<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
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VALUE INSTITUTIONAL PORTFOLIO
PROSPECTUS
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment
portfolios, including the Value Institutional Portfolio ("Portfolio") offered
hereby. The Portfolio seeks 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. It invests in the
Nicholas-Applegate Value Fund, which in turn invests primarily in a diversified
portfolio of equity securities of issuers with larger market capitalizations. It
is generally offered to institutional investors and high net worth individuals.
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THE PORTFOLIO, UNLIKE MANY OTHER INVESTMENT COMPANIES WHICH DIRECTLY ACQUIRE
AND MANAGE THEIR OWN PORTFOLIOS OF SECURITIES, SEEKS TO ACHIEVE ITS INVESTMENT
OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN A CORRESPONDING SERIES ("FUND") OF
NICHOLAS-APPLEGATE INVESTMENT TRUST, WHICH HAS THE SAME OBJECTIVE AS THE
PORTFOLIO. THE FUND IN TURN INVESTS ITS ASSETS, INCLUDING THOSE OF THE
PORTFOLIO, IN PORTFOLIO SECURITIES. ACCORDINGLY, THE INVESTMENT EXPERIENCE OF
THE PORTFOLIO WILL CORRESPOND DIRECTLY WITH THE INVESTMENT EXPERIENCE OF THE
FUND. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. SEE
"INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS--SPECIAL CONSIDERATIONS
REGARDING MASTER/FEEDER STRUCTURE," PAGE 6, FOR ADDITIONAL INFORMATION REGARDING
THIS UNIQUE STRUCTURE. THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO OR FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE.
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SHARES OF THE PORTFOLIO ARE NOT BANK DEPOSITS AND ARE NOT FEDERALLY INSURED
BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE PORTFOLIO INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus presents information you should know before investing in the
Portfolio. It should be retained for future reference. A Statement of Additional
Information for Nicholas-Applegate Mutual Funds dated April 17, 1996 has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. The Statement may be obtained, without charge,
by writing to the Trust, P.O. Box 82169, San Diego, California 92138-2169, or by
calling (800) 551-8643. Inquiries regarding any of the Portfolios can also be
made by calling (800) 551-8643.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
APRIL 17, 1996
<PAGE>
NICHOLAS--APPLEGATE MUTUAL FUNDS
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VALUE INSTITUTIONAL PORTFOLIO
TABLE OF CONTENTS
Summary of Expenses........................3
Prospectus Summary.........................4
Investment Objective, Policies and Risk
Considerations.............................6
Organization and Management................9
Purchasing Shares.........................11
Investor Services.........................13
Redeeming Shares..........................15
Dividends, Distributions and Taxes........16
General Information.......................17
Appendix: Investment Policies, Strategies
and Risks.................................19
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE PORTFOLIO OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE PORTFOLIO OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION.
2
<PAGE>
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SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in the
Portfolio. These are expected expenses of the Portfolio for its first year of
operations, and because the Portfolio invests all of its assets in the Fund, the
Portfolio's expenses include its proportionate share of the operating expenses
of the Fund. Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
VALUE
INSTITUTIONAL
PORTFOLIO
<S> <C>
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SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases (as a percentage of offering price) None
Sales charge on reinvested dividends None
Deferred sales charge (as a percentage of original purchase price or redemption proceeds,
whichever is lower) None
Redemption fee None
Exchange fee None
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ANNUAL PORTFOLIO OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS (AFTER EXPENSE
REDUCTION):(1)
Management fees 0.75 %
12b-1 expenses None
All other expenses (after expense deferral)(1) 0.25 %
Total operating expenses (after expense deferral)(1) 1.00 %
</TABLE>
The Board of Trustees of the Trust believes that the aggregate per share
expenses of the Portfolio are no greater than the expenses that the Portfolio
would incur if it retained the services of an investment adviser and the assets
of the Portfolio were invested directly in the types of securities held by the
Fund. For a detailed description of the expenses of the Portfolio and the Fund,
see "Organization and Management."
- ---------------------------
(1)
The Investment Adviser of the Master Trust has agreed to waive or defer its
fees, and to absorb other operating expenses, to ensure that the expenses for
the Portfolio (other than interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital expenditures and extraordinary
expenses) will not exceed 1.00% of the Portfolio's average net assets on an
annual basis through March 31, 1997. In subsequent years, overall operating
expenses for the Portfolio will not fall below 1.00% of average net assets
until the Investment Adviser has fully recouped fees deferred or expenses paid
by the Investment Adviser under this agreement, as the Portfolio will reimburse
the Investment Adviser when operating expenses (before recoupment) for the
Portfolio are less than 1.00% of average net assets. Accordingly, until all
such deferred fees or expenses have been recouped by the Investment Adviser,
the Portfolio's expenses will be higher, and its yields will be lower, than
would otherwise be the case. See "Organization and Management-Expense
Limitation." Actual operating expenses for the Portfolio for the fiscal year
ended March 31, 1997 are estimated to be 2.07% of the Portfolio's average net
assets (annualized). The various operating expenses of the Portfolio are
further described under "Organization and Management."
EXAMPLE OF PORTFOLIO EXPENSES. The following table illustrates the expenses that
an investor would pay on a hypothetical $1,000 investment in the Portfolio over
various time periods, assuming (1) a 5% annual return and (2) redemption at the
end of each time period. The Portfolio does not charge a redemption fee.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C> <C>
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Value Institutional Portfolio $ 10 $ 32
</TABLE>
This Example assumes that all dividends and other distributions are reinvested
and that the percentage amounts listed under the heading "Annual Portfolio
Operating Expenses" in the fee table above remain the same in the years shown.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE PORTFOLIO'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN. The hypothetical 5% annual return is used for illustrative purposes only
and should not be interpreted as an estimate of the Portfolio's annual return,
as there can be no guarantee of the Portfolio's future performance.
3
<PAGE>
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PROSPECTUS SUMMARY
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment portfolios,
including the Value Institutional Portfolio ("Portfolio") offered hereby. The
Portfolio is generally offered to institutional investors, high net worth
individuals, and participants in certain mutual fund asset allocation programs.
INVESTMENT OBJECTIVE. The investment objective of the Portfolio 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. There can be no assurance that the Portfolio will achieve its
investment objective. See "Investment Objective, Policies and Risk
Considerations" and "Appendix: Investment Policies, Strategies and Risks."
MASTER/FEEDER STRUCTURE. The Portfolio seeks to achieve its investment objective
by investing all of its assets in the Value Fund ("Fund") of Nicholas-Applegate
Investment Trust (the "Master Trust"), a diversified, open-end management
investment company. The Fund has the same investment objective as the Portfolio.
The Fund, in turn, holds investment securities. Although the "master/feeder"
structure employed by the Portfolio to achieve its investment objectives could
provide certain efficiencies and economies of scale, it could also have
potential adverse effects such as those resulting from large-scale redemptions
by other investors of their interests in the Fund, or from the failure by
investors of the Portfolio to approve a change in investment objectives and
policies that has been approved by the investors of the Fund. There may also be
other investment companies through which you can invest in the Fund which may
have higher or lower fees and expenses than those of the Portfolio. See
"Investment Objective, Policies and Risk Considerations-Special Considerations
Regarding Master/Feeder Structure."
The Portfolio may cease investing in the Fund only if the Trust's Board of
Trustees determines that this is in the best interests of the Portfolio and its
investors, and only with the approval of the Portfolio's investors. In such
event the Board of Trustees would consider alternative arrangements such as
investing all of the Portfolio's assets in another investment company with the
same investment objective as the Portfolio or hiring an investment adviser to
manage the Portfolio's assets in accordance with the Portfolio's investment
policies. No assurance exists that satisfactory alternative arrangements would
be available.
INVESTMENT RISKS AND CONSIDERATIONS. INVESTMENT RISKS AND OTHER CONSIDERATIONS
RELEVANT TO THE SECURITIES IN WHICH THE PORTFOLIO INVESTS THROUGH THE FUND ARE
DESCRIBED UNDER "INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS" AND IN
"APPENDIX: INVESTMENT POLICIES, STRATEGIES AND RISKS." They include the
following:
Investments by the Fund in securities of foreign companies involve special risks
in addition to the usual risks inherent in domestic investments, including
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. Settlement of transactions in foreign markets may be delayed or
less frequent than in the U.S., and foreign governments may withhold taxes from
dividends and interest paid on securities held by the Fund. There is also likely
to be less publicly available information about certain foreign issuers than is
available about U.S. companies, and foreign companies are not generally subject
to uniform financial reporting standards comparable to those applicable to U.S.
companies.
The investment approach of Nicholas-Applegate Capital Management (the
"Investment Adviser") results in above-average portfolio turnover. A high rate
of portfolio turnover involves correspondingly greater brokerage commission
expenses, and may also result in the realization and distribution to
shareholders of net capital gains which are taxable to them as ordinary income
for federal tax purposes.
4
<PAGE>
For hedging purposes, the Fund may effect transactions in futures contracts and
related options on stock indices. These are derivative instruments, whose value
derives from the value of an underlying index. Risks associated with the use of
such instruments include the possibility that the Investment Adviser's forecasts
of market values and other factors are not correct; imperfect correlation
between the Fund's hedging technique and the asset or liability being hedged;
default by the other party to the transaction; and inability to close out a
position because of the lack of a liquid market. Investment in such derivative
instruments may not be successful, and may reduce the returns and increase the
volatility of the Fund. See "Appendix: Investment Policies, Strategies and
Risks" in this Prospectus and "Investment Objectives, Policies and Risks" in the
Statement of Additional Information.
The Fund may invest up to 15% of its net assets in illiquid securities. The Fund
may enter into repurchase agreements and lend its portfolio securities, which
involve the risk of loss upon the default of the seller or borrower. The Fund
may also borrow money from banks for temporary purposes which, among other
things, may require the Fund to sell portfolio securities to meet interest and
principal payments at an unfavorable time. See "Repurchase Agreements,"
"Securities Lending" and "Borrowing" in "Appendix: Investment Policies,
Strategies and Risks."
The Fund commenced operation as of the date of this Prospectus and has no
operating history.
INVESTMENT ADVISER. The Trust has not retained the services of an investment
adviser for the Portfolio, as the Portfolio seeks to achieve its investment
objectives by investing all of its assets in the Fund. Nicholas-Applegate
Capital Management serves as investment adviser to the Fund. The Investment
Adviser has been in the investment advisory business since 1984 and currently
manages approximately $29 billion of discretionary assets for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations and other institutional investors,
and individuals. The Investment Adviser is compensated for its services to the
Fund in the form of monthly fees at the annual rate of 0.75% of the Fund's net
assets. See "Organization and Management."
DISTRIBUTOR. Nicholas-Applegate Securities (the "Distributor"), an affiliate of
the Investment Adviser, serves as distributor of shares of the Portfolio. The
Portfolio does not pay distribution or other fees to the Distributor in
connection with services it provides.
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN. Investment Company Administration
Corporation (the "Administrator") is the administrator for the Trust, with
responsibility for managing the daily business operations of the Portfolio,
subject to the supervision of the Trust's Board of Trustees. It also acts as
administrator for the Master Trust. PNC Bank (the "Custodian") is the custodian
for the Trust and the Master Trust, and State Street Bank and Trust Company (the
"Transfer Agent") is the transfer and dividend disbursing agent for the Trust.
PURCHASE OF SHARES. Shares of the Portfolio are generally offered to
institutional investors and high net worth individuals. Purchases may only be
made by check or by wiring federal funds to the Transfer Agent. Shares are
purchased at the next offering price without any sales charge, after an order is
received in proper form by the Transfer Agent or a sub-transfer agent. The
minimum initial investment is $250,000 and the minimum subsequent investment is
$10,000. The minimum initial and subsequent investments are waived for
individual participants of qualified retirement plans and for certain others,
and may be waived from time to time by the Distributor for other investors.
Shares of the Portfolio may also be purchased with securities which are
otherwise appropriate for investment by the Portfolio. See "Purchasing Shares."
INVESTOR SERVICES. The following services are provided to investors of the
Portfolio for their convenience and flexibility: an automatic investment plan;
automatic reinvestment and cross-reinvestment of dividends and capital gains
distributions; an exchange privilege; and automatic withdrawals. See "Investor
Services." Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
5
<PAGE>
REDEEMING SHARES. Shares of the Portfolio may be redeemed by writing to the
Transfer Agent or by telephone if telephone redemption privileges have been
established. Redemption proceeds will be wired to your bank. Participants of
qualified retirement plans must make redemption requests to the plan sponsor or
administrator. The price received for Portfolio shares redeemed is at the next
determined net asset value after the request is received by the Transfer Agent
or a sub-transfer agent, which may be more or less than the purchase price. No
contingent deferred sales charge or other fee is imposed on redemptions. See
"Redeeming Shares."
DIVIDENDS, DISTRIBUTIONS AND TAXES. The Portfolio declares and pays annual
dividends of net investment income and makes distributions at least annually of
any net capital gains. All dividends and distributions will be paid in the form
of additional shares at net asset value unless cash payment is requested.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The investment objective and policies of the Portfolio are discussed below and
in "Appendix: Investment Policies, Strategies and Risks."
SPECIAL CONSIDERATIONS REGARDING MASTER/FEEDER STRUCTURE. The Portfolio seeks to
achieve its investment objective by investing all of its assets in the Fund,
which has the same objective as the Portfolio. The Fund, in turn, holds
investment securities. Accordingly, the investment experience of the Portfolio
will correspond directly with the investment experience of the Fund. For a
description of the Fund's objective, policies, restrictions, management and
expenses, see "Organization and Management" below and "Appendix: Investment
Objective, Policies and Risk Considerations." There can be no assurance that the
Portfolio or Fund will achieve its investment objective. The Portfolio's and
Fund's investment objective is a fundamental policy which may not be changed
without the approval of the holders of a majority of the outstanding shares of
the Portfolio or Fund, respectively, as defined in the Investment Company Act of
1940 (the "Investment Company Act"). Upon any such approval, the Portfolio will
provide at least 30 days' written notice to its investors before any change is
made to its or the Fund's investment objective.
