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NICHOLAS-APPLEGATE MUTUAL FUNDS
SERIES A, B, C AND INSTITUTIONAL PORTFOLIOS
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
August 2, 1996
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified portfolios. This Statement of Additional Information contains
information regarding 33 of these portfolios (each a "Portfolio" and
collectively the "Portfolios"): Nicholas-Applegate Core Growth Portfolio A,
Portfolio B, Portfolio C and Institutional Portfolio (the "Core Growth
Portfolios"); Nicholas-Applegate Emerging Growth Portfolio A, Portfolio B,
Portfolio C and Institutional Portfolio (the "Emerging Growth Portfolios");
Nicholas-Applegate Income & Growth Portfolio A, Portfolio B, Portfolio C and
Institutional Portfolio (the "Income & Growth Portfolios");
Nicholas-Applegate Balanced Growth Portfolio A, Portfolio B, Portfolio C and
Institutional Portfolio (the "Balanced Portfolios"); Nicholas-Applegate
Worldwide Growth Portfolio A, Portfolio B, Portfolio C and Institutional
Portfolio (the "Worldwide Portfolios"); Nicholas-Applegate International
Growth Portfolio A, Portfolio B, Portfolio C and Institutional Portfolio (the
"International Growth Portfolios"); Nicholas-Applegate Emerging Countries
Portfolio A, Portfolio B, Portfolio C and Institutional Portfolio (the
"Emerging Countries Portfolios"); Nicholas-Applegate Government Income
Portfolio A, Portfolio B and Portfolio C (the "Government Portfolios");
Nicholas-Applegate Money Market Portfolio (the "Money Market Portfolio"); and
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 Portfolios' Prospectuses and should be read in conjunction with each such
Prospectus. Each Portfolio Prospectus may be obtained without charge by
calling or writing the Trust at the address and phone number given above.
TABLE OF CONTENTS
Page
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General Information B-2
Investment Objectives, Policies and Risks B-2
Investment Restrictions B-25
Principal Holders of Securities B-29
Trustees and Principal Officers B-33
Investment Adviser B-37
Administrator B-39
Distributor B-41
Portfolio Transactions and Brokerage B-44
Purchase and Redemption of Portfolio Shares B-46
Shareholder Services B-49
Net Asset Value B-50
Taxes B-53
Performance Information B-58
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel B-71
Miscellaneous B-71
Appendix A - Description of Securities Ratings A-1
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GENERAL INFORMATION
The Trust and the Master Trust were organized in December 1992 as
business trusts under the laws of Delaware. Information regarding 37 of the
portfolios of the Trust is included in this Statement of Additional
Information. Nine Portfolios (each a "Series A Portfolio" and collectively
the "Series A Portfolios") have an initial sales charge and lower annual
distribution fees; nine Portfolios (each a "Series B Portfolio" and
collectively the "Series B Portfolios") have a contingent deferred sales
charge and annual distribution fees; nine Portfolios (each a "Series C
Portfolio" and collectively the "Series C Portfolios") have a different
contingent deferred sales charge and annual distribution fees; one Money
Market Portfolio has no initial or contingent deferred sales charges and
lower annual distribution fees; and nine Portfolios are offered to
institutional investors and high net worth individuals and other eligible
purchasers without any sales charge or distribution fees (each an
"Institutional Portfolio" and collectively the "Institutional Portfolios").
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 separate series
(each a "Fund" and collectively the "Funds") to the Portfolios and other
investment companies and institutional investors: the Nicholas-Applegate
Core Growth Fund (the "Core Growth Fund"), in which the Core Growth
Portfolios invest; the Nicholas-Applegate Emerging Growth Fund (the "Emerging
Growth Fund"), in which the Emerging Growth Portfolios invest; the
Nicholas-Applegate Income & Growth Fund (the "Income & Growth Fund"), in
which the Income & Growth Portfolios invest; the Nicholas-Applegate Balanced
Fund (the "Balanced Fund"), in which the Balanced Growth Portfolios invest;
the Nicholas-Applegate Worldwide Growth Fund (the "Worldwide Fund"), in which
the Worldwide Portfolios invest; the Nicholas-Applegate International Growth
Fund (the "International Growth Fund"), in which the International Growth
Portfolios invest; the Nicholas-Applegate Emerging Countries Fund (the
"Emerging Countries Fund"), in which the Emerging Countries Portfolios
invest; the Nicholas-Applegate Government Income Fund (the "Government
Fund"), in which the Government Portfolios invest; and the Nicholas-Applegate
Money Market Fund (the "Money Market Fund"), in which the Money Market
Portfolio invests; and 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 each
Portfolio's investment objective and policies as set forth in the Portfolios'
Prospectus. As each Portfolio seeks to achieve its investment objective by
investing all of its assets in a corresponding Fund with the same investment
objective as the Portfolio, the following discussion describes the various
investment policies and techniques employed by the Funds. There can be no
assurance that the investment objective of any of the Funds or Portfolios can
be achieved.
EQUITY SECURITIES OF GROWTH COMPANIES
Each of the Core Growth, Emerging Growth, Income & Growth, Balanced,
Worldwide, International Growth and Emerging Countries Funds invests in
equity securities of domestic
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and foreign companies, the earnings and stock prices of which are expected by
the Master Trust's Investment Adviser to grow at an above-average rate. Such
investments will be diversified over a cross-section of industries and
individual companies. Some of these companies will be organizations with
market capitalizations of $500 million or less or companies that have limited
product lines, markets and financial resources and are dependent upon a
limited management group. Examples of possible investments include emerging
growth companies employing new technology, cyclical companies, initial public
offerings of companies offering high growth potential, or other corporations
offering good potential for high growth in market value. The securities of
such companies may be subject to more abrupt or erratic market movements than
larger, more established companies both because the securities typically are
traded in lower volume and because the issuers typically are subject to a
greater degree to changes in earnings and prospects.
