emerging Countries, Global Growth 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.
8.13 Letter agreement among Registrant, PNC Bank and Chase Manhattan
Bank, adding Short-Intermediate and Fully Discretionary Funds to
Sub-Custodian Agreement -- filed as Exhibit 8.12 to Amendment
No. 11 on August 2, 1996 and incorporated herein by reference.
8.14 Letter agreement among Registrant, PNC Bank, and Chase Manhattan
Bank, adding Value Fund to Sub-Custodian Agreement -- filed as
Exhibit 8.13 to Amendment No. 11 on August 2, 1996 and
incorporated herein by reference.
8.15 Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, adding High Yield Bond and Strategic Income Funds
to Sub-Custodian Agreement -- filed as Exhibit 8.14 to Amendment
No. 11 on August 2, 1996 and incorporated herein by reference.
8.16 Form of letter agreement among Registrant, PNC Bank and Chase
Manhattan Bank, adding Large Cap Growth and International Core
Growth Funds to Sub-Custodian Agreement filed as Exhibit 8.16 to
Amendment No. 12 on December 27, 1996 and incorporated herein by
reference.
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 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
C-5
<PAGE>
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, Global Growth Fund and Mini-Cap 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 Letter agreement between Registrant and PFPC Inc. adding Short-
Intermediate and Fully Discretionary Funds to Accounting Services
Agreement -- filed as Exhibit ___ to Amendment No. 11 on
August 2, 1996 and incorporated herein by reference.
9.7 Letter agreement between Registrant and PFPC Inc. adding Value
Fund to Accounting Services Agreement -- filed as Exhibit 9.7 to
Amendment No. 11 on August 2, 1996 and incorporated herein by
reference.
9.8 Form of letter agreement between Registrant and PFPC Inc. adding
High Yield Bond and Strategic Income Funds to Accounting Services
Agreement -- filed as Exhibit 9.8 to Amendment No. 11 on August
2, 1996 and incorporated herein by reference.
9.9 Form of letter agreement between Registrant and PFPC Inc. adding
Large Cap Growth and International Core Growth Funds to
Accounting Services Agreement filed as Exhibit 9.9 to Amendment
No. 12 on December 27, 1996 and incorporated herein by reference.
9.10 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 Consent of Independent Auditors.
12 Not applicable.
13 None.
14 None.
15 None.
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<PAGE>
16 None.
17. Financial Data Schedules.
18. 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 June 30, 1997, the Trust had 61 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
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, 1996, the
C-7
<PAGE>
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 Positions in Offices
Business Address with Principal Underwriter with Registrant
---------------- -------------------------- --------------------
Arthur E. Nicholas Chairman None
John D. Wylie President President
Peter J. Johnson Vice President Vice President
Thomas Pindelski Chief Financial Officer Chief Financial
Officer
E. Blake Moore, Jr. General Counsel and Secretary
Secretary
Todd Spillane Director of Compliance None
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).
C-8
<PAGE>
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding 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.
C-9
<PAGE>
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 30th day of July, 1997.
NICHOLAS-APPLEGATE INVESTMENT TRUST
By /s/ E. BLAKE MOORE, JR.
-----------------------------------
E. Blake Moore, Jr.
Secretary
C-10
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE INVESTMENT TRUST
AMENDMENT NO. 13 TO
FORM N-1A REGISTRATION STATEMENT
File No. 811-7384
EXHIBIT NO. TITLE OF EXHIBIT
- ----------- ----------------
11 Consent of Independent Auditors.
17 Financial Data Schedules.
C-11
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Auditors" and "Financial Statements" in the Prospectus and the related
Statement of Additional Information in Amendment No. 13 to the Registration
Statement (Form N-1A No. 811-7384) of Nicholas-Applegate Investment Trust.
Los Angeles, California
July 30, 1997
C-12
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