There are certain risks to the Portfolio related to the use of the
"master/feeder" structure. Such risks include, but are not limited to, the
following: Large-scale redemptions by other investment companies of their
interests in the Fund, could have adverse effects, such as lack of portfolio
diversity and decreased economies of scale, and could result in the shareholders
of the Portfolio, as the remaining investor in the Fund, bearing all the
operating costs of the Fund and thus experiencing higher pro rata operating
expenses and lower returns than would otherwise be the case. In addition, the
total withdrawal by another investment company as an investor in the Fund will
cause the Fund to terminate automatically in 120 days, unless the Portfolio and
any other investors in the Fund unanimously agree to continue the business of
the Fund. As the Portfolio is required to submit such matters to a vote of its
shareholders, it will be required to incur the expenses of shareholder meetings
in connection with such withdrawals. If unanimous agreement is not reached to
continue the Fund, the Board of Trustees of the Trust would need to consider
alternative arrangements for the Portfolio, including investing all of the
Portfolio's assets in another investment company with the same investment
objective as the Portfolio or hiring an investment adviser to manage the
Portfolio's assets in accordance with the investment policies described below
and in "Appendix: Investment Policies, Strategies and Risks." The absence of
substantial experience with the
6
<PAGE>
master/feeder structure could result in accounting or other difficulties.
Failure by investors of the Portfolio to approve a change in the investment
objective and policies of the Portfolio parallel to a change that has been
approved by the investors of the Fund would require the Portfolio to redeem its
shares of the Fund; this could result in a distribution in kind to the Portfolio
of the portfolio securities of the Fund (rather than a cash distribution),
causing the Portfolio to incur brokerage fees or other transaction costs in
converting such securities to cash, reducing the diversification of the
Portfolio's investments and adversely affecting its liquidity. Other
shareholders in the Fund may have a greater ownership interest in the Fund than
the Portfolio's interest, and could thus have effective voting control over the
operation of the Fund.
The Trust's Board of Trustees believes that the Portfolio will achieve certain
efficiencies and economies of scale through the "master/feeder" structure, and
that the aggregate expenses of the Portfolio will be less than if the Portfolio
invested directly in the securities held by the Fund. However, other investment
companies that offer their shares to the public also may invest all or
substantially all of their assets in the Fund. Accordingly, there may be other
investment companies through which investors can invest indirectly in the Fund.
The fees charged by such other investment companies may be higher or lower than
those charged by the Portfolio, which may reflect, among other things,
differences in the nature and level of the services and features offered by such
companies to their investors. Information about the availability of other
investment companies that invest in the Fund can be obtained by calling (800)
551-8643.
The Portfolio may cease investing in the Fund only if the Board of Trustees of
the Trust determines that such action is in the best interests of the Portfolio
and its investors, and only with the approval of the Portfolio's investors. In
that event, the Board of Trustees would consider alternative arrangements,
including investing all of the Portfolio's assets in another investment company
with the same investment objective as the Portfolio or hiring an investment
adviser to manage the Portfolio's assets in accordance with the investment
policies described below and in "Appendix: Investment Policies, Strategies and
Risks."
VALUE INSTITUTIONAL PORTFOLIO. The Value Institutional Portfolio seeks 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 (the "S&P 500 Index"). It invests all of its assets in the
Nicholas-Applegate Value Fund, which has the same investment objective as the
Portfolio. Under normal circumstances, the 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 and instruments described in "Appendix: Investment Policies,
Strategies and Risks".
INVESTMENT TECHNIQUES AND PROCESSES. The focus of the Investment Adviser's
investment program is GROWTH OVER TIME-REGISTERED TRADEMARK-. In making
decisions with respect to equity securities for the Fund, 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
7
<PAGE>
it to various segments of the capital markets, domestically and internationally.
This methodology consists of investment techniques and processes designed to
identify companies with attractive earnings and dividend growth potential and to
evaluate their investment prospects. These techniques and processes include
relationships with an extensive network of brokerage and research firms located
throughout the world; computer-assisted fundamental analysis of thousands of
domestic 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 collects data on approximately 26,000 companies in 35
countries (adjusted for reporting and accounting differences). There can be no
assurance that use of the proprietary investment methodology will be successful.
The decision to invest assets of the Fund in any particular debt security 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. In managing the Fund's debt security investments, 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.
INVESTMENT POLICIES, STRATEGIES AND RISKS. The Appendix and the Statement of
Additional Information describe certain investment securities and techniques of
the Fund, and the associated risks. These include short-term investments in cash
and cash equivalents; investment in debt securities of the U.S. government and
its agencies and instrumentalities; floating and variable rate demand notes and
bonds; commercial paper; non-convertible corporate debt securities; convertible
securities, synthetic convertible securities, and warrants; depository receipts;
foreign securities; over-the-counter securities; when-issued securities and firm
commitment agreements; futures contracts; repurchase agreements; illiquid
securities; securities lending; and borrowing.
INVESTMENT RESTRICTIONS. The Portfolio and Fund are 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 shares of the Portfolio or Fund, respectively, as defined in the
Investment Company Act. An investment policy or restriction which is not
described as fundamental in this Prospectus or the Statement of Additional
Information may be changed or modified by the Board of Trustees of the Trust or
Master Trust, as the case may be, without shareholder approval.
Certain of the investment restrictions which are fundamental policies are set
forth below. Additional investment restrictions are discussed in the Appendix
and Statement of Additional Information.
1. Neither the Portfolio nor the Fund may invest more than 5% of its total
assets in the securities of any one issuer. However, up to 25% of the
Portfolio's or Fund's total assets may be invested without regard to this
limitation, and this limitation does not apply to investments in
securities of the U.S. Government or its agencies and instrumentalities.
8
<PAGE>
2. Neither the Portfolio nor the 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. Neither the Portfolio nor the 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.
4. Neither the Portfolio nor the Fund may make loans of its portfolio
securities in an aggregate amount exceeding 30% of the value of its total
assets, or borrow money (except from banks for temporary, extraordinary or
emergency purposes or for the clearance of transactions and in an
aggregate amount not exceeding 20% of the value of its total assets).
5. Neither the Portfolio nor the Fund may invest more than 15% of its net
assets in illiquid securities.
The investment restrictions described above do not apply to an investment by the
Portfolio of all of its assets in the Fund.
PORTFOLIO TURNOVER. The Investment Adviser's investment approach results in
above-average portfolio turnover, as the Investment Adviser sells portfolio
securities when it believes the reasons for their initial purchase are no longer
valid or when it believes that the sale of a security owned by the Fund and the
purchase of another security of better value can enhance principal or increase
income. A security may also be sold to avoid a prospective decline in market
value or purchased in anticipation of a market rise. Although it is not possible
to predict future portfolio turnover rates accurately, and such rates may vary
greatly from year to year, the Investment Adviser anticipates that the Fund's
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) involves correspondingly greater brokerage commission expenses,
which will be borne directly by the Fund and ultimately by the investors of the
Portfolio. 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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ORGANIZATION AND MANAGEMENT
ORGANIZATION. The Portfolio is a series of Nicholas-Applegate Mutual Funds, a
Delaware business trust. The Board of Trustees of the Trust, in addition to
reviewing the actions of the Trust's Administrator and Distributor, as set forth
below, decides upon matters of general policy with respect to the Portfolio. See
"General Information." The trustees and officers of the Trust and of the Master
Trust are described in "Trustees and Principal Officers" in the Statement of
Additional Information. None of the disinterested trustees of the Trust are the
same individuals as the disinterested trustees of the Master Trust.
INVESTMENT ADVISER. The Trust has not retained the services of an investment
adviser for the Portfolio, as the Portfolio seeks to achieve its investment
objective by investing all of its assets in the Fund. Nicholas-Applegate Capital
Management, 600 West Broadway, 30th Floor, San Diego, California 92101, serves
as the Investment Adviser to the Fund. The Investment Adviser currently manages
a total of approximately $29 billion of discretionary assets for numerous
clients, including employee benefit plans of corporations, public retirement
systems
9
<PAGE>
and unions, university endowments, foundations and other institutional
investors. The Investment Adviser was organized in 1984 as a California limited
partnership. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership controlled by Arthur E.
Nicholas. He and fourteen other partners manage a staff of approximately 300
employees.
As compensation for the services it provides, the Investment Adviser receives a
monthly fee at the annual rate of 0.75% of the Fund's net assets. The Fund is
managed under the general supervision of Mr. Nicholas, who has been the chief
investment officer of the Investment Adviser since its organization. John D.
Wylie, the Investment Adviser's Chief Investment Officer-Retail, has been
primarily responsible for the Investment Adviser's day-to-day management of the
Fund's portfolio since the Fund began operation. He has managed institutional
accounts for the Investment Adviser for more than the last five years.
ADMINISTRATOR. Investment Company Administration Corporation, a Delaware
corporation, is the Administrator of the Portfolio. 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. For the services
it provides to the Trust, the Administrator receives an annual fee of between
$5,000 and $35,000 for each of the groups of portfolios of the Trust investing
in the various series of the Master Trust; the fee is allocated among various
series of the Trust, including the Portfolio, in accordance with relative net
asset values. The Administrator provides similar services as the administrator
of the Master Trust, subject to the supervision of its Board of Trustees, and is
compensated separately for the services rendered to the Fund at an annual rate
of approximately .02% of the average daily net assets of the Fund.
EXPENSE LIMITATION. To limit the expenses of the Portfolio, the Investment
Adviser has agreed to defer its fees, and to absorb the other operating expenses
of the Portfolio, to ensure that the expenses of the Portfolio (excluding
interest, taxes, brokerage commissions and other portfolio transaction expenses,
capital expenditures and extraordinary expenses, but including the Portfolio's
proportionate share of the Fund's similar operating expenses) do not exceed
1.00% of the Portfolio's average net assets on an annual basis through March 31,
1997. The Portfolio will reimburse the Investment Adviser for fees deferred or
other expenses paid by the Investment Adviser pursuant to this agreement in
later years in which operating expenses for the Portfolio are less than the
applicable percentage limitation set forth above for any such year. No interest,
carrying or finance charge will be paid by the Portfolio with respect to any
amounts representing fees deferred or other expenses paid by the Investment
Adviser. In addition, neither the Portfolio nor the Fund will be required to
repay any unreimbursed amounts to the Investment Adviser upon termination or
non-renewal of its Investment Advisory Agreement with the Master Trust.
DISTRIBUTOR. Nicholas-Applegate Securities, 600 West Broadway, 30th Floor, San
Diego, California 92101, a California limited partnership, serves as the
Distributor of shares of each Portfolio. The general partner of the Distributor
is Nicholas-Applegate Capital Management Holdings, L.P. and its limited partner
is the Investment Adviser.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT. PNC Bank, Airport Business
Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania, 19113,
serves as Custodian for the Portfolio and the Fund. PFPC Inc., an affiliate of
the Custodian, provides accounting
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services to the Portfolio and the Fund. State Street Bank and Trust Company,
Mutual Funds Division, Nicholas-Applegate, 2 Heritage Drive, 5th Floor, North
Quincy, Massachusetts 02171, is the Transfer Agent and the Dividend Disbursing
Agent for the Portfolio.
PORTFOLIO TRANSACTIONS AND BROKERAGE. The Investment Adviser is responsible for
the Fund's portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser seeks to obtain the best
price and execution for the Fund. Subject to obtaining the best price and
execution, the Investment Adviser may effect transactions through brokers who
sell shares of the Portfolio or provide research services to the Investment
Adviser, which may result in the payment of higher commissions than those
charged by other brokers. However, the selection of such brokers will be made in
accordance with Section 28(e) of the Securities Exchange Act of 1934. Section
28(e) requires the Investment Adviser to make a good faith determination that
the commissions paid are reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities with
respect to the accounts as to which it exercises investment discretion.
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PURCHASING SHARES
HOW TO PURCHASE SHARES. Shares of the Portfolio are offered to institutional
investors, high net worth individuals, and participants in mutual fund asset
allocation programs sponsored by certain broker-dealers. Shares of the Portfolio
are also offered to former limited partners and participants of certain
investment partnerships and pooled trusts previously managed by the Investment
Adviser (the "former partners"); to partners, officers and employees of the
Investment Adviser and Distributor and their immediate family members; and to
certain other persons determined from time to time by the Distributor.
Investments by individual participants of qualified retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
all orders for the purchase, redemption and exchange of Portfolio shares. The
availability of an investment by a plan participant in the Portfolio, and the
procedures for investing, depend upon the provisions of the qualified retirement
plan and whether the plan sponsor or administrator has contracted with the Trust
or the Transfer Agent for special processing services, including subaccounting.
Other institutional investors and eligible purchasers must arrange for services
through the Transfer Agent or Distributor by calling (800) 551-8043.
Shares of the Portfolio may be purchased at net asset value without a sales
charge. The minimum initial investment is $250,000 and the minimum subsequent
investment is $10,000. The minimum initial and subsequent investments are waived
for individual participants of qualified retirement plans and for the former
partners and trust participants described above, and may be waived from time to
time by the Distributor for other investors. Shares will be purchased for a
participant of a qualified retirement plan only upon receipt by the plan's
recordkeeper of the participant's funds accompanied by the information necessary
to determine the proper share allocation for the participant.
An account may be opened by completing and signing an account application and
sending it to the address indicated on the application. Account applications can
be obtained from the Distributor or Transfer Agent. Individual participants of
qualified retirement plans can obtain
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an account application from their plan sponsor or administrator. Plan sponsors
and administrators will be responsible for forwarding to the Transfer Agent all
relevant information and account applications for plan participants.