CONVERTIBLE SECURITIES AND WARRANTS
The Core Growth, Emerging Growth, Income & Growth, Balanced,
Worldwide, International Growth, Emerging Countries, and Value Funds each 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 derivable from
common stock but lower than that afforded by a similar nonconvertible
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 event the warrant may expire without being exercised, resulting in
a loss of the Fund's entire investment therein).
OTHER CORPORATE DEBT SECURITIES
The Core Growth, Emerging Growth, Income & Growth, Balanced,
Worldwide, International Growth, Emerging Countries, Government, and Value
Funds invest in non-convertible debt securities of foreign and domestic
companies over a cross-section of industries. The debt securities in which
such Funds may invest will be of varying maturities and may include corporate
bonds, debentures, notes and other similar corporate debt instruments. The
value of a longer-term debt security fluctuates more widely in response to
changes in interest rates than do shorter-term debt securities.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors,
including the general condition of the money and bond markets, the size
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of a particular offering, the maturity of the obligation, and the rating of
the issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to potentially greater capital appreciation
and depreciation than obligations with short maturities and lower yields.
The market prices of debt securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
such portfolio investments, and a decline in interest rates will generally
increase the value of such portfolio investments. The ability of the Funds
to achieve their investment objectives also depends on the continuing ability
of the issuers of the debt securities in which the Funds invest to meet their
obligations for the payment of interest and principal when due.
RISKS OF INVESTING IN LOWER-RATED DEBT SECURITIES
As set forth in the applicable Prospectuses, the Income & Growth and
Balanced Funds may invest a portion of their net assets in debt securities
rated below "Baa" by Moody's or "BBB-" by S&P or below investment grade by
other recognized rating agencies or in unrated securities of comparable
quality under certain circumstances. Securities with ratings below "Baa"
and/or "BBB-" are commonly referred to as "junk bonds." Such bonds are
subject to greater market fluctuations and risk of loss of income and
principal than higher rated bonds for a variety of reasons, including the
following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other
securities. For example, the prices of high yield bonds have been found to be
less sensitive to interest rate changes than higher-rated investments, but
more sensitive to adverse economic changes or individual corporate
developments. Also, during an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal
and interest obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond defaults, the Funds may incur
additional expenses to seek recovery. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high yield bonds and the Funds' asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption
and call provisions. If an issuer exercises these provisions in a declining
interest rate market, a Fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors.
Conversely, a high yield bond's value will decrease in a rising interest rate
market, as will the value of the Fund's assets. If a Fund experiences
unexpected net redemptions, it may be forced to sell its high yield bonds
without regard to their investment merits, thereby decreasing the asset base
upon which the Fund's expenses can be spread and possibly reducing the Fund's
rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and
this may impact the Investment Adviser's ability to accurately value high
yield bonds and the Fund's assets and hinder the Fund's ability to dispose of
the bonds. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of high yield
bonds, especially in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also,
since credit rating agencies may fail to timely change the credit ratings to
reflect subsequent events, the Investment Adviser must monitor the issuers of
high yield bonds in the Funds' portfolios to determine if the issuers will
have sufficient cash flow and
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profits to meet required principal and interest payments, and to assure the
bonds' liquidity so the Funds can meet redemption requests. The Funds will
not necessarily dispose of a portfolio security when its rating has been
changed.
SHORT-TERM INVESTMENTS
Each of the Funds invests in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Each Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or
bills of exchange, normally drawn by an importer or exporter to pay for
specific merchandise, which are "accepted" by a bank, meaning in effect that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Certificates of deposit and bankers' acceptances acquired by the
Funds will be dollar-denominated obligations of domestic or foreign banks or
financial institutions which at the time of purchase have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less
than $100 million if the principal amount of such bank obligations are fully
insured by the U.S. Government.
A Fund holding instruments of foreign banks or financial institutions
may be subject to additional investment risks that are different in some
respects from those incurred by a fund which invests only in debt obligations
of U.S. domestic issuers. See "Foreign Investments" below. 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 a Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in their Prospectuses, a Fund may
make interest-bearing time or other interest-bearing deposits in commercial
or savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest
rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or
savings and loan associations that have
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capital, surplus and undivided profits in excess of $100 million, based on
latest published reports, or less than $100 million if the principal amount
of such obligations is fully insured by the U.S. Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Funds may invest a portion of their assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes
issued by corporations. Issues of commercial paper and short-term notes will
normally have maturities of less than nine months and fixed rates of return,
although such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by
Moody's, or similarly rated by another nationally recognized statistical
rating organization or, if unrated, will be determined by the Investment
Adviser to be of comparable quality. These rating symbols are described in
Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper.
While such obligations generally have maturities of ten years or more, the
Funds may purchase corporate obligations which have remaining maturities of
one year or less from the date of purchase and which are rated "AA" or higher
by S&P or "Aa" or higher by Moody's.
MONEY MARKET FUNDS
The Funds may under certain circumstances invest a portion of their
assets in money market funds. The Investment Company Act prohibits the Funds
from investing more than 5% of the value of their total assets in any one
investment company, or more than 10% of the value of their total assets in
investment companies as a group, and also restricts their investment in any
investment company to 3% of the voting securities of such investment company.
The Investment Adviser will not impose an advisory fee on assets of a Fund
invested in a money market mutual fund. (This restriction does not apply to
assets of the Money Market Portfolio invested in the Money Market Fund.)
However, an investment in a money market mutual fund will involve payment by
a Fund of its pro rata share of advisory and administrative fees charged by
such fund.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers
Home Administration, Federal Home Loan Banks, Federal Intermediate Credit
Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit
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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.
Certain Funds may invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay principal
and interest in a timely manner may be affected by a number of factors,
including its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which it may be subject. Emerging market
governments could default on their sovereign debt. Such sovereign debtors
also may be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities abroad to reduce principal and
interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such
third parties' commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to service its debt in a
timely manner.