Purchases of shares of the Portfolio can be made by check or by wiring federal
funds to the Transfer Agent. Checks should be in U.S. dollars and made payable
to Nicholas-Applegate Mutual Funds or, in the case of a retirement account, the
custodian. Third party checks, except those payable to an existing shareholder
who is a natural person (as opposed to a corporation or partnership) and checks
drawn on credit card accounts will normally not be accepted. Checks should be
sent to the Transfer Agent, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, Attention: Mutual Funds Division,
Nicholas-Applegate. Please specify the name of the Portfolio, the account number
assigned by the Transfer Agent, and your name. See "Purchase by Wire" below for
wiring instructions. Shares of the Portfolio may also be purchased with
securities which are otherwise appropriate for investment by the Portfolio.
PURCHASE BY WIRE. Before wiring federal funds, you must first telephone the
Transfer Agent at (800) 551-8043 (toll-free) between the hours of 8:00 A.M. and
4:00 P.M. (Eastern Time) on a day when the New York Stock Exchange is open for
normal trading to receive an account number. The following information will be
requested: your name, address, tax identification number, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to the Portfolio's Transfer Agent,
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, ABA No. 011000028, DDA No. 9904-645-0 Attention: Mutual Funds Division,
Nicholas-Applegate, specifying on the wire the name of the Portfolio, the
account number assigned by the Transfer Agent and your name. If you arrange for
receipt by the Transfer Agent of federal funds prior to close of trading
(currently 4:00 P.M., Eastern time) of the New York Stock Exchange on a day when
the Exchange is open for normal trading, you may purchase shares of the
Portfolio as of that day. Your bank is likely to charge you a fee for wire
transfers.
Subsequent purchases by wire may be made at any time by calling the Transfer
Agent and wiring federal funds as outlined above.
Individual participants of qualified retirement plans should purchase Portfolio
shares through their plan sponsor or administrator who is responsible for
forwarding payment to the Transfer Agent.
SHARE PRICE. Shares are purchased at the next offering price after the order is
received in proper form by the Transfer Agent or a sub-transfer agent. An order
in proper form must include all correct and complete information, documents and
signatures required to process your purchase, as well as a check or bank wire
payment properly drawn and collectable. For purchases by a qualified retirement
plan, an order in proper form is defined as receipt of funds and the information
necessary to determine the proper share allocation for each participant. The
price per share is its net asset value, which is determined as of the close of
trading of the New York Stock Exchange on each day the Exchange is open for
normal trading. Orders received before 4:00 P.M. (Eastern time) on a day when
the Exchange is open for normal trading will be processed as of the close of
trading on that day. Otherwise, processing will occur on the next business day.
To determine the Portfolio's net asset value per share, the current value of the
Portfolio's total assets, less all liabilities, is divided by the total number
of shares outstanding, and the result is rounded to the nearer cent.
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Investors may be charged a fee if they affect transactions through a broker or
agent.
RETIREMENT PLANS. You may invest in the Portfolio through various retirement
plans including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans (including 401(k) plans). For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please consult your tax adviser.
OTHER PORTFOLIOS. Currently, the Trust has twelve Institutional Portfolios.
Seven other domestic Institutional Portfolios and four global Institutional
Portfolios are offered pursuant to separate prospectuses which can be obtained
by calling (800) 551-8643. The Distributor also offers shares of other
portfolios of the Trust which invest in the same Funds of the Master Trust as
the Institutional Portfolios. These other portfolios have different sales
charges and other expenses than the Institutional Portfolios, which may affect
their performance. Information about these other portfolios can be obtained from
your dealer or by calling (800) 551-8045.
OTHER PURCHASE INFORMATION. Purchases of Portfolio shares will be made in full
and fractional shares. In the interest of economy and convenience, certificates
for shares will generally not be issued. The Portfolio reserves the right to
reject any purchase order or to suspend or modify the continuous offering of its
shares.
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INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN. Investors may make regular monthly or quarterly
investments in the Portfolio through automatic withdrawals of specified amounts
from their bank account once an automatic investment plan is established.
Individual participants of qualified retirement plans may make regular
investments in the Portfolio through payroll deductions in accordance with
procedures adopted by the plan sponsor or administrator. Further details about
this service and an application form are available from the Distributor or from
your plan sponsor or administrator.
AUTOMATIC REINVESTMENT. Dividends and capital gain distributions are reinvested
in additional shares at no sales charge unless you indicate otherwise on the
account application. You may elect to have dividends and capital gain
distributions paid in cash.
CROSS-REINVESTMENT. You may cross-reinvest dividends or dividends and capital
gain distributions paid by the Portfolio into shares of any other Institutional
Portfolio series of the Trust, subject to conditions outlined in the Statement
of Additional Information and the applicable provisions of the qualified
retirement plan.
EXCHANGE PRIVILEGE. Shares of the Portfolio may be exchanged into shares of any
other available Institutional Portfolio series of the Trust by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention: Mutual Funds
Division, Nicholas-Applegate, P.O. Box 8326, Boston, Massachusetts 02266-8326.
Please specify the name of the applicable series, the number of shares or dollar
amount to be exchanged and your name and account number. Shares may also be
exchanged by telephoning the Transfer Agent at (800) 551-8043 or by sending the
Transfer Agent a facsimile at (617) 774-2651, between the hours of 8:00 A.M. and
4:00 P.M. (Eastern time) on a day when the New York Stock Exchange is open for
normal trading (see "Telephone Privilege" below). The Trust's exchange privilege
is not intended to
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afford shareholders a way to speculate on short-term market movements.
Accordingly, the Trust reserves the right to limit the number of exchanges an
investor or participant may make in any year, to avoid excessive Portfolio
expenses.
Individual participants of qualified retirement plans may exchange shares
(depending upon the provisions of the plan) by written or telephone request
through the plan sponsor or administrator. Such participants may exchange shares
only for shares of other Institutional Portfolios that are included in their
plans. In addition, the exchange privilege may not be available to investors who
are eligible to purchase shares of the Portfolio as a result of agreements
between the Distributor and certain broker-dealers, financial planners and
similar institutions.
Before effecting an exchange, investors should obtain the currently effective
prospectus of the series into which the exchange is to be made. All exchanges
will be made on the basis of the relative net asset values of the two series
next determined after a completed request is received. Exchange purchases are
subject to the minimum investment requirements of the series being purchased. An
exchange will be treated as a redemption and purchase for tax purposes.
TELEPHONE PRIVILEGE. Investors may exchange or redeem shares by telephone if
they have elected the telephone privilege on their account application.
Participants in qualified retirement plans may make telephone requests only
through their plan sponsor or administrator and only if such service is offered
under the plan. Investors should realize that by electing the telephone
privilege, they may be giving up a measure of security that they may have if
they were to exchange or redeem their shares in writing. Furthermore, in periods
of severe market or economic conditions, telephone exchanges or redemptions may
be difficult to implement, in which case investors should mail or send by
overnight delivery a written exchange or redemption request to the Transfer
Agent. Overnight deliveries should be sent to the Transfer Agent, Attention:
Mutual Funds Division, Nicholas-Applegate, 2 Heritage Drive, 5th Floor, North
Quincy, Massachusetts 02171. Requests for telephone exchanges or redemptions
received before 4:00 P.M. (Eastern time) on a day when the New York Stock
Exchange is open for normal trading will be processed as of the close of trading
on that day. Otherwise, processing will occur on the next business day.
The Trust will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures employed by the Trust include requiring personal identification by
account number and social security number, tape recording of telephone
instructions, and providing written confirmation of transactions. The Trust
reserves the right to refuse a telephone exchange or redemption request if it
believes, for example, that the person making the request is neither the record
owner of the shares being exchanged or redeemed nor otherwise authorized by the
investor to request the exchange or redemption. Investors will be promptly
notified of any refused request for a telephone exchange. Neither the Portfolio
nor its agents will be liable for any loss, liability or cost which results from
acting upon instructions of a person reasonably believed to be an investor with
respect to the telephone exchange privilege.
AUTOMATIC WITHDRAWAL PLAN. An automatic withdrawal plan may be established by an
investor or by a qualified retirement plan sponsor or administrator for its
participants subject to the requirements of the plan and applicable federal law.
Individual participants of qualified retirement plans must establish automatic
withdrawal plans with the plan sponsor or administrator rather than the Trust.
Automatic withdrawals of $250 or more may be made on a monthly, quarterly,
semi-annual or annual basis if you have an account of at least $15,000
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when the automatic withdrawal plan begins. Withdrawal proceeds will normally be
received prior to the end of the period designated. All income dividends and
capital gain distributions on shares under the Automatic Withdrawal Plan must be
reinvested in additional shares of the Portfolio. For the protection of
investors and the Trust, wiring instructions must be on file prior to executing
any request for the wire transfer of automatic withdrawal proceeds.
ACCOUNT STATEMENTS. An account is opened in accordance with applicable
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from the Transfer Agent.
REPORTS TO INVESTORS. The Portfolio will send its investors annual and
semi-annual reports. The financial statements appearing in annual reports will
be audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Portfolios may provide one annual and semi-annual report
and annual prospectus per household. In addition, quarterly unaudited financial
data are available from the Portfolio upon request.
INVESTOR INQUIRIES. Investor inquiries should be addressed to the Trust, P.O.
Box 82169, San Diego, California 92138-2169, or by telephone, at (800) 551-8643
(toll free). Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
The services referred to above are available only in states where the Portfolio
to be purchased may be legally offered and may be terminated or modified at any
time upon 60 days' written notice. Investors seeking to add to, change or cancel
their selection of available services should contact the Transfer Agent of the
address and telephone number provided above.
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REDEEMING SHARES
HOW TO REDEEM SHARES. Shares of the Portfolio may be redeemed by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention: Mutual Funds
Division, Nicholas-Applegate, P.O. Box 8326, Boston, Massachusetts 02266-8326.
Redemptions by participants in qualified retirement plans must be made in
writing to the plan sponsor or administrator rather than the Trust. Please
specify the name of the Portfolio, the number of shares or dollar amount to be
sold and your name and account number. The price received for the shares
redeemed is at the next determined net asset value for the Portfolio shares
after the redemption request is received by the Transfer Agent or a sub-transfer
agent. No charge will be imposed by the Trust or the Transfer Agent for
redemptions.
The signatures on a redemption request must be exactly as names appear on the
Portfolio's account records, and the request must be signed by the minimum
number of persons designated on the account application that are required to
effect a redemption. Requests by participants of qualified retirement plans must
include all other signatures required by the plan and applicable federal law.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. If the proceeds of the redemption exceed
$50,000, are to be paid to a person other than the record owner, are to be sent
to an address other than the address on the Transfer Agent's records, or are to
be paid to a corporation, partnership, trust or fiduciary, the
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signature(s) on the redemption request may be required to be guaranteed by an
"eligible guarantor," which includes a bank or savings and loan association that
is federally insured or a member firm of a national securities exchange.
REDEMPTIONS BY TELEPHONE. If an election is made on the account application (or
subsequently in writing), redemptions of shares may be requested by contacting
the Transfer Agent by telephone at (800) 551-8043 or by facsimile at (617)
774-2651 between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading. Investors should
state the name of the Portfolio, the number of shares or dollar amount to be
sold and their name and account number. Participants of qualified retirement
plans may make telephonic or facsimile redemption requests through their plan
sponsor or administrator, provided that such service is offered under the plan
and satisfactory arrangements have been made with the Transfer Agent. Redemption
requests received by the Transfer Agent before 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading and be processed
that day. Otherwise, processing will occur on the next business day. See
"Investor Services-Telephone Privilege" above.
REDEMPTION PAYMENTS. Payment for shares presented for redemption will ordinarily
be wired to your bank one business day after redemption is requested, but may
take up to three business days after receipt by the Transfer Agent of a written
or telephonic redemption request except as indicated below. When purchases are
made by check, redemptions will not be allowed until the investment being
redeemed has been in the account for 15 business days. Such payment may be
postponed or the right of redemption suspended at times when the New York Stock
Exchange is closed for other than customary weekends and holidays, when trading
on such Exchange is restricted, when an emergency exists as a result of which
disposal by the Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio fairly to
determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Portfolio, the Trust
may redeem all of the shares of any investor whose account has a net asset value
of less than $10,000 due to redemptions other than a shareholder who is a
participant in a qualified retirement plan. The Trust will give such investors
60 days' prior written notice in which to purchase sufficient additional shares
to avoid such redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust intends to qualify the Portfolio as a regulated investment company
under the Internal Revenue Code. Accordingly, the Portfolio will not be subject
to federal income taxes on its net investment income and capital gains, if any,
that it distributes to its investors. All dividends out of net investment
income, together with distributions of short-term capital gains, will be taxable
as ordinary income to the investors whether or not reinvested. Any net long-term
capital gains distributed to investors will be taxable as such to the investors,
whether or not reinvested and regardless of the length of time an investor has
owned his shares.
The Portfolio declares and pays annual dividends of net investment income and
makes distributions at least annually of its net capital gains, if any. In
determining amounts of capital gains to be distributed by the Portfolio, any
capital loss carryovers from prior years will be offset against its capital
gains. Under U.S. Treasury Regulations, the Portfolio is required to withhold
and remit to the U.S. Treasury 31% of the dividends, capital gains and
redemption
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proceeds on the accounts of those investors who fail to furnish their correct
tax identification numbers on IRS Form W-9 (or IRS Form W-8, in the case of
certain foreign investors) with the required certifications regarding the
investor's status under the federal income tax law or who are subject to backup
withholding for failure to include payments of interest or dividends on their
returns. Notwithstanding the foregoing, dividends of net income and short-term
capital gains to a foreign investor will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
The Trust may elect to "pass through" to the Portfolio's shareholders the amount
of foreign income taxes paid by the Portfolio. The Trust will make such an
election only if it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of the Portfolio will be required to
include in their gross income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
The Fund is not required to pay federal income taxes on its net investment
income and capital gains, as it is treated as a partnership for tax purposes.
Any interest, dividends and gains or losses of the Fund will be deemed to have
been "passed through" to the Portfolio and other investors in the Fund,
regardless of whether such interest, dividends or gains have been distributed by
the Fund or losses have been realized by the Portfolio and such other investors.
Investors should consult their own tax advisers regarding specific questions as
to federal, state or local taxes. See "Dividends, Distributions and Taxes" in
the Statement of Additional Information.
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GENERAL INFORMATION
PERFORMANCE INFORMATION. From time to time the Trust may advertise the
Portfolio's total return. These figures are based on historical earnings and are
not intended to indicate future performance. Total return shows how much an
investment in the Portfolio would have increased (or decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the
Portfolio) assuming that all distributions and dividends by the Trust to
investors of the Portfolio were reinvested on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes which may be payable by the investor. The Trust also may include
comparative performance information in advertising or marketing Portfolio
shares. Such performance information may include data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices. See "Performance Information" in the Statement of
Additional Information.
DESCRIPTION OF SHARES. The Portfolio is a series of Nicholas-Applegate Mutual
Funds, a diversified, open-end management investment company. The Trust was
organized in December 1992 as a Delaware business trust. The Trust is authorized
to issue an unlimited number of shares of the Portfolio. Shares of the
Portfolio, when issued, are fully paid, nonassessable, fully transferable and
redeemable at the option of the holder. Shares of the Portfolio are also
redeemable at the option of the Trust under certain circumstances. There are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of the Portfolio is entitled to its portion of all of
the Portfolio's assets after all debts and expenses of the Portfolio have been
paid. Pursuant to the Trust's Declaration of Trust, the Board of Trustees of the
Trust may authorize the creation of additional series, and classes within
series, with such preferences, privileges, limitations and voting and dividend
rights as the Board may determine.
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Investors of the Portfolio are entitled to one vote for each full share held and
fractional votes for fractional shares held, and will vote by series except as
otherwise required by law or when the Board of Trustees of the Trust determines
that a matter to be voted upon affects only the interests of investors of a
particular series. Shares of the Trust do not have cumulative voting rights for
the election of Trustees. The Trust does not intend to hold annual meetings of
its investors unless otherwise required by law. The Trust will not be required
to hold meetings of investors unless the election of Trustees or any other
matter is required to be acted on by investors under the Investment Company Act.
Investors have certain rights, including the right to call a meeting upon the
request of 10% of the outstanding shares of the Portfolio, for the purpose of
voting on the removal of one or more Trustees.
MASTER TRUST. The Funds are series of Nicholas-Applegate Investment Trust, a
diversified, open-end management investment company organized as a Delaware
business trust in December 1992. The trustees and officers of the Master Trust
are described in the Statement of Additional Information. Whenever the Portfolio
is requested to vote on matters pertaining to the Fund or the Master Trust in
its capacity as a shareholder of the Fund, the Trust will hold a meeting of its
investors and will cast its vote as instructed by such investors or, in the case
of a matter pertaining exclusively to the Fund, as instructed particularly by
investors of the Portfolio and other series of the Trust which invest in the
Fund. The Trust will vote shares for which it has received no voting
instructions in the same proportion as the shares for which it does receive
voting instructions.
ADDITIONAL INFORMATION. This Prospectus, including the Statement of Additional
Information which has been incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by the Trust
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Master Trust has also filed a Registration Statement with the
Commission. Copies of the Trust's and Master Trust's Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
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APPENDIX
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INVESTMENT POLICIES, STRATEGIES AND RISKS
The investment policies and strategies of the Portfolio (as implemented through
its investment in the Fund) encompass the following securities, techniques and
risk considerations.
SHORT-TERM INVESTMENTS. The Fund may invest in short-term investments to
maintain liquidity for redemptions or during periods when, in the opinion of the
Investment Adviser, attractive investments are temporarily unavailable. Under
normal circumstances, no more than 10% of the Fund's total assets will be
retained in cash (U.S. dollars) and cash equivalents. However, the Fund may
invest without restriction in short-term investments for temporary defensive
purposes, such as when the securities markets or economic conditions are
expected to enter a period of decline. Short-term investments in which the Fund
may invest include U.S. Treasury bills or other U.S. Government or Government
agency or instrumentality obligations; certificates of deposit; bankers'
acceptances; time deposits; high quality commercial paper and other short-term
high grade corporate obligations; shares of money market mutual funds; or
repurchase agreements with respect to such securities. These instruments are
described below. The Fund will only invest in short-term investments which, in
the opinion of the Investment Adviser, present minimal credit and interest rate
risk.
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities in which the Fund 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 Fund will
invest in securities issued or guaranteed by U.S. Government agencies and
instrumentalities only when the Investment Adviser is satisfied that the credit
risk with respect to the issuer is minimal.
CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANKERS' ACCEPTANCES. The Fund may
invest in certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks, foreign banks, foreign branches of domestic banks, domestic
and foreign branches of foreign banks, and domestic savings and loan
associations, all of which at the date of investment have capital, surplus and
undivided profits as of the date of their most recent published financial
statements in excess of $100 million, or less than $100 million if the principal
amount of such bank obligations is insured by the Federal Deposit Insurance
Corporation. Certificates of deposit are certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Bankers' acceptances are
credit
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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. The Fund may invest in commercial paper of domestic and
foreign entities which is rated (or guaranteed by a corporation the commercial
paper of which is rated) in the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"), including
"P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P, or, if rated by only one
NRSRO, in such NRSRO's two highest grades, or, if not rated, is issued by an
entity which the Investment Adviser, acting pursuant to guidelines established
by the Master Trust's Board of Trustees, has determined to be of minimal credit
risk and comparable quality. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
VARIABLE RATE DEMAND NOTES. The Fund 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 the Fund to invest
fluctuating amounts, which may change daily without penalty. The interest rates
on these notes are adjusted at designated intervals or whenever there are
changes in the market rates of interest on which the interest rates are based.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Such obligations frequently are not rated by credit rating agencies and
the 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 the 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% of net assets
if there is no secondary market available for these obligations.
CORPORATE DEBT SECURITIES. The non-convertible corporate debt securities in
which the Fund 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 held by the Fund
are generally of investment grade. For short-term purposes, the Fund may also
invest in corporate obligations issued by domestic and foreign issuers 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 which are unrated but determined by the Investment Adviser to be of minimal
credit risk and comparable quality.
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CONVERTIBLE SECURITIES AND WARRANTS. The Fund 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 the yield is higher and the
security is senior to common stock. Convertible securities may also include
warrants which give the holder the right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price but which do not pay a fixed dividend. Investments in warrants involve
certain risks, including the possible lack of a liquid market for resale,
potential price fluctuations as a result of speculation or other factors, and
the failure of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently exercised,
in which event the warrant may expire without being exercised, resulting in a
loss of the Fund's entire investment therein. As a matter of operating policy,
the Fund will not invest more than 5% of its net assets in warrants.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value.
Like other debt securities, the market value of convertible securities tends to
vary inversely with the level of interest rates. The value of the security
declines as interest rates increase and increases as interest rates decline.
Although under normal market conditions longer term securities have greater
yields than do shorter term securities of similar quality, they are subject to
greater price fluctuations. Fluctuations in the value of the Fund's investments
will be reflected in its and the Portfolio's 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 the Fund is called for redemption, the Fund will be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Convertible debt securities purchased by the Fund, which are acquired in whole
or substantial part for their equity characteristics, are not subject to rating
requirements.
SYNTHETIC CONVERTIBLE SECURITIES. The Fund 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, 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
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market vaue 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, or an equivalent rating by any
other NRSRO, and will not invest more than 15% of its net assets in such
synthetic securities and other illiquid securities. See "Illiquid Securities"
below.
DEPOSITORY RECEIPTS. The Fund 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. Such
depository receipts may be sponsored by the foreign issuer or may be
unsponsored. The Fund 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 issuers of the
underlying securities.
FOREIGN INVESTMENT CONSIDERATIONS. There are special risks associated with
investments in securities of foreign companies and governments, which add to the
usual risks inherent in domestic investments. Such special risks include
fluctuations in foreign exchange rates, political or economic instability in the
country of issue, and the possible imposition of exchange controls or other laws
or restrictions. In addition, securities prices in foreign markets are generally
subject to different economic, financial, political and social factors than are
the prices of securities in United States markets. With respect to some foreign
countries there may be the possibility of expropriation or confiscatory
taxation, limitations on liquidity of securities or political or economic
developments which could affect the foreign investments of the 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 the 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. 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. See "Investment Objectives, Policies and Risks--Foreign
Investments" in the Statement of Additional Information.
OVER-THE-COUNTER SECURITIES. Securities owned by the Fund 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 the Fund of portfolio
securities to meet redemptions by investors or otherwise may require the Fund to
sell these securities at a 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.
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WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS. The Fund 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 the Fund enters into such a transaction may not
perform its commitment. The Fund will normally enter into these transactions
with the intention of actually receiving or delivering the securities. The Fund
may sell the securities before the settlement date.
To the extent the 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 Fund will segregate liquid assets such as cash, U.S. Government
securities and other liquid high quality debt securities in an amount sufficient
to meet their payment obligations with respect to these transactions. The Fund
may not purchase when-issued securities or enter into firm commitments if, as a
result, more than 15% of the Fund's net assets would be segregated to cover such
contracts.
FUTURES CONTRACTS. The Fund may purchase and sell stock index futures contracts
on the S&P 500 Index 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 Fund may also purchase and sell financial and currency futures contracts as
a hedge against changes in interest rates and foreign currency fluctuations, and
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 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 derivatives
instruments traded on United States 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.
The Fund 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
23
<PAGE>
held by the Fund. As a general rule, the Fund will not purchase or sell futures
if, immediately thereafter, more than 25% of its net assets would be hedged. In
addition, the Fund may not purchase or sell futures or related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5% of
the market value of the Fund's net assets. In instances involving the purchase
of futures contracts by the Fund, an amount of cash and cash equivalents equal
to the market value of the futures contracts will be deposited in a segregated
account with the Fund's Custodian or with a broker to collateralize the position
and thereby insure that the use of such futures is unleveraged. See "Investment
Objectives, Policies and Risks--Futures Contracts and Related Options" in the
Statement of Additional Information.
SPECIAL HEDGING CONSIDERATIONS. Special risks are associated with the use of
futures contracts 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 the 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 futures 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. If the Investment Adviser is incorrect in its
forecasts regarding market values or other relevant factors, the Fund may be in
a worse position than if the Fund had not engaged in futures transactions. The
potential loss incurred by the Fund in engaging in futures transactions is
unlimited. The Investment Adviser is experienced in the use of futures contracts
as an investment technique.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a futures 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 the Fund
from liquidating an unfavorable position and the Fund would remain obligated to
meet margin requirements until the position is closed. See "Investment
Objectives, Policies and Risks-- Options and Securities and Securities Indices"
and "--Futures Contracts and Related Options" in the Statement of Additional
Information.
The Fund's ability to enter into futures contracts is limited by the
requirements of the Internal Revenue Code with respect to the Portfolio's
qualification as a regulated investment company. See "Dividends, Distributions
and Taxes" in the Statement of Additional Information.
REPURCHASE AGREEMENTS. The 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. The 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
24
<PAGE>
with respect to the seller, realization upon the collateral by the Fund may be
delayed or limited. The Fund will only enter into repurchase agreements
involving securities in which it could otherwise invest and with selected
financial institutions and brokers and dealers which meet certain
creditworthiness and other criteria.
ILLIQUID SECURITIES. The Fund may invest up to 15% 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 Master Trust's Board of
Trustees may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale, based on
factors such as the frequency of trades and quotes for the securities, the
number of dealers and others wishing to purchase and sell the securities, and
the nature of the security and the marketplace trades. In all other cases,
however, securities subject to restrictions on resale will be deemed illiquid.
Investing in restricted securities eligible for resale under Rule 144A could
have the effect of increasing the level of illiquidity in the Fund to the extent
that the qualified institutional buyers become uninterested in purchasing such
securities.
SECURITIES LENDING. To increase its income, the 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 Master
Trust's Board of Trustees has adopted an operating policy that limits the amount
of loans made by the Fund to not more than 30% of the value of the total assets
of the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured a letter of credit.
Such loans involve risks of delay in receiving additional collateral or in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially. However, such securities
lending will be made only when, in the Investment Adviser's judgment, the income
to be earned from the loans justifies the attendant risks. Loans are subject to
termination at the option of the Fund or the borrower.
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<PAGE>
BORROWING. The Fund may borrow money from banks in amounts up to 20% of its
total assets (calculated when the loan is made) only for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
Borrowing involves special risk considerations. Interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, 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. All borrowings by the 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" are considered borrowings for purposes of the percentage
limitations applicable to borrowings.
26
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
VALUE INSTITUTIONAL PORTFOLIO
600 West Broadway
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
April 17, 1996
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company comprised of a number of diversified investment
portfolios (each a "Portfolio" and collectively the "Portfolios"). This
Statement of Additional Information contains information regarding one of those
Portfolios: Nicholas-Applegate Value Institutional Portfolio (the "Value
Portfolio").
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
Value Portfolio's Prospectus and should be read in conjunction with such
Prospectus. The Prospectus may be obtained without charge by calling or writing
the Trust at the address and phone number given above.
TABLE OF CONTENTS
Page
----
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . B-14
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . . B-17
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . B-21
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-22
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . B-24
Purchase and Redemption of Portfolio Shares. . . . . . . . . . . . . . . B-25
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . B-26
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-27
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . B-34
Custodian, Transfer and Dividend Disbursing
Agent, Independent Accountants and Legal Counsel . . . . . . . . . . . B-35
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-36
Appendix A - Description of Securities Ratings . . . . . . . . . . . . . A-1
B-1
<PAGE>
GENERAL INFORMATION
The Trust and the Master Trust were organized in December 1992 as
business trusts under the laws of Delaware. The Trust offers shares of numerous
Portfolios with differing sales load, shareholder service plan and distribution
plan arrangements, including Series A Portfolios, Series B Portfolios, Series C
Portfolios, Institutional Portfolios and Qualified Portfolios. This Statement
of Additional Information contains information regarding one Portfolio, the
Value Institutional Portfolio.