ZERO COUPON SECURITIES
The Income & Growth, Balanced, and Government Funds may each invest in
zero coupon securities issued by the U.S. Treasury on up to 35% of their
respective net assets. Zero coupon Treasury securities are U.S. Treasury
notes and bonds which have been stripped of their unmatured interest coupons
and receipts, or certificates representing interests in such stripped debt
obligations or coupons. Because a zero coupon security pays no interest to
its holder during its life or for a substantial period of time, it usually
trades at a deep discount from its face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Funds may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however,
unrated variable and floating rate instruments purchased by a Fund will be
determined by the Investment Adviser under guidelines established by the
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 defaulting on its payment obligation or during periods in
which the Fund is not entitled to exercise its demand rights, and the Fund
could, for these or other reasons, suffer a loss to the extent of the
default. Variable and floating rate instruments may be secured by bank
letters of credit.
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MORTGAGE-RELATED SECURITIES
The Government Fund invests in mortgage-related securities.
Mortgage-related securities are derivative interests in pools of mortgage
loans made to U.S. residential home buyers, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations. The
Government Fund may also invest in debt securities which are secured with
collateral consisting of U.S. mortgage-related securities, and in other types
of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing
or foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by the Government
National Mortgage Association) are described as "modified pass-throughs."
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is
a wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders and subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages not insured or guaranteed by any government agency from a list of
approved seller/services which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. FHLMC is a government-sponsored corporation
created to increase availability of mortgage credit for residential housing
and owned entirely by private stockholders. FHLMC issues participation
certificates which represent interests in conventional mortgages from FHLMC's
national portfolio. Pass-through securities issued by FNMA and participation
certificates issued by FHLMC are guaranteed as to timely payment of principal
and interest by FNMA and FHLMC, respectively, but are not backed by the full
faith and credit of the United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment
rates vary widely and may be affected by changes in market interest rates.
In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average
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life of the pool certificates. Conversely, when interest rates are rising,
the rate of prepayments tends to decrease, thereby lengthening the actual
average life of the certificates. Accordingly, it is not possible to predict
accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign
CMO in which the Government Fund may invest is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond,
interest is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, FNMA or
equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
and interest received from the pool of underlying mortgages, including
prepayments, is first returned to the class having the earliest maturity date
or highest seniority. Classes that have longer maturity dates and lower
seniority will receive principal only after the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and
others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related, and private
organizations (e.g., Canada Mortgage and Housing Corporation and First
Australian National Mortgage Acceptance Corporation Limited). The mechanics
of these mortgage-related securities are generally the same as those issued
in the United States. However, foreign mortgage markets may differ materially
from the U.S. mortgage market with respect to matters such as the sizes of
loan pools, pre-payment experience, and maturities of loans.
FOREIGN INVESTMENTS
The Funds may invest in securities of foreign issuers that are not
publicly traded in the United States. The Funds (other than the Money Market
Fund) may also invest in depository receipts, and the Worldwide,
International Growth, Emerging Countries, and Value Funds may invest in
foreign currency futures contracts.
The United States government has from time to time imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Funds. If such restrictions should be reinstituted, it
might become necessary for such Funds to invest substantially all of their
assets in United States securities. In such event, the Board of Trustees of
the Trust would consider alternative arrangements, including reevaluation of
the Portfolios' investment objectives and policies, investment of all of the
Portfolios' assets in another investment company with different investment
objectives and policies than the Funds, or hiring an investment adviser to
manage the Portfolios' assets. However, a Portfolio would adopt any revised
investment objective and fundamental policies only after approval by the
shareholders holding a majority (as defined in the Investment Company Act) of
the shares of the Portfolio.
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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. All of the Funds other than the Money Market
Fund may invest in securities denominated in foreign currencies.
Accordingly, a change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of a
Fund's assets denominated in that currency. Such changes will also affect
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 Funds invest will be purchased in
over-the-counter markets or on exchanges located in the countries in which
the principal offices of the issuers of the various securities are located,
if that is the best available market. Foreign exchanges and markets may be
more volatile than those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets, and the Funds'
portfolio securities may be less liquid and more volatile than U.S.
Government securities. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets, and may
include delays beyond periods customary in the United States. Foreign
security trading practices, including those involving securities settlement
where Fund assets may be released prior to receipt of payment or securities,
may expose the Fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of a
Fund's positions may also be adversely impacted by delays in its ability to
act upon economic events occurring in foreign markets during non-business
hours in the United States.
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LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and
less financial information available to issuers, than is available in the
United States.
TAXES. The interest payable on certain of the Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the
Portfolios' shareholders. A shareholder otherwise subject to United States
federal income taxes may, subject to certain limitations, be entitled to
claim a credit or deduction of U.S. federal income tax purposes for his
proportionate share of such foreign taxes paid by the Funds.
COSTS. The expense ratios of the Funds are likely to be higher than
those of investment companies investing in domestic securities, since the
cost of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics
of the particular company, differences between economic trends and the
performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental
and social conditions of the country or countries where the company is
located. The extent to which a Fund (other than the International and
Emerging Countries Funds) will be invested in foreign companies and countries
and depository receipts will fluctuate from time to time within the
limitations described in the Prospectuses, depending on the Investment
Adviser's assessment of prevailing market, economic and other conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. The Core Growth, Emerging Growth,
Income & Growth, Balanced, Worldwide, International Growth, and Emerging
Countries Funds are each authorized to purchase covered "put" and "call"
options with respect to securities which are otherwise eligible for purchase
by the Funds and with respect to various stock indices subject to certain
restrictions. Such Funds will engage in trading of such derivative
securities exclusively for hedging purposes.