The various Portfolios of the Trust seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
of the Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified
open-end management investment company organized as a Delaware business trust.
The Master Trust offers shares of thirteen series (each a "Fund" and
collectively the "Funds") to the Trust and other investment companies and
institutional investors, including the Nicholas-Applegate Value Fund (the "Value
Fund"), in which the Value Portfolio invests.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of the Value
Portfolio's investment objective and policies as set forth in the Portfolio's
Prospectus. As the Value Portfolio seeks to achieve its investment objective by
investing all of its assets in the Value Fund, which has the same investment
objective as the Portfolio, the following discussion describes the various
investment policies and techniques employed by the Value Fund. There can be no
assurance that the investment objective of the Value Fund or the Value Portfolio
can be achieved.
CONVERTIBLE SECURITIES AND WARRANTS
The Value Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in an issuer's capital
structure, but are usually subordinated to similar non-convertible securities.
While providing a fixed income stream (generally higher in yield than the income
derived from common stock but lower than that afforded by a similar non-
convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of 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
B-2
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event the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
OTHER CORPORATE DEBT SECURITIES
The Value Fund invests in non-convertible debt securities of foreign
and domestic companies over a cross-section of industries. The debt securities
in which the Fund may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
The value of a longer-term debt security fluctuates more widely in response to
changes in interest rates than do shorter-term debt securities.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields. The market prices of
debt securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of such portfolio investments,
and a decline in interest rates will generally increase the value of such
portfolio investments. The ability of the Value Fund to achieve its investment
objective also depends on the continuing ability of the issuers of the debt
securities in which the Fund invests to meet their obligations for the payment
of interest and principal when due.
SHORT-TERM INVESTMENTS
The Value Fund may invest in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund 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.
The Fund's holdings of 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
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"Foreign Investments" below. Such risks include future political and economic
developments, the possible imposition of withholding taxes by the particular
country in which the issuer is located on interest income payable on the
securities, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers
acceptances, to the extent permitted under its investment objective and policies
stated above and in its Prospectus, the Fund may make interest-bearing time or
other interest-bearing deposits in commercial or savings banks. Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund 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 Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations
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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.
MONEY MARKET FUNDS. The Fund may under certain circumstances invest a
portion of its assets in money market funds. The Investment Company Act
prohibits the Fund from investing more than 5% of the value of its total assets
in any one investment company, or more than 10% of the value of its total assets
in investment companies as a group, and also restricts its investment in any
investment company to 3% of the voting securities of such investment company.
The Investment Adviser will not impose an advisory fee on assets of the Fund
invested in a money market mutual fund. However, an investment in a money
market mutual fund will involve payment by the Fund of its pro rata share of
advisory and administrative fees charged by such fund.
GOVERNMENT OBLIGATIONS. The Fund may make short-term investments in
U.S. Government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association ("GNMA"), Export-Import Bank of the
United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Fund may acquire variable
and floating rate instruments. Such instruments are frequently not rated by
credit rating agencies; however, unrated variable and floating rate instruments
purchased by the Fund will be determined by the Investment Adviser under
guidelines established by the Master Trust's Board of Trustees to be of
comparable quality at the time of the purchase and rated instruments eligible
for purchase by the Fund. In making such determinations, the Investment Adviser
will consider the earning power, cash flow and other liquidity ratios of the
issuers of such instruments (such issuers include financial, merchandising, bank
holding and other companies) and will monitor their financial condition. An
active secondary market may not exist with respect to particular variable or
floating rate instruments purchased by the Fund. The absence of such an active
secondary market could make it difficult for the Fund to dispose of the variable
or floating rate instrument involved in the event of the issuer of the
instrument defaulted on its payment obligation or during periods in which the
Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss to the extent of the default. Variable
and floating rate instruments may be secured by bank letters of credit.
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FOREIGN INVESTMENTS
DEPOSITORY RECEIPTS. American Depository Receipts ("ADRs") may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in the United States dollars; the underlying
security may be denominated in a foreign currency, although the underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, diversification and balance of
payments position. The internal politics of certain foreign countries may not
be as stable as those of the United States. Governments in certain foreign
countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective economies. Action by
these governments could include restrictions on foreign investment,
nationalization, expropriation of goods or imposition of taxes, and could have a
significant effect on market prices of securities and payment of interest. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by the trade policies and economic conditions
of their trading partners. Enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
CURRENCY FLUCTUATIONS. The Value Fund may invest in securities
denominated in foreign currencies. Accordingly, a change in the value of any
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the Fund's assets denominated in that currency. Such
changes will also affect the Fund's income. The value of the Fund's assets may
also be affected significantly by currency restrictions and exchange control
regulations enacted from time to time.
MARKET CHARACTERISTICS. The Investment Adviser expects that most
foreign securities in which the Fund invests will be purchased in over-the-
counter markets or on exchanges located in the countries in which the principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign exchanges and markets may be more volatile than
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets, and the Fund's portfolio securities
may be less liquid and more volatile than U.S. Government securities. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets, and may include delays beyond periods customary in the
United States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Fund to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.
Transactions in 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
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such positions also could be adversely affected by the imposition of different
exercise terms and procedures and margin requirements than in the United States.
The value of the Fund's positions may also be adversely impacted by delays in
its ability to act upon economic events occurring in foreign markets during non-
business hours in the United States.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolio's
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction of U.S. federal income tax purposes for his proportionate share of
such foreign taxes paid by the Fund.
COSTS. The expense ratio of the Fund is 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 the
Fund will be invested in 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.
FUTURES CONTRACTS AND RELATED OPTIONS
The Value Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates.
The Fund will trade in such derivative securities for bona fide hedging purposes
and otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund will segregate liquid assets in a separate
account with the Custodian when required to do so by CFTC guidelines in order to
cover its obligation in connection with futures and options transactions.
STOCK INDEX FUTURES CONTRACTS. The Fund may invest in futures
contracts on the S&P 500 Stock Price Index. 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.
No price is paid or received by the Fund upon the purchase or sale
of a futures contract. When it enters into a domestic futures contract, the
Fund will be required to
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deposit in a segregated account with its Custodian an amount of cash or U.S.
Treasury bills equal to approximately 5% of the contract amount. This amount is
known as initial margin.
The nature of initial margin in futures transactions is different
from that of margin in securities transactions. Futures contract margin does
not involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the Fund has purchased a stock index
futures contract and the price of the underlying stock index has declined, the
position will be less valuable and the Fund will be required to make a variation
margin payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund 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 contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays
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<PAGE>
the difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund's entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or gain.
The Fund deals 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. The 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 Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The Fund may use foreign currency
future 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
future contracts are likely to be developed and traded in the future. The Fund
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
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, the 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.
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To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Adviser believes that over
time the value of a diversified portfolio will tend to move in the same
direction as the market indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in
the price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Investment Adviser may still not
result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
will purchase or sell futures only with respect to the S&P 500 Stock Price
Index, 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 Fund 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.
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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 the Fund is also subject to the
Investment Adviser's ability to predict correctly movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting stocks held in its portfolio and stock
prices increase instead, the Fund will lose part or all of the benefit of the
increased value of the stocks which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the 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 Fund may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund
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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. The
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. The Fund
may not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. The Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
Upon the purchase of futures contracts by the Fund, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and may be changed by the Trustees of the Master
Trust if applicable law permits such a change and the change is consistent with
the overall investment objective and policies of the Fund.
The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the Value Portfolio as a regulated investment company. See
"Taxes."
REPURCHASE AGREEMENTS
The Value Fund may enter into repurchase agreements with respect to
its portfolio securities. Pursuant to such agreements, the Fund acquires
securities from financial institutions such as banks and broker-dealers as are
deemed to be creditworthy by the Investment Adviser, subject to the seller's
agreement to repurchase and the Fund's agreement to resell such securities at a
mutually agreed upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current short-
term rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
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.
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WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Value 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, the Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the 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.
The 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,
the 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 the 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 the
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 the Fund starting on the day the Fund agrees to
purchase the securities. The 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
The Value Fund is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of transactions
in amounts up to 20% of the value of its total assets at the time of such
borrowings. The use of borrowing by the Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of the Fund's assets fluctuate
in value, whereas the interest obligation resulting from a borrowing will be
fixed by the terms of the Fund's agreement with its lender, the asset value per
share of the Fund will tend to increase more when its portfolio securities
increase in value and to decrease more when its portfolio assets decrease in
value than would otherwise be the case if the Fund did not borrow funds. In
addition, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the return earned on borrowed
funds. Under adverse market conditions, the Fund might have to sell portfolio
securities to
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meet interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
LENDING PORTFOLIO SECURITIES
The Value Fund may lend its portfolio securities in an amount not
exceeding 30% of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demand by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund
to reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Internal Revenue Code.
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 the Portfolios' prospectuses under "Investment Objectives and
Policies -- Investment Techniques and Processes." In making decisions with
respect to equity securities for the Fund, growth over time is the Investment
Adviser's underlying goal, and it's how they have built their reputation. Over
the past ten years, the Investment Adviser has built a record as one of the
finest performing investment managers in the United States. It has successfully
delivered growth over time to many institutional investors, pension plans,
foundations, endowments and high net worth individuals. The Investment
Adviser's methods have proven their ability to achieve growth over time through
a variety of investment vehicles.
The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "bottom-up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is guided
by three critical questions: Is there positive change? Is it sustainable? Is
it timely? The Investment Adviser uses these three factors because it focuses
on discovering positive developments when they first show up in an issuer's
earnings, but before they are fully reflected in the price of the issuer's
securities. The Investment Adviser is always looking for companies that are
driving change and surpassing analysts' expectations. It seeks to identify
companies poised for rapid growth. The Investment Adviser focuses on
recognizing successful companies, regardless of their capitalizations or whether
they are domestic or foreign.
As indicated in the Value Portfolio's Prospectus, 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
B-14
<PAGE>
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 Master Trust 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.
As indicated in the Value Portfolio's prospectus, the equity
investments of the Fund are diversified, as with respect to at least 75% of the
Fund's assets, the Fund may not 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 the 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 the prospectus. 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
The Trust, on behalf of the Value Portfolio, and the Master Trust, on
behalf of the Value Fund have adopted the following fundamental policies that
cannot be changed without the affirmative vote of a majority of the outstanding
shares of the Portfolio or Fund, respectively (as defined in the Investment
Company Act). Whenever the Value Portfolio is requested to vote on a change in
the investment restrictions of the Fund, the Trust will hold a meeting of its
shareholders and will cast its vote as instructed by the shareholders. If the
investment restrictions of the Fund are changed, the Value Portfolio may
withdraw its investment in the Fund if the Trust's Board of Trustees determines
that withdrawal is in the best interests of the Portfolio and its shareholders,
but only upon shareholder approval. Upon such withdrawal, the Trust's Board
would consider alternative investments, including investing all of the Value
Portfolio's assets in another investment company with the same investment
objective, policies and restrictions as the Portfolio or hiring an investment
adviser to manage the Portfolio's assets in accordance with the investment
objectives, policies and restrictions of the Portfolio described in the
Portfolio's Prospectus and in this Statement of Additional Information.
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
Neither the Value Fund nor the Value Portfolio:
1. May 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, except that up to 25% of the Portfolio or the Fund's total assets may be
invested without regard to this restriction and the Portfolio will be permitted
to invest all or a portion of its assets in the Fund or another diversified,
open-end management investment company with substantially the same investment
objective, policies and restrictions as the Portfolio. This restriction
B-15
<PAGE>
also does not apply to investments by the Portfolio or the Fund in securities of
the U.S. Government or any of its agencies and instrumentalities.
2. May 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, except that the
Portfolio will be permitted to invest all or a portion of its assets in the Fund
or another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Portfolio.
3. May invest 25% or more of the market value of its total assets in
the securities of issuers in any one particular industry, except that the
Portfolio will be permitted to invest all or a portion of its assets in the Fund
or another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Portfolio. This restriction does not apply to investments by the Portfolio or
the Fund in securities of the U.S. Government or its agencies and
instrumentalities.
4. May purchase or sell real estate. However, the Portfolio or the
Fund may invest in securities secured by, or issued by companies that invest in,
real estate or interests in real estate.
5. May make loans of money, except that the Portfolio or the Fund
may purchase publicly distributed debt instruments and certificates of deposit
and enter into repurchase agreements. The Portfolio and the Fund each 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. May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Portfolio or
Fund will take prompt action to reduce its borrowings as required by applicable
law.
7. May 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 Portfolio or Fund
from engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid.
B-16
<PAGE>
10. May purchase securities on margin, except for initial and
variation margin on options and futures contracts, and except that the Portfolio
or the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities.
11. May engage in short sales, except that the Portfolio or Fund may
use such short-term credits as are necessary for the clearance of transactions.
This restriction does not prohibit the Portfolio or Fund from engaging in
hedging transactions in futures and currencies.
12. May invest in securities of other investment companies, except
(a) that the Portfolio may invest all or a portion of its assets in the Fund or
another diversified, open-end management investment company with the same
investment objective policies and restrictions as the Portfolio; (b) in
compliance with the Investment Company Act and applicable state securities laws,
or (c) as part of a merger, consolidation, acquisition or reorganization
involving the Portfolio or Fund.
13. May issue senior securities, except that the Portfolio or the
Fund may borrow money as permitted by restrictions 6 and 7 above. This
restriction shall not prohibit the Portfolio or Fund from engaging in options,
futures and foreign currency transactions.