If a Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of
the option (for "American-style" options) or on the option expiration date
(for "European-style" options). Purchasing put options may be used as a
portfolio investment strategy when the Investment Adviser perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it
protects against significant downward price movement while it allows full
participation in any upward movement. If the Fund is holding a stock which
it feels has strong fundamentals, but for some reason may be weak in the near
term, the Fund may purchase a put option on such security, thereby giving
itself the right to sell such security at a certain strike price throughout
the term of the option. Consequently, the Fund will exercise the put only if
the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the
underlying security on the date the Fund exercises the put, less transaction
costs, will be the amount by which the Fund will be able to hedge against a
decline in the underlying security. If during the period of the option the
market price for the underlying security remains at or above the put's strike
price, the put will expire worthless, representing a loss of the price the
Fund paid for the put, plus transaction costs. If the price of the underlying
security increases, the profit the Fund realizes on the
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sale of the security will be reduced by the premium paid for the put option
less any amount for which the put may be sold.
If a Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of
the option. The purchase of a call option is a type of insurance policy to
hedge against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period
the market price for the underlying security remains at or below the strike
price of the call option, the option will expire worthless, representing a
loss of the price paid for the option, plus transaction costs. If the call
option has been purchased to hedge a short position of the Fund in the
underlying security and the price of the underlying security thereafter
falls, the profit the Fund realizes on the cover of the short position in the
security will be reduced by the premium paid for the call option less any
amount for which such option may be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Funds generally will purchase only those options for which
the Investment Adviser believes there is an active secondary market to
facilitate closing transactions.
WRITING CALL OPTIONS. The Core Growth, Emerging Growth, Income &
Growth, Worldwide, International Growth, and Emerging Countries Funds may
write covered call options. A call option is "covered" if the Fund owns the
security underlying the call or has an absolute right to acquire the security
without additional cash consideration (or, if additional cash consideration
is required, cash or cash equivalents in such amount as are held in a
segregated account by the Custodian). The writer of a call option receives a
premium and gives the purchaser the right to buy the security underlying the
option at the exercise price. The writer has the obligation upon exercise of
the option to deliver the underlying security against payment of the exercise
price during the option period. If the writer of an exchange-traded option
wishes to terminate his obligation, he may effect a "closing purchase
transaction." This is accomplished by buying an option of the same series as
the option previously written. A writer may not effect a closing purchase
transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
investments of the Fund. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, it will effect a
closing transaction prior to or concurrent with the sale of the security.
A Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the
premium paid to purchase the option. A Fund will realize a loss from a
closing transaction if the cost of the closing transaction is more than the
premium received from writing the option or if the proceeds from the closing
transaction are less than the premium paid to purchase the option. However,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss to the
Fund resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
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STOCK INDEX OPTIONS. The Funds (other than the Government and Money
Market Funds) may also purchase put and call options with respect to the S&P
500 and other stock indices. Such options may be purchased as a hedge
against changes resulting from market conditions in the values of securities
which are held in a Fund's portfolio or which it intends to purchase or sell,
or when they are economically appropriate for the reduction of risks inherent
in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether the Fund will realize a
gain or loss on the purchase or sale of an option on an index depends upon
movements in the level of stock prices in the stock market generally rather
than movements in the price of a particular stock. Accordingly, successful
use by a Fund of options on a stock index would be subject to the Investment
Adviser's ability to predict correctly movements in the direction of the
stock market generally. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading of index options also may be interrupted
in certain circumstances, such as if trading were halted in a substantial
number of stocks included in the index. If this were to occur, the Fund
would not be able to close out options which it had purchased, and if
restrictions on exercise were imposed, the Fund might be unable to exercise
an option it holds, which could result in substantial losses to the Fund. It
is the policy of the Funds to purchase put or call options only with respect
to an index which the Investment Adviser believes includes a sufficient
number of stocks to minimize the likelihood of a trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objective. In addition, a liquid secondary
market for particular options may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of option of underlying
securities; unusual or unforeseen circumstances may interrupt normal
operations on an exchange; the facilities of an exchange or clearing
corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide
or be compelled at some future date to discontinue the trading of options (or
a particular class or series of options), in which event the secondary market
on that exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
The extent to which a Fund may enter into options transactions may be limited
by the Internal Revenue Code requirements for qualification of the
corresponding Portfolio as a regulated investment company. See "Dividends,
Distributions and Taxes."
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<PAGE>
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will
not be available. For example, there may be no daily price fluctuation
limits in such exchanges or markets, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although
the purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost. Moreover,
a Fund as an option writer could lose amounts substantially in excess of its
initial investment, due to the margin and collateral requirements typically
associated with such option writing. See "Dealer Options" below.
DEALER OPTIONS. The Core Growth, Emerging Growth, Worldwide,
International Growth, and Emerging Countries Funds will engage in
transactions involving dealer options as well as exchange-traded options.
Certain risks are specific to dealer options. While the Funds might look to
a clearing corporation to exercise exchange-traded options, if a Fund were to
purchase a dealer option it would need to rely on the dealer from which it
purchased the option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as
well as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, a Fund may generally be able to
realize the value of a dealer option it has purchased only by exercising or
reselling the option to the dealer who issued it. Similarly, when a Fund
writes a dealer option, the Fund may generally be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to whom the Fund originally wrote the option.
While the Fund will seek to enter into dealer options only with dealers who
will agree to and which are expected to be capable of entering into closing
transactions with the Fund, there can be no assurance that the Fund will at
any time be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Unless the Fund, as a covered dealer call option
writer, is able to effect a closing purchase transaction, it will not be able
to liquidate securities (or other assets) used as cover until the option
expires or is exercised. In the event of insolvency of the other party, the
Fund may be unable to liquidate a dealer option. With respect to options
written by the Fund, the inability to enter into a closing transaction may
result in material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on a security it
writes, the Fund may not sell the assets which it has segregated to secure
the position while it is obligated under the option. This requirement may
impair the Portfolio's ability to sell portfolio securities at a time when
such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
A Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written
for a maximum price to be calculated by a predetermined formula. In such
cases, the dealer option would be considered illiquid only to the extent the
maximum purchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Fund will treat dealer options as subject to the
Fund's limitation on unmarketable securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its
treatment of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Worldwide, International Growth, and Emerging Countries Funds may
buy or sell put and call options on foreign currencies. A put or call option
on a foreign currency gives the purchaser of the option the right to sell or
purchase a foreign currency at the exercise price until the option expires.
The Funds will use foreign currency options separately or
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in combination to control currency volatility. Among the strategies employed
to control currency volatility is an option collar. An option collar
involves the purchase of a put option and the simultaneous sale of call
option on the same currency with the same expiration date but with different
exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price or an in-the-money strike price. Foreign currency
options are derivative securities. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of
the Funds to reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option
on foreign currency will constitute only a partial hedge, up to the amount of
the premium received. The Funds could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may constitute an
effective hedge against exchange rate fluctuations; however, in the event of
exchange rate movement adverse to a Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
The Worldwide, International Growth, and Emerging Countries Funds may
enter into forward currency contracts in anticipation of changes in currency
exchange rates. A forward currency contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fix number of
days from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. For example, a Fund might purchase a particular
currency or enter into a forward currency contract to preserve the U.S.
dollar price of securities it intends to or has contracted to purchase.
Alternatively, it might sell a particular currency on either a spot or
forward basis to hedge against an anticipated decline in the dollar value of
securities it intends to or has contracted to sell. Although this strategy
could minimize the risk of loss due to a decline in the value of the hedged
currency, it could also limit any potential gain from an increase in the
value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds other than the Balanced and Money Market Funds may
invest in futures contracts and options on futures contracts as a hedge
against changes in market conditions or interest rates. Such Funds will
trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). Each such Fund will segregate liquid assets in a
separate account with its Custodian when required to do so by CFTC guidelines
in order to cover its obligation in connection with futures and options
transactions.
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<PAGE>
No price is paid or received by a Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
will be required to deposit in a segregated account with its Custodian an
amount of cash or U.S. Treasury bills equal to approximately 5% of the
contract amount. This amount is known as initial margin. The margin
requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination
of the futures contract, assuming all contractual obligations have been
satisfied. Subsequent payments (called variation margin) to and from the
broker will be made on a daily basis as the price of the underlying stock
index fluctuates, to reflect movements in the price of the contract making
the long and short positions in the futures contract more or less valuable.
For example, when the Fund has purchased a stock index futures contract and
the price of the underlying stock index has risen, that position will have
increased in value and the Fund will receive from the broker a variation
margin payment equal to that increase in value. Conversely, when the Fund
has purchased a stock index futures contract and the price of the underlying
stock index has declined, the position will be less valuable and the Fund
will be required to make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is made on closing the position.
Additional cash is paid by or released to the Fund, which realizes a loss or
a gain.
STOCK INDEX FUTURES CONTRACTS. The Core Growth, Emerging Growth,
Income & Growth, Balanced, Worldwide, International Growth, Emerging
Countries, and Value Funds may invest in futures contracts on stock indices.
Currently, stock index futures contracts can be purchased or sold with
respect to the S&P 500 Stock Price Index on the Chicago Mercantile Exchange,
the Major Market Index on the Chicago Board of Trade, the New York Stock
Exchange Composite Index on the New York Futures Exchange and the Value Line
Stock Index on the Kansas City Board of Trade. Foreign financial and stock
index futures are traded on foreign exchanges including the London
International Financial Futures Exchange, the Singapore International
Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock
Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Income & Growth,
Worldwide, International Growth, Emerging Countries, Government, and Value
Funds may invest in interest rate or financial futures contracts. Bond
prices are established in both the cash market and the futures market. In
the cash market, bonds are purchased and sold with payment for the full
purchase price of the bond being made in cash, generally within five business
days after the trade. In the futures market, a contract is made to purchase
or sell a bond in the future for a set price on a certain date. Historically,
the prices for bonds established in the futures markets have generally tended
to move in the aggregate in concert with cash market prices, and the prices
have maintained fairly predictable relationships.
The sale of an interest rate or financial futures sale by a Fund would
create an obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by a Fund 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,
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respectively, at settlement date, would not be determined until at or near
that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and the same delivery date. If the
price in the sale exceeds the price in the offsetting purchase, the Fund is
paid the difference and thus realizes a gain. If the offsetting purchase
price exceeds the sale price, the Fund pays the difference and realizes a
loss. Similarly, the closing out of a futures contract purchase is effected
by the Fund's entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an
auction environment on the floors of several exchanges - principally, the
Chicago Board of Trade and the Chicago Mercantile Exchange. A public market
now exists in domestic futures contracts covering various financial
instruments including long-term United States Treasury bonds and notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
90-day commercial paper. A Fund may trade in any futures contract for which
there exists a public market, including, without limitation, the foregoing
instruments. International interest rate futures contracts are traded on the
London International Financial Futures Exchange, the Singapore International
Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock
Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The Worldwide, International
Growth, Emerging Countries, and Value Funds 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 futures contracts are likely to be developed and traded in the
future. The Funds will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of
trade, or similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because
of the imperfect correlation between movements in the price of the futures
contract and movements in the price of the securities which are the subject
of the hedge. The price of the future may move more or less than the price of
the securities being hedged. If the price of the future moves less than the
price of the securities which are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, a Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, this advantage will be partially offset by
the loss on the future. If the price of the future moves more than the price
of the hedged securities, the Fund will experience either a loss or a gain on
the future which will not be completely offset by movements in the price of
the securities which are subject to the hedge.
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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, a Fund may buy or sell futures contracts in a greater dollar amount
than the dollar amount of securities being hedged if the historical
volatility of the prices of such securities has been greater than the
historical volatility over such time period of the future. Conversely, the
Fund may buy or sell fewer futures contracts if the historical volatility of
the price of the securities being hedged is less than the historical
volatility of the futures contract being used. It is possible that, when the
Fund has sold futures to hedge its portfolio against a decline in the market,
the market may advance while the value of securities held in the Fund's
portfolio may decline. If this occurs, the Fund will lose money on the
future and also experience a decline in value in its portfolio securities.