14. May enter into transactions for the purpose of arbitrage, or
invest in commodities and commodities contracts, except that the Fund or the
Portfolio may invest in stock index, currency and financial futures contracts
and related options in accordance with any rules of the Commodity Futures
Trading Commission.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust and the Master Trust, neither the Value Portfolio nor
the Value Fund:
1. May purchase or write options on securities.
2. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships, although
the Portfolio or the Fund may invest in the securities of companies which invest
in or sponsor such programs.
3. May purchase any security if as a result the Portfolio or Fund
would then have more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors) having a record of
less than three years of continuous operation, except (a) that the Portfolio may
invest all or a portion of its assets in the Fund or another diversified, open-
end management investment company with the same investment objective, policies
and restrictions as the Portfolio in compliance with the Investment Company Act
or (b) as part of a merger, consolidation, acquisition or reorganization
involving the Portfolio or Fund.
B-17
<PAGE>
4. May purchase securities of any issuer if any officer or trustee
of the Portfolio or Fund, or of the Administrator, the Distributor, the
Investment Adviser, or the Sub-Adviser owning more than 1/2 of 1% of the
outstanding securities of such issuer, own in the aggregate more than 5% of the
outstanding securities of such issuer.
5. 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.
6. May invest in warrants, valued at the lower of cost or market, in
excess of 5% of the market value of the Portfolio's or Fund's net assets, or in
excess of 2% of the market value of the Portfolio's or Fund's net assets if such
warrants are not listed on the New York Stock Exchange or the American Stock
Exchange, as of the date of investment.
BLUE SKY RESTRICTIONS
In order to permit the sale of shares of a Portfolio in certain
states, the Boards of Trustees of the Trust and the Master Trust may, in their
sole discretion, adopt additional restrictions on investment policies more
restrictive than those described above. Should either of such Boards determine
that any such restrictive policy is no longer in the best interests of such
respective Trust or its investors, the Trust may cease offering shares of a
Portfolio in the state involved and the Boards of Trustees may revoke such
restrictive policy. Moreover, if the states involved no longer require any such
restrictive policy, the Boards of Trustees may, at their sole discretion, revoke
such policy.
The Master Trust has agreed in connection with certain undertakings
given by the Trust to the State of South Dakota, that (i) the Fund will not
invest more than 10% of its total assets in interests in real estate investments
trusts, (ii) the Fund will not invest more than 15% of its total assets in
equity securities of issuers which are not readily marketable, in securities of
issuers which the Portfolio or Fund is restricted from selling without
registration under the Securities Act (other than restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 that have been
determined by the Master Trust's Board of Trustees to be liquid based upon the
trading markets for the securities), and securities of unseasoned issuers
referred to in restriction 2 above (these restrictions will not affect the
ability of the Portfolio to invest in securities of the corresponding Fund or
other diversified, open-end management investment companies with the same
investment objectives, policies and restrictions as the Portfolio), and (iii)
the Master Trust will provide adequate notice to the Trust of changes in these
non-fundamental investment restrictions to enable the Trust to provide at least
30 days advance notice of such changes to its shareholders.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of Ohio, that the Fund will not invest more than
50% of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years' continuous operation or
securities of issuers which are restricted as to disposition (including without
limitation securities issued pursuant to Rule 144A under the Securities Act of
1933).
B-18
<PAGE>
TRUSTEES AND PRINCIPAL OFFICERS
TRUST
The names and addresses of the Trustees and principal officers of the
Trust, including their positions and principal occupations during the past five
years, are shown below. Trustees whose names are followed by an asterisk are
"interested persons" of the Trust (as defined by the Investment Company Act).
Unless otherwise indicated, the address of each Trustee and officer is 600 West
Broadway, 30th Floor, San Diego, California 92101.
FRED C. APPLEGATE, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES. 885 La Jolla
Corona Court, La Jolla, California. President, Hightower Management Co., a
financial management firm (since January 1992); formerly President, Nicholas-
Applegate Capital Management (from August 1984 to December 1991). Director,
Nicholas-Applegate Fund, Inc. (since 1987).
ARTHUR B. LAFFER, TRUSTEE*. 5405 Morehouse Drive, Suite 340, San
Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an economic
consulting firm (since 1979); Chairman, Laffer Advisors Incorporated, economic
consultants (since 1981); Director, Nicholas-Applegate Fund, Inc. (since 1987);
Director, U.S. Filter Corporation (since March 1991) and MasTec Inc.,
(construction) (since 1994); Chairman, Calpurt Asset Management, Inc. (since
1992); formerly Distinguished University Professor and Director, Pepperdine
University (from September 1985 to May 1988) and Professor of Business
Economics, University of Southern California (1976 to 1984). Mr. Laffer is
considered to be an "interested person" of the Trust under the 1940 Act because
A.B. Laffer, V.A. Canto & Associates received $100,000 in 1994 from the
Investment Adviser as compensation for consulting services provided from time to
time to the Investment Adviser.
CHARLES E. YOUNG, TRUSTEE. UCLA, 2147 Murphy Hall, Los Angeles,
California. Chancellor, UCLA (since 1968); Trustee, Nicholas-Applegate Growth
Equity Fund; Director, Intel Corp. (since 1974), Academy of Television Arts and
Sciences Foundation (since October 1988), Los Angeles World Affairs Council
(since 1977) and Town Hall of California (since 1982).
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.
Mr. Wylie is also the President of the Master Trust.
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER. Partner (since January
1996) and Chief Financial Officer (since January 1993), Nicholas-Applegate
Capital Management, and
B-19
<PAGE>
Chief Financial Officer, Nicholas-Applegate Securities (since January 1993),
formerly Chief Financial Officer, Aurora Capital Partners/WSGP Partners L.P., an
investment partnership (from November 1988 to January 1993), and Vice President
and Controller, Security Pacific Merchant Banking Group (from November 1986 to
November 1988). Mr. Pindelski is also the Chief Financial Officer of the Master
Trust.
PETER J. JOHNSON, VICE PRESIDENT. Partner and Director, Client
Service/Marketing, Nicholas-Applegate Capital Management (since January 1992);
formerly, Marketing Director, Pacific Financial Asset Management Company, an
investment management firm (from July 1989 to December 1991), and Senior
Marketing Representative, Fidelity Investments Institutional Services (from
August 1987 to July 1989). Mr. Johnson is also the Vice President of the Master
Trust.
ASHLEY T. RABUN, VICE-PRESIDENT. Partner and Director - Investor
Services Group, Nicholas-Applegate Capital Management (since May 1992) and
Senior Vice President, Nicholas-Applegate Securities (since December 1992);
formerly Vice President - Marketing, Interinvest Corporation, an asset
management firm (from December 1990 to May 1992), and Vice President, Dean
Witter (from 1984 to 1990). Ms. Rabun is also the Vice-President of the Master
Trust.
E. BLAKE MOORE, JR., SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities (since
1993); formerly Attorney, Luce, Forward, Hamilton and Scripps (from 1989 to
1993). Mr. Moore is also Secretary of the Master Trust.
Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $10,000 for services rendered as a Trustee of the Trust, and $1,000 for
each meeting attended. Each Trustee is also reimbursed for out-of-pocket
expenses incurred as a Trustee.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1996, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
<TABLE>
<CAPTION>
Total
Pension or Estimated Compensation
Aggregate Retirement Benefits Annual from Trust and
Compensation Accrued as Part of Benefits Upon Trust Complex
Name from Trust Trust Expenses Retirement Paid to Trustee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $15,000 None N/A $29,000 (45*)
Arthur B. Laffer $15,500 None N/A $31,500 (45*)
Charles E. Young $15,000 None N/A $31,000 (45*)
</TABLE>
B-20
<PAGE>
* Indicates number of funds in Trust complex, including the Portfolio.
MASTER TRUST
The names and addresses of the Trustees and principal officers of the
Master Trust, including their positions and principal occupations during the
past five years, are shown below. The positions and principal occupations of
the officers during the past five years, are set forth above. Trustees whose
names are followed by an asterisk are "interested persons" of the Trust (as
defined by the Investment Company Act). Unless otherwise indicated, the address
of each Trustee and officer is 600 West Broadway, 30th Floor, San Diego,
California 92101.
ARTHUR E. NICHOLAS, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.*/
Managing Partner and Chief Investment Officer, Nicholas-Applegate Capital
Management, since 1984. Director and Chairman of the Board of Directors of
Nicholas-Applegate Fund, Inc., a registered open-end 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
(1979-1987) 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 provider of computer peripherals and
communications products (since 1993), SEDA Specialty Packaging, Inc. (since
1993) and Bonded Motors, Inc., an automotive engine remanufacturer (since 1996).
WALTER E. AUCH, TRUSTEE. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio communications
company (since 1987); Fort Dearborn Fund (since 1987), Brinson Funds (since
1994); and Smith Barney Trak Fund (since 1992), registered investment companies;
Pimco, L.P., an investment manager (since 1994); and Banyan Realty Fund (since
1987), Banyan Strategic Land Fund (since 1984), 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).
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991) and student, Harvard Divinity School and Harvard Graduate School of
Education (since September 1991); Director, Nicholas-Applegate Fund, Inc. (since
1987); Emerging Germany Fund (since 1991); Premier Radio Networks (since 1991);
Sage Analytics International (since 1991); Tonights Feature Ltd. (since 1995).
Formerly Managing Director of Global Equity Transactions Group and member of
Board of Directors, Prudential Securities (from 1986 to June 1991).
DARLENE DEREMER, TRUSTEE*/. 155 South Street, Wrentham,
Massachusetts. President and Founder, DeRemer Associates, a marketing
consultant for the financial services industry (since 1987); formerly Vice
President and Director, Asset Management
B-21
<PAGE>
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). Mr. DeRemer is considered to be an "interested
person" of the Master Trust under the 1940 Act because DeRemer Associates
received $100,336 in 1995 and $54,274 in 1994 from the Investment Adviser as
compensation for consulting services provided in connection with its
institutional business.
GEORGE F. KEANE, TRUSTEE*. 450 Post Road East, Westport, Connecticut.
President Emeritus and Senior Investment Adviser, The Common Fund, a non-profit
investment management organization representing educational institutions (since
1993), after serving as its President (from 1971 to 1992); Member of Investment
Advisory Committee, New York State Common Retirement Fund (since 1982); Director
and Chairman of the Investment Committee, United Negro College Fund (since
1987); Director, United Educators Risk Retention Group (since 1989); Director,
RCB Trust Company (since 1991); Director, School, College and University
Underwriters Ltd. (since 1986); Director, National Association of College and
University Business Officers (since 1993); Trustee, Fairfield University (since
1993); Director, The Bramwell Funds, Inc. (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). Mr. Keane is considered to be an "interested
person" of the Master Trust under the 1940 Act because he is a registered
representative of a broker dealer.
JOHN D. WYLIE, PRESIDENT.
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER.
PETER J. JOHNSON, VICE PRESIDENT.
ASHLEY T. RABUN, VICE PRESIDENT.
E. BLAKE MOORE, JR., SECRETARY.
Each Trustee of the Master Trust who is not an officer or affiliate of
the Master Trust, the Investment Adviser or the Distributor receives an
aggregate annual fee of $10,000 for services rendered as a Trustee of the Master
Trust, and $1,000 for each meeting attended. Each Trustee is also reimbursed
for out-of-pocket expenses incurred as a Trustee.
The following table sets forth the aggregate compensation paid by the
Master Trust for the fiscal year ended March 31, 1996, to the Trustees who are
not affiliated with the Investment Adviser and the aggregate compensation paid
to such Trustees for service on the Master Trust's board and that of all other
funds in the "Master Trust complex" (as defined in Schedule 14A under the
Securities Exchange Act of 1934):
B-22
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Estimated Compensation
Aggregate Retirement Annual from Master
Compensation Benefits Accrued Benefits Trust and Master
Name from Master as Part of Master Upon Trust Complex
Trust Trust Expenses Retirement Paid to Trustee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dann V. Angeloff $15,500 None N/A $32,500 (13*)
Walter E. Auch $15,000 None N/A $15,000 (12*)
Theodore J. Coburn $15,000 None N/A $29,000 (13*)
Darlene DeRemer $15,000 None N/A $15,000 (12*)
George K. Keane $15,000 None N/A $15,000 (12*)
</TABLE>
* Indicates total number of funds in Master Trust complex, including the Fund.
INVESTMENT ADVISER
The Trust has not engaged the services of an investment adviser
because its Portfolios invest all of their assets in corresponding Funds. The
Investment Adviser to the Master Trust is Nicholas-Applegate Capital Management,
a California limited partnership, with offices at 600 West Broadway, 30th Floor,
San Diego, California 92101.
The Investment Adviser was organized in August 1984 to manage
discretionary accounts investing primarily in publicly traded equity securities
and securities convertible into or exercisable for publicly traded equity
securities, with the goal of capital appreciation. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership of which the general partner is Nicholas-Applegate Capital
Management Holdings, Inc., a California corporation owned by Mr. Nicholas. The
Investment Adviser currently has fifteen partners (including Mr. Nicholas) who
manage a staff of approximately 300 employees, including 28 portfolio managers.