However, the Investment Adviser believes that over time the value of a
diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest
in securities or options at that time because of concern as to possible
further market decline or for other reasons, it will realize a loss on the
futures contract that is not offset by a reduction in the price of securities
purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the stock index or cash market due to certain market
distortions. All participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship between
the index or cash market and futures markets. In addition, the deposit
requirements in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by speculators
in the futures market may also cause temporary price distortions. As a
result of price distortions in the futures market and the imperfect
correlation between movements in the cash market and the price of securities
and movements in the price of futures, a correct forecast of general trends
by the Investment Adviser may still not result in a successful hedging
transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash
payments of variation margin. When futures contracts have been used to hedge
portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset to losses on a futures
contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price
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at the end of a trading session. Once the daily limit has been reached in a
particular type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price movement during
a particular trading day and therefore does not limit potential losses,
because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to predict correctly movements in the direction of the
market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting stocks held in its portfolio and
stock prices increase instead, the Fund will lose part or all of the benefit
of the increased value of the stocks which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits
with the broker.
OPTIONS ON FUTURES CONTRACTS. As described above, certain of the
Funds may purchase options on the futures contracts they can purchase or
sell, as described above. A futures option gives the holder, in return for
the premium paid, the right to buy (call) from or sell (put) to the writer of
the option a futures contract at a specified price at any time during the
period of the option. Upon exercise, the writer of the option is obligated
to pay the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder
or writer of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing an option of the
same series, at which time the person entering into the closing transaction
will realize a gain or loss. There is no guarantee that such closing
transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option. Depending on the pricing of the
option compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or may not be
less risky than ownership of the futures contract or such securities. In
general, the market prices of options can be expected to be more volatile
than the market prices on the underlying futures contracts. Compared to the
purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to
the Funds because the maximum amount at risk is limited to the premium paid
for the options (plus transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. A
Fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which
it intends to purchase and where the transactions are economically
appropriate to the
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reduction of risks inherent in the ongoing management of the Funds. A Fund
may not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. A Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
Upon the purchase of futures contracts by a Fund, an amount of cash
and cash equivalents, equal to the market value of the futures contracts,
will be deposited in a segregated account with the Custodian or in a margin
account with a broker to collateralize the position and thereby insure that
the use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and may be changed by the Trustees of the Master
Trust if applicable law permits such a change and the change is consistent
with the overall investment objective and policies of the Fund.
The extent to which a Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment
company. See "Taxes."
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires
securities from financial institutions such as banks and broker-dealers as
are deemed to be creditworthy by the Investment Adviser, subject to the
seller's agreement to repurchase and the Fund's agreement to resell such
securities at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates (which may be more or less than the rate on
the underlying portfolio security). Securities subject to repurchase
agreements will be held by the 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.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each of the Funds may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to satisfy a purchase commitment. In such a case, a
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
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The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy
its purchase commitments in the manner described, the Fund's liquidity and
the ability of the Investment Adviser to manage it may be affected in the
event the Fund's forward commitments, commitments to purchase when-issued
securities and delayed settlements ever exceeded 15% of the value of its net
assets.
A Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities
are delivered to the Fund on the settlement date. In these cases the Fund
may realize a taxable capital gain or loss. When a Fund engages in
when-issued, forward commitment and delayed settlement transactions, it
relies on the other party to consummate the trade. Failure of such party to
do so may result in a Fund's incurring a loss or missing an opportunity to
obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
BORROWING
Each of the Funds is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of
transactions in amounts up to 20% of the value of its total assets at the
time of such borrowings. The use of borrowing by a Fund involves special
risk considerations that may not be associated with other funds having
similar objectives and policies. Since substantially all of a Fund's assets
fluctuate in value, whereas the interest obligation resulting from a
borrowing will be fixed by the terms of the Fund's agreement with its lender,
the asset value per share of the Fund will tend to increase more when its
portfolio securities increase in value and to decrease more when its
portfolio assets decrease in value than would otherwise be the case if the
Fund did not borrow funds. In addition, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions,
the Fund might have to sell portfolio securities to meet interest or
principal payments at a time when fundamental investment considerations would
not favor such sales.
The Trust has entered into a Credit Agreement on behalf of its various
Portfolios with several banks and Chemical Bank, as administrative agent for
the lenders, to borrow up to $50,000,000 from time to time for purposes of
meeting shareholder redemption requests without the necessity of requiring
the Funds to sell portfolio securities, at times when the Investment Adviser
believes such sales are not in the best interests of the Portfolios'
shareholders, in order to provide the Portfolios with cash to meet such
redemption requests. The Credit Agreement expires on April 10, 1997, unless
renewed by the parties.
Under the Credit Agreement, each Portfolio may borrow, repay and
reborrow amounts (collectively, the "Revolving Credit Loans") in increments
of $50,000, provided the Revolving Credit Loans outstanding at any time
aggregate at least $350,000 (the "Credit Facility"). The Trust will pay a
commitment fee at the rate of 0.10% per annum of the average daily unused
portion of the
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Credit Facility, and may at any time terminate the Credit Agreement or reduce
the lenders' commitment thereunder in increments of $2,500,000.
While outstanding, the Revolving Credit Loans will bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or
(ii) the prime rate of interest of Chemical Bank. If, as a result of changes
in applicable laws, regulations or guideline with respect to the capital
adequacy of any lender, the return on such lender's capital is reduced, the
Trust may be required to adjust the rate of interest to compensate such
lender for such reduction. Each Revolving Credit Loan is payable in thirty
days, and may be prepaid at any time in increments of $100,000 without
premium or penalty. No Portfolio is liable for repayment of a Revolving
Credit Loan to any other Portfolio.
The Credit Agreement contains, among other things, covenants that
require each Portfolio to maintain certain minimum ratios of debt to net
worth; limit the ability of the Trust to incur other indebtedness and create
liens on its assets or guarantee obligations of others; merge or consolidate
with, or sell its assets to, others; make material changes in its method of
conducting business; make distributions to shareholders in excess of the
requirements of Subchapter M of the Internal Revenue Code in the event of a
default under the Credit Agreement; or make changes in fundamental investment
policies. The Credit Agreement also contains other terms and conditions
customary in such agreements, including various events of default.
LENDING PORTFOLIO SECURITIES
Each of the Funds may lend its portfolio securities in an amount not
exceeding 30% of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable
regulations. Under the present regulatory requirements which govern loans of
portfolio securities, the loan collateral must, on each business day, at
least equal the value of the loaned securities and must consist of cash,
letters of credit of domestic banks or domestic branches of foreign banks, or
securities of the U.S. Government or its agencies. To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Fund if the demand meets the terms of the letter. Such terms and the
issuing bank would have to be satisfactory to the Fund. Any loan might be
secured by any one or more of the three types of collateral. The terms of
the Fund's loans must permit the Fund to reacquire loaned securities on five
days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code.
SHORT SALES
The Investment Adviser's growth equity management approach is aimed
principally at identifying equity securities the earnings and prices of which
it expects to grow at a rate above that of the S&P 500. However, the
Investment Adviser believes that its approach also identifies securities the
prices of which can be expected to decline. Therefore, the Core Growth,
Emerging Growth, Worldwide and International Growth Funds are authorized to
make short sales of securities they own or have the right to acquire at no
added cost through conversion or exchange of other securities they own
(referred to as short sales "against the box") and to make short sales of
securities which they do not own or have the right to acquire.
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In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of
the security. To complete the sale, the Fund must borrow the security
generally from the broker through which the short sale is made) in order to
make delivery to the buyer. The Fund is then obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund
has a short position can range from one day to more than a year. Until the
security is replaced, the proceeds of the short sale are retained by the
broker, and the Fund is required to pay to the broker a negotiated portion of
any dividends or interest which accrue during the period of the loan. To
meet current margin requirements, the Fund is also required to deposit with
the broker additional cash or securities so that the total deposit with the
broker is maintained daily at 150% of the current market value of the
securities sold short (100% of the current market value if a security is held
in the account that is convertible or exchangeable into the security sold
short within 90 days without restriction other than the payment of money).
Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the
securities sold short without the need to invest the full purchase price of
the securities on the date of the short sale, the Fund's net asset value per
share will tend to increase more when the securities it has sold short
decrease in value, and to decrease more when the securities it has sold short
increase in value, than would otherwise be the case if it had not engaged in
such short sales. The amount of any gain will be decreased, and the amount
of any loss increased, by the amount of any premium, dividends or interest
the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds
from the sale. The seller is said to have a short position in the securities
sold until it delivers the securities sold, at which time it receives the
proceeds of the sale. To secure its obligation to deliver securities sold
short, a Fund will deposit in escrow in a separate account with the Custodian
an equal amount of the securities sold short or securities convertible into
or exchangeable for such securities. The Fund can close out its short
position by purchasing and delivering an equal amount of the securities sold
short, rather than by delivering securities already held by the Fund, because
the Fund might want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold
short.
A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount
of securities sold short relative to the amount of the securities the Fund
owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the investment values or conversion
premiums of such securities.
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The extent to which a Fund may enter into short sales transactions may
be limited by the Internal Revenue Code requirements for qualification of the
corresponding Portfolio as a regulated investment company. See "Taxes."
ILLIQUID SECURITIES
No Fund may invest more than 15% (10% in the case of the Money Market
Fund) of the value of its net assets in securities that at the time of
purchase have legal or contractual restrictions on resale or are otherwise
illiquid. The Investment Adviser will monitor the amount of illiquid
securities in the Fund's portfolio, under the supervision of the Master
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which
have not been registered under the Securities Act are referred to as private
placement or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio
securities and the Fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption within seven days. The Fund
might also have to register such restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions
could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments. If such securities are subject to
purchase by institutional buyers in accordance with Rule 144A promulgated by
the Commission under the Securities Act, the Master Trust's Board of Trustees
may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all
other cases, however, securities subject to restrictions on resale will be
deemed illiquid.
The Emerging Countries Fund may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the
same class that are not subject to such restrictions. Unless these
securities are acquired directly from the issuer or its underwriter, the Fund
treats such foreign securities whose principal market is abroad as not
subject to the investment limitation on securities subject to legal or
contractual restrictions on resale.
INVESTMENT TECHNIQUES AND PROCESSES
The Investment Adviser's investment techniques and processes, which it
has used in managing institutional portfolios for many years, are described
generally in the Portfolios'
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prospectuses under "Investment Objectives and Policies -- Investment
Techniques and Processes." In making decisions with respect to equity
securities for the Funds, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal. It's how the Investment Adviser built
its reputation. Over the past ten years, the Investment Adviser has built a
record as one of the finest performing investment managers in the United
States. It has successfully delivered growth over time to many institutional
investors, pension plans, foundations, endowments and high net worth
individuals. The Investment Adviser's methods have proven their ability to
achieve growth over time through a variety of investment vehicles.
The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "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 a positive change? Is it
sustainable? Is it timely? The Investment Adviser uses these three factors
because it focuses on discovering positive developments when they first show
up in an issuer's earnings, but before they are fully reflected in the price
of the issuer's securities. The Investment Adviser is always looking for
companies that are driving change and surpassing analysts' expectations. It
seeks to identify companies poised for rapid growth. The Investment Adviser
focuses on recognizing successful companies, regardless of their
capitalization or whether they are domestic or foreign companies.