Under the Investment Advisory Agreement between the Master Trust and
the Investment Adviser with respect to the Value Fund, the Master Trust retains
the Investment Adviser to manage the Value Fund's investment portfolio, subject
to the direction of the Master Trust's Board of Trustees. The Investment
Adviser is authorized to determine which securities are to be bought or sold by
the Fund and in what amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by the
Value Fund or the Master Trust in connection with the matters to which the
Investment Advisory Agreement relates, except for liability resulting from
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of the Investment Adviser's reckless disregard of its duties
and obligations under the
B-23
<PAGE>
Investment Advisory Agreement. The Master 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 Master Trust. The Investment
Adviser is not entitled to indemnification with respect to any liability to the
Master Trust or its investors 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 with respect to the Value Fund
by the Master Trust (by the Board of Trustees of the Master Trust or vote of a
majority of the outstanding voting securities of the Value Fund, as defined in
the Investment Company Act) or the Investment Adviser upon not more than 60
days' written notice, without payment of any penalty. The Investment Advisory
Agreement provides that it will continue in effect with respect to the Value
Fund only so long as such continuance is specifically approved at least annually
in conformity with the Investment Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of the Value Portfolio
(including administrative fees and distribution expenses for the Portfolio, and
the Portfolio's allocable share of the operating expenses of the Fund, but
excluding interest, taxes, brokerage commissions and other costs incurred in
connection with portfolio securities transactions, organizational expenses and
other capitalized expenditures and extraordinary expenses), to ensure that the
operating expenses for the Portfolio do not exceed 1.00% of the average net
assets of the Portfolio through March 31, 1997.
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 Portfolios. 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.
Investment Company Administration Corporation also serves as the Administrator
for the Master Trust.
For its services, the Administrator receives under the Administration
Agreement $35,000 for each grouping of five similar portfolios (e.g., Core
Growth Portfolio A, Portfolio B, Portfolio C, Institutional and Qualified
Portfolios), $25,000 for each grouping of three similar portfolios, $20,000 for
each grouping of two similar portfolios and $5,000 for one portfolio. As a
result, the Administrator currently receives aggregate compensation at the rate
of $230,000 per year for all of the series of the Trust. Such fees will be
allocated among the series in each grouping based on relative net asset values.
For its services to the Master Trust, the Administrator receives, pursuant to an
Administration Agreement, a monthly fee at the following annual rates: 0.05% on
the first $100 million of aggregate net assets of the Funds, 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 of the Funds in excess of
$850 million. The Administrator will receive a minimum of $150,000 per year
allocated among the Funds based on average net assets.
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In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel and
pays all expenses incurred in connection with managing the ordinary course of
the business of the Trust, other than expenses assumed by the Trust as described
below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with the Administrator
or 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 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 members, (j) the cost of maintaining the
Trust's existence, taxes and interest, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining the
registration of the Trust and of its shares with the Commission and registering
the Trust as a broker or dealer and qualifying their shares under state
securities laws, including the preparation and printing of the Trust's
registration statement, prospectuses and statements of additional information,
(m) allocable communication expenses with respect to investor services and all
expenses of shareholders' and Board of Trustees' meetings and of preparing,
printing and mailing prospectuses and reports to shareholders, (n) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the business of the Trust, and (o) expenses assumed by
the Trust pursuant to any plan of distribution adopted in conformity with Rule
12b-1 under the Investment Company Act.
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 will terminate automatically if assigned, and may be terminated
without penalty by either the Administrator or the Trust (by the Board of
Trustees of the Trust 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 for a period of
more than two years from the date of execution only so long as such continuance
is specifically approved at least annually in conformity with the Investment
Company Act.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the Portfolios. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Portfolios,
but is not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. Pursuant to the
Distribution Agreement, the Trust has agreed to indemnify the Distributor to the
extent permitted by applicable law against certain liabilities under the
Securities Act.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Master Trust's Board of
Trustees, the Investment Adviser is primarily responsible for the execution of
the Value Fund's 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 Fund, 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 Fund
invest may be traded in the over-the-counter markets, and the Fund deals
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 Fund does 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 of the
Master Trust.
The Value Fund has 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 sell shares of the Portfolios or
provide supplemental research, market and statistical information and other
research services and products to the Investment Adviser may receive orders for
transactions by the Fund. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement, and
the expenses of the Investment Adviser are not necessarily reduced as a result
of the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Master Trust, and not all such
information, services and products are used by the Investment Adviser in
connection with the Fund. 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 Fund. The Investment
Adviser is authorized to pay higher commission on brokerage transactions for the
Fund to brokers in order to secure the information, services and products
described above, subject to review by the Master Trust's Board of Trustees from
time to time as to the extent and continuation of this practice.
Although investment decisions for the Master Trust are made
independently from those of the other accounts managed by the Investment
Adviser, investments of the kind made by the Value Fund 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 Fund 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 Fund and its
other managed accounts, and the price paid to or received by the Fund 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 Fund or the size of the position purchased or sold by the Fund.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's commission or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid.
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PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the Value Portfolio may be purchased and redeemed at their
net asset value without any initial or deferred sales charge. The price paid
for purchase and redemptions of shares of the Portfolio is based on the net
asset value per share, which is calculated once daily at the close of trading
(currently 4:00 P.M. New York time) each day the New York Stock Exchange is
open. The New York Stock Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. The
offering price is effective for orders received by the Transfer Agent or dealers
prior to the time of determination of net asset value and, in the case of orders
placed with dealers, accepted by the Transfer Agent prior to the close of its
business. The dealer is responsible for promptly transmitting purchase orders
to the Transfer Agent. The Trust reserves the right in its sole discretion to
suspend the continued offering of the Portfolio's shares and to reject purchase
orders in whole or in part when such rejection is in the best interests of the
Trust and the affected Portfolios.
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Value Portfolio, a
Shareholder Investment Account is established for each investor under which the
shares are held for the investor by the Transfer Agent. No certificates will be
issued for shares of the Portfolio.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Value Portfolio at
net asset value. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the case
of recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the dealer.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of the Value Portfolio on a
monthly or quarterly basis on any day of the month or quarter by authorizing his
or her bank account to be debited to invest specified dollar amounts in shares
of the Portfolio. The investor's bank must be a member of the Automatic
Clearing House System. Participation in the Plan will begin within 30 days
after receipt of the account application. If the investor's bank account cannot
be charged due to insufficient funds, a stop-payment order or closing of the
account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer Agent. Further information
about this program and an application form can be obtained from the Transfer
Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in the Value Portfolio may elect to cross-reinvest
dividends or dividends and capital gain distributions paid by the Portfolio into
any other Institutional Portfolio (the "receiving Portfolio") subject to the
following conditions: (i) as long as the value of the account in the receiving
Portfolio is below that receiving Portfolio's minimum initial investment
requirement, dividends and capital gain distributions paid by the receiving
Portfolio must be automatically reinvested in the receiving Portfolio, there is
no cross-reinvestment, and (ii) if this privilege is discontinued with respect
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to a particular receiving Portfolio, the value of the account in that receiving
Portfolio must equal or exceed the receiving Portfolio's minimum initial
investment requirement or the receiving Portfolio will have the right, if the
shareholder fails to increase the value of the account to such minimum within 90
days after being notified of the deficiency, automatically to redeem the account
and send the proceeds to the shareholder. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without a
sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Value Portfolio
of sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of the Value Portfolio
redeemed, but when the Master Trust makes payment to the Portfolio in readily
marketable investment securities, the Trust reserves the right to make payment
wholly or partly in shares of such securities. In such cases, a shareholder 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 shareholder or record, limited in amount with respect to each
shareholder 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.
INSTITUTIONAL PORTFOLIOS
The services offered by the Trust to shareholders of the Institutional
Portfolios can vary, depending on the needs of the qualified retirement plan or
other institutional investor, and should be arranged by contacting the Trust,
the Distributor, the Administrator or the Transfer Agent.
NET ASSET VALUE
The net asset value of a share of the Value Portfolio is calculated by
dividing (i) the value of the securities held by the Portfolio (I.E., the value
of its investments in the Value Fund), plus any cash or other assets, minus all
liabilities (including accrued estimated expenses on an annual basis), by
(ii) the total number of shares of the Portfolio outstanding. The net asset
value of an interest in the Value Fund is calculated in the same manner. The
value of the investments and assets of the Portfolio or the Fund is determined
each business day. Net asset value per share of the Value Portfolio is
calculated as of the close of business of the New York Stock Exchange (normally
4:00 p.m. New York time) on every day the Exchange is open for trading.
Investment securities, including ADRs, that are traded on a stock
exchange or on the NASDAQ National Market System are valued at the last sale
price as of the close of business on the New York Stock Exchange (normally 4:00
P.M. New York time) on the day the securities are being valued, or lacking any
sales, at the mean between the closing bid and asked prices. Securities listed
or traded on certain foreign exchanges whose operations are similar to the
United States over-the-counter market are valued at the price within the limits
of the latest available current bid and asked prices deemed by the Investment
Adviser best to reflect fair value. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange determined to
be the primary market for such security by the Investment Adviser. Listed
securities that are not traded on a particular day and other over-the-counter
securities are valued at the mean between the closing bid and asked prices.
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In the event that the New York Stock Exchange or the national
securities exchange on which stock is traded adopt different trading hours on
either a permanent or temporary basis, the Boards of Trustees of the Trust and
the Master Trust will reconsider the time at which net asset value is computed.
In addition, the asset value of the Value Portfolio or the Value Fund may be
computed as of any time permitted pursuant to any exemption, order or statement
of the Commission or its staff.
Long-term debt obligations are valued at the mean of representative
quoted bid prices 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 Value Portfolio or the Value Fund is more than 60 days, unless
this is determined by the Board of Trustees of the Master Trust not to represent
fair value. Repurchase agreements are valued at cost plus accrued interest.
U.S. Government securities are traded in the over-the-counter market
and are valued at the mean between the last available bid and asked prices,
except that securities with a demand feature exercisable within one to seven
days are valued at par. Such valuations are based on quotations of one or more
dealers that make markets in the securities as obtained from such dealers, or on
the evaluation of a pricing service.
Futures contracts and options thereon, which are traded on exchanges,
are valued at their last sale or settlement price as of the close of such
exchanges or, if no sales are reported, at the mean between the last reported
bid and asked prices. If a futures exchange closes later than 4:00 p.m. New
York time, the futures traded on it are valued based on the sale price, or on
the mean between the bid and asked prices, as the case may be, as of 4:00 p.m.
New York time.
Trading in securities on foreign securities exchanges and over-the-
counter markets is normally completed well before the close of business day in
New York. In addition, foreign securities trading may not take place on all
business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the New
York Stock Exchange will not be reflected in the calculation of net asset value
unless the Board of Trustees of the Master Trust 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 Master Trust's 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 Master Trust's Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of
Trustees.
The Master Trust may use a pricing service approved by its 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 value 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
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Master 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 Fund to do so.
TAXES
MASTER TRUST'S TAX STATUS
The Value Fund will be treated as a partnership rather than as a
regulated investment company or a corporation under the Internal Revenue Code
(the "Code"). As a partnership under the Code, any interest, dividends and
gains or losses of the Master Trust attributable to the Fund will be deemed to
have been "passed through" to the Trust and other investors in such Fund,
regardless of whether the interest, dividends or gains have been distributed by
the Fund or such losses have been realized and recognized by the Trust and other
investors. Therefore, to the extent the Fund were to accrue but not distribute
any interest, dividends or gains, the Trust and other investors in the Fund
would be deemed to have realized and recognized their proportionate shares of
interest, dividends, gains or losses realized and recognized by the Fund without
receipt of any corresponding distribution. However, the Master Trust will seek
to minimize recognition by investors in the Fund of interest, dividends, gains
or losses allocable to the Fund without a corresponding distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify the Value Portfolio as a regulated
investment company under Subchapter M of the Code, and intends that the
Portfolio will remain so qualified.
As a regulated investment company, the Value Portfolio will not be
liable for federal income tax on its income and gains provided it distributes
all of its income and gains currently. Qualification as a regulated investment
company under the Code requires, among other things, that the Portfolio (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such securities or currencies; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures, forward contracts, certain foreign currencies and certain
options, futures, and forward contracts on foreign currencies held less than
three months; (c) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of the Portfolio's assets is
represented by cash, U.S. Government securities and securities of other
regulated investment companies, and other securities (for purposes of this
calculation generally limited, in respect of any one issuer, to an amount not
greater than 5% of the market value of the Portfolio's assets and 10% of the
outstanding voting securities of such issuer) and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government or foreign government securities or the securities of other
regulated investment companies), or two or more issuers which the Trust controls
and which are determined to be engaged in the same or similar trades or
businesses; and (d) distribute at least 90% of its investment company taxable
income (which includes dividends, interest, and net short term capital gains in
excess of net long term capital losses) each taxable year.
The Value Portfolio generally will be subject to a nondeductible
excise tax of 4% to the extent that it does not meet certain minimum
distribution requirements as of the end of each calendar year. To avoid the
tax, the Portfolio must distribute during each calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income and net capital gain (not
taking into account any capital gains or losses as an exception) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the twelve month period
ending on October 31 of the calendar year, and (3) all ordinary income and
capital gains for previous years that were not distributed during such years. A
distribution will be treated as paid on December 31 of the calendar year if it
is declared by the Portfolio in October, November, or December of that year to
shareholders of record on a date in such a month and paid by the Portfolio
during January of the following year. Such distributions will be taxable to
shareholders (other than those not subject to
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federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid the excise tax, the Portfolio intends to make timely distributions of
its income in compliance with these requirements and anticipate that it will not
be subject to the excise tax.
Dividends paid by the Value Portfolio from ordinary income, and
distributions of the Portfolio's net realized short-term capital gains, are
taxable to its shareholders as ordinary income. Distributions to corporate
shareholders will be eligible for the 70% dividends received deduction to the
extent that the income of the Portfolio is derived from dividends on common or
preferred stock of domestic corporations. Dividend income earned by the
Portfolio will be eligible for the dividends received deduction only if the
Portfolio and Value Fund have satisfied a 46-day holding period requirement with
respect to the underlying portfolio security (91 days in the case of dividends
derived from preferred stock). In addition, a corporate shareholder must have
held its shares in the Portfolio for not less than 46 days (91 days in the case
of dividends derived from preferred stock) in order to claim the dividend
received deduction. Not later than 60 days after the end of its taxable year,
the Portfolio will send to its shareholders a written notice designating the
amount of any distributions made during such year which may be taken into
account by its shareholders for purposes of such deduction provisions of the
Code. Net capital gain distributions are not eligible for the dividends
received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to the Value Portfolio's shareholders as long-term
capital gains, regardless of the holding period of such shareholders. Such
distributions of net capital gains will be designated by the Portfolio as a
capital gains distribution in a written notice to its shareholders which
accompanies the distribution payment. Any loss on the sale of shares held for
less than six months will be treated as a long-term capital loss for federal tax
purposes to the extent a shareholder receives net capital gain distributions on
such shares. The maximum federal income tax rate applicable to long-term
capital gains is currently 28% for individual shareholders and 35% for corporate
shareholders. Dividends and distributions are taxable as such whether received
in cash or reinvested in additional shares of the Portfolio.
Any loss realized on a sale, redemption or exchange of shares of the
Value Portfolio by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period (beginning 30 days before the disposition of
shares). Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares.
A shareholder who acquires shares of the Value Portfolio and sells or
otherwise disposes of such shares within 90 days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares for
purposes of calculating gain or loss realized upon a sale or exchange of shares
of the Portfolio if the shareholder acquires shares in the Portfolio pursuant to
a reinvestment right that reduces the sales charges in the subsequent
acquisition of shares.
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 a
shareholder from a Portfolio 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
shareholders annually of the percentage of income and distributions derived from
direct U.S. Government obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
the Value Portfolio is considered tax exempt in their particular states.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Value Fund 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
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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 Fund 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 futures and forward contracts undertaken by the Value Fund 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 Value Portfolio.
In addition, losses realized by the Portfolio 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 futures and
forward contracts to the Portfolio are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by the Portfolio which
is taxed as ordinary income when distributed to shareholders.
The Value Portfolio may make one or more of the elections available
under the Code which are applicable to straddles. If the Portfolio makes any of
the elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the 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 Value Portfolio's and
the Value Fund's assets may limit the extent to which the Fund 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 the
Value 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 the Value Portfolio's investment company taxable income
to be distributed to the shareholders.
FOREIGN TAX. Income received by the Value 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
Fund with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to elect to "pass-through" to the Value
Portfolio's shareholders the amount of foreign income and similar taxes paid by
the Fund. Each shareholder will be notified within 60 days after the close of
the Value Portfolio's taxable year whether the foreign taxes paid by the Value
Fund will be "pass-through" for that year.
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Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Value Fund's income will flow through to
shareholders of the Portfolio. With respect to such election, gains from the
sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign currency
denominated debt securities, receivables and payables will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, and to certain
other types of income. Shareholders may be unable to claim a credit for the
full amount of their proportion at 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
imposed on corporations and individuals 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 Value Fund 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 Value Fund 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 is treated as ordinary income to the
extent the gain, or principal payment, does not exceed the "accrued market
discount" on such debt security. Market discount generally accrues in equal
daily installments. The Fund may make one or more of the elections applicable
to debt securities having market discount, which could affect the character and
timing 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 Value Fund may be
treated as having an acquisition discount, or OID in the case of certain types
of debt securities. Generally, the 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.
The Value Portfolio generally will be required to distribute dividends
to shareholders representing discount on debt securities that is currently
includible in income, even though cash representing such income may not have
been received by the Value Fund. Cash to pay such dividends may be obtained
from sales proceeds of securities held by the Fund.
CONTRIBUTION LIMITS. Payments made to the Trust, by the employer
sponsoring a qualified profit-sharing plan (the "plan") which invests in the
Value Portfolio, of such plan's pro rata share of the fees charged by the
Investment Adviser for management of the assets of the Portfolio invested in the
Value Fund, may be treated as an employer "contribution" to the plan under
Sections 404 and 415 of the Code. Contributions to a qualified retirement plan
are subject to limitations under Sections 404 and 415 of the Code. Generally,
Section 404(a)(3) of the Code limits an employer's contribution to the plan to
an amount not exceeding 15% of the compensation paid to all plan participants
during the year, and Section 415 of the Code limits the total contributions made
by both the employer and the participants. Contributions in excess of these
limits may not be deducted by the employer and may result in an excise tax on
the employer equal to 10% of the non-deductible contributions. In addition, the
plan may become disqualified. Shareholders should consult with their own tax
and retirement plan advisers regarding this issue.
B-33
<PAGE>
OTHER TAX INFORMATION
The Value Portfolio may be required to withhold for U.S. federal
income taxes 31% of all taxable distributions payable to shareholders who fail
to provide the Portfolio with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal tax liability.
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 shareholders of the
Value Portfolio with respect to distributions by the Portfolio may differ from
federal tax treatment. Distributions to shareholders may be subject to
additional state and local taxes. Shareholders should consult their own tax
advisers regarding specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise the total return for the
Value Portfolio. Any performance information should be considered in light of
the Portfolio's and the Value Fund's investment objectives and policies,
characteristics and quality of the its portfolio, and the market conditions
during the given time period, and should not be considered to be representative
of what may be achieved in the future.
TOTAL RETURN
The total return for the Portfolio is computed by assuming a
hypothetical initial payment of $1,000. It is assumed that all investments are
made at net asset value (as opposed to market price) and that all of the
dividends and distributions by the Portfolio over the relevant time periods are
invested at net asset value. It is then assumed that, at the end of each
period, the entire amount is redeemed without regard to any redemption fees or
costs. The average annual total return is then determined by calculating the
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption. Total return does not take into account any
federal or state income taxes.
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or fractional
portion thereof) of a hypothetical $1,000 payment made at the
beginning of the period.
COMPARISON TO INDICES AND RANKINGS
Performance information for the Value Portfolio may also be compared
to various unmanaged indices, such as the Standard & Poor's 500 Stock Price
Index, the Dow Jones Industrial Average, and indices prepared by Lipper
Analytical Services. Unmanaged indices (I.E., other than Lipper) generally do
not reflect deductions for administrative and management costs and expenses.
B-34
<PAGE>
Performance rankings are prepared by a number of mutual fund ranking
entities that are independent of the Trust and its affiliates. These entities
categorize and rank funds by various criteria, including fund type, performance
over a given period of years, total return, standardized yield, variations in
sales charges and risk/reward considerations.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Portfolio and Fund and in that capacity maintains
certain financial and accounting books and records pursuant to agreements with
the Trust and Master Trust. PFPC Inc., 103 Bellevue Parkway, Wilmington,
Delaware, an affiliate of the Custodian, provides additional accounting services
to the Portfolio and Fund.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor,
North Quincy, Massachusetts, 02171, serves as the Transfer and Dividend
Disbursing Agent for the Portfolio and Fund. The Transfer Agent provides
customary transfer agency services to the Trust and Master Trust, including the
handling of shareholder communications, the processing of shareholder
transactions, the maintenance of shareholder account records, and related
functions. The Dividend Disbursing Agent provides customary dividend disbursing
services to the Trust, including payment of dividends and distributions and
related functions.
The following act as sub-transfer agents for the Portfolio: Financial
Data Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida
32246; and William M. Mercer Plan Participant Services, Inc. 1417 Lake Cook
Road, Deerfield, Illinois 60015.
Ernst & Young, L.L.P., 515 S. Flower Street, Los Angeles, California
90071, serves as the independent accountants for the Trust and Master Trust, and
in that capacity examines the annual financial statements of the Trust and
Master Trust.
Paul, Hastings, Janofsky & Walker, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust and Master Trust. It
also acts as counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 44 series of shares -- eight A
Portfolios, eight B Portfolios, eight C Portfolios, eleven Institutional
Portfolios, one Money Market Portfolio and eight Qualified Portfolios.
VOTING RIGHTS. On any matter submitted to a vote of shareholders of
the Trust, all shares then entitled to vote will be voted by the affected
Portfolio(s) unless otherwise required by the Investment Company Act, in which
case all shares of the Trust will be voted in the aggregate. For example, a
change in the Value Portfolio's fundamental investment policies would be voted
upon only by shareholders of that Portfolio, as would the approval of any
advisory or distribution contract for the Portfolio. However, all shares of the
Trust may vote together in the election or selection of Trustees, principal
underwriters and accountants for the Trust.
Rule 18f-2 under the 1940 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 shares
B-35
<PAGE>
of the series of the Trust affected by the matter. Under Rule 18f-2, a series
is presumed to be affected by a matter, unless the interests of each series in
the matter are identical or the matter does not affect any interest of such
series. Under Rule 18f-2 the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to a Portfolio only if approved by a majority of its outstanding
shares. However, the rule also provides that the ratification of independent
public accountants, the approval of principal underwriting contracts and the
election of trustees may be effectively acted upon by the shareholders of the
Trust voting without regard to Portfolio.
As used in the Value Portfolio's Prospectus and in this Statement of
Additional Information, the term "majority," when referring to approvals to be
obtained from shareholders of the Portfolio, means the vote of the lesser of (i)
67% of the shares of the Portfolio represented at a meeting if the holders of
more than 50% of the outstanding shares of the Portfolio are present in person
or by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio.
The term "majority," when referring to the approvals to be obtained from
shareholders of the Trust's shares represented at a meeting if the holders of
more than 50% of the Trust's outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Trust's outstanding shares. Shareholders
are entitled to one vote for each full share held and fractional votes for
fractional shares held. Unless otherwise provided by law (for example, by rule
18f-2 discussed above) or by the Trust's Declaration of Trust or Bylaws, the
Trust may take or authorize any action upon the favorable vote of the holders of
more than 50% of the outstanding shares of the Trust.
Whenever a Portfolio or the Trust is requested to vote on a matter
with respect to the Master Trust, the Trust will hold a meeting of its
shareholders and will cast its votes as instructed by such shareholders and, in
the case of a matter affecting only a specific Fund, as instructed by the
shareholders of the corresponding Portfolio(s).
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Investment Company Act.
Each share of a Portfolio represents an equal proportional interest in
the Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Portfolio
as are declared in the discretion of the Trustees. In the event of the
liquidation or dissolution of the Trust, shareholders of a Portfolio are
entitled to receive the assets attributable to such Portfolio that are available
for distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Trustees in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
DECLARATIONS OF TRUST. In accordance with Delaware law and in
connection with the tax treatment sought by the Master Trust, the Master Trust's
Declaration of Trust provides that its investors will be personally and jointly
and severally responsible (with rights of contribution INTER SE in proportion to
their respective ownership interests in the Master Trust) for the Master Trust's
liabilities and obligations in the event that the Master Trust fails to satisfy
such liabilities and obligations. However, to the extent assets are available
from the Master Trust, the Master Trust will indemnify each investor from any
claim or liability to which the investor may become subject solely by reason of
his or her having been an investor to the extent such claim or liability imposes
on the investor an obligation or liability which is greater than his or her
proportionate ownership interest in the Master Trust, and will reimburse the
investor for all legal and other expenses reasonably incurred by him or her in
connection with any such claim or liability.
B-36
<PAGE>
The Declarations of Trust of both the Trust and Master Trust provide
that obligations of the Trust and the Master Trust are not binding upon their
respective Trustees, officers, employees and agents individually and that the
Trustees, officers, employees and agents will not be liable to the trusts or
their respective investors for any action or failure to act, but nothing in the
Declarations of Trust protect a Trustee, officer, employee or agent against any
liability to the trusts or their respective 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 Declarations of Trust also provide that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Portfolio or Fund shall be enforceable against the assets and
property of such Portfolio or Fund only (and, in the case of the Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of the Portfolio, the investors therein).
REGISTRATION STATEMENT. The Registration Statement of the Trust and
the Master Trust, including the Value Portfolio's Prospectus, the Statement of
Additional Information and the exhibits filed therewith, may be examined at the
office of the Commission in Washington, D.C. Statements contained in the
Portfolio's Prospectus or the Statement of Additional Information as to the
contents of any contract or other document referred to herein or in the
Prospectus 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 the
Registration Statement, each such statement being qualified in all respects by
such reference.
B-37
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating
symbols of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated PRIME-1
have a superior ability for repayment of short-term promissory obligations.
PRIME-1 repayment ability will often be evidenced by the following
characteristics: (A) leading market positions in well-established industries;
(B) high rates of return on funds employed; (C) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (D) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (E) well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above in the
PRIME-1 category but to a lesser degree. Earning trends and coverage ratios,
while sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting institutions)
have an acceptable ability for repayment of short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and 3 to indicate the relative
degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-1
<PAGE>
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
FITCH INVESTORS SERVICE, INC.
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 issuers assigned 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.
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.
THOMSON BANKWATCH
A-2
<PAGE>
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.
IBCA
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
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.
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative investment
qualities of bonds. Moody's employs nine designations to indicate such relative
qualities, ranging from "Aaa" for the highest quality obligations to "C" for the
lowest. Issues are further refined with the designation 1,2, and 3 to indicate
the relative ranking within designations. Bonds with the following Moody's
ratings have the following investment qualities:
Aaa: Bonds in this category are judged to be of the highest 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 in this category 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-3
<PAGE>
A: Bonds in this category possess many favorable investment
attributes and are considered to be 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 in this category are considered medium-grade obligations,
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds in this category are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds in this category 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 in this category 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 in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.
C: Bonds in this category 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.
STANDARD & POOR'S
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
Ratings are graded into ten categories, ranging from "AAA" for the highest
quality obligation to "D" for debt in default. Issues are further refined with
a "PLUS" or "MINUS" sign to show relative standing within the categories. Bonds
with the following Standard & Poor's ratings have the following investment
qualities:
AAA: Bonds in this category have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds in this category have a very strong capacity to pay
interest and repay principal and differ from the higher rated issues only in
small degree.
A: Bonds in this category have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB: Bonds in this category have 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: Bonds in this category have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
A-4
<PAGE>
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating.
B: Bonds in this category have a greater vulnerability to default but
currently have 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: Bonds in this category have currently identifiable vulnerability
to default, and are 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, they are 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.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
FITCH INVESTORS SERVICE, 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.
A-5
<PAGE>
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.
ICBA
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.
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THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
A - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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.
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