As indicated in the Portfolios' prospectuses, the Investment Adviser's
techniques and processes include relationships with an extensive network of
brokerage research firms located throughout the world. These analysts are
often located in the same geographic regions as the companies they follow,
have followed those companies for a number of years, and have developed
excellent sources of information about them. The Investment Adviser does not
employ in-house analysts other than the personnel actually engaged in
managing investments for the Funds and the Investment Adviser's other
clients. However, information obtained from a brokerage research firm is
confirmed with other research sources or the Investment Adviser's
computer-assisted quantitative analysis (including "real time" pricing data)
of a substantial universe of potential investments.
As indicated in the Portfolios' prospectuses, the equity investments
of a Portfolio are diversified, as with respect to at least 75% of each
Fund's assets no Fund may invest more than 5% of its total assets in the
equity securities of any one issuer. The equity securities of each issuer
that are included in the investment portfolio of a Fund are purchased by the
Investment Adviser in approximately equal amounts, and the Investment Adviser
attempts to stay fully invested within the applicable percentage limitations
set forth in 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 Portfolios, and the Master Trust, on
behalf of the corresponding Funds, have adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the appropriate Portfolio or Fund, respectively (as
defined in the Investment Company Act). Whenever a Portfolio is requested to
vote on a change in the investment restrictions of a 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 a Fund are changed, the
corresponding Portfolio may withdraw its investment in the Fund if the
Trust's Board of
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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 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.
No Portfolio or Fund:
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 a Portfolio or Fund's total assets may
be invested without regard to this restriction and a Portfolio will be
permitted to invest all or a portion of its assets in a corresponding Fund or
other diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Portfolio.
This restriction also does not apply to investments by a Portfolio or 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 a Portfolio will be permitted to invest all or a portion of its assets
in a corresponding Fund or other 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 a
Portfolio will be permitted to invest all or a portion of its assets in a
corresponding Fund or other 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 a Portfolio or Fund in securities of the U.S. Government or
its agencies and instrumentalities, or to investments by the Money Market
Portfolio or Money Market Fund in obligations of domestic branches of U.S.
banks and U.S. branches of foreign banks which are subject to the same
regulation as U.S. banks.
4. May purchase or sell real estate. However, a Portfolio or 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 a Portfolio or Fund may
purchase publicly distributed debt instruments and certificates of deposit
and enter into repurchase agreements. Each Portfolio and Fund reserves the
authority to make loans of its portfolio securities in an aggregate amount
not exceeding 30% of the value of its total assets.
6. 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
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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 Portfolios or
Funds 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% (10% in the case of each of the Money
Market Portfolio or the Money Market Fund) of the value of its net assets in
securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid.
10. May purchase securities on margin, except for initial and
variation margin on options and futures contracts, and except that a
Portfolio or 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 (other than the Core Growth Portfolios
and Fund, the Emerging Growth Portfolios and Fund, the Worldwide Portfolios
and Fund and the International Growth Portfolios and Fund), except that a
Portfolio or Fund may use such short-term credits as are necessary for the
clearance of transactions.
12. May invest in securities of other investment companies, except (a)
that a Portfolio may invest all or a portion of its assets in a corresponding
Fund or other 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 a Portfolio or Fund may
borrow money as permitted by restrictions 6 and 7 above. This restriction
shall not prohibit the Portfolios or Funds from engaging in short sales,
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 a Fund or
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.
15. May purchase or write options on securities, except for hedging
purposes and then only if (i) aggregate premiums on call options purchased by
a Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put
options purchased by a Fund do not exceed 5% of its net assets, (iii) not
more than 25% of a Fund's net assets would be hedged, and (iv) not more than
25% of a Fund's net assets are used as cover for options written by the Fund.
MONEY MARKET FUND RESTRICTIONS
Investment by the Money Market Portfolio and Fund are subject to
limitations imposed under regulations adopted by the Commission. These
regulations generally require the Money Market Portfolio and Fund to acquire
only U.S. dollar denominated obligations maturing in 397 days or
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less and to maintain a dollar-weighted average portfolio maturity of 90 days
or less. In addition, the Money Market Portfolio and Fund may acquire only
obligations that present minimal credit risks and that are "eligible
securities" which means they are (i) rated, at the time of investment, by at
least two nationally recognized security rating organizations (one if it is
the only organization rating such obligation) in the highest short-term
rating category or, if unrated, determined to be of comparable quality (a
"first tier security"), or (ii) rated according to the foregoing criteria in
the second highest short-term rating category or, if unrated, determined to
be of comparable quality ("second tier security"). A security is not
considered to be unrated if its issuer has outstanding obligations of
comparable priority and security that have a short-term rating. The
Investment Adviser will determine that an obligation presents minimal credit
risks or that unrated instruments are of comparable quality in accordance
with guidelines established by the Boards of Trustees of the Trust and Master
Trust. The Trustees must also approve or ratify the acquisition of unrated
securities or securities rated by only one rating organization. In addition,
investments in second tier securities are subject to the further constraints
that (i) no more than 5% of the Money Market Portfolio's or Fund's assets may
be invested in such securities in the aggregate, and (ii) any investment in
such securities of one issuer is limited to the greater of 1% of the
Portfolio's or Fund's total assets or $1 million. In addition, the Portfolio
or Fund may only invest up to 25% of its total assets in the first tier
securities of a single issuer for three business days.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the
Boards of Trustees of the Trust, no Portfolio or Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships,
although a Portfolio or a Fund may invest in the securities of companies
which invest in or sponsor such programs.
2. May purchase any security if as a result 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 a Portfolio
may invest all or a portion of its assets in a corresponding Fund or other
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.
3. May purchase securities of any issuer if any officer or trustee of
the Portfolio or Fund, or of the Administrator, the Distributor, or
Investment Adviser, owning more than 1/2 of 1% of the outstanding securities
of such issuer, own in the aggregate more than 5% of the outstanding
securities of such issuer.
4. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.
5. May invest in warrants, valued at the lower of cost or market, in
excess of 5% of the market value of the 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.
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In addition, the Value Fund may not purchase or write options on
securities.
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 its
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 Board 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) no Fund will invest
more than 10% of its total assets in interests in real estate investment
trusts, (ii) no Fund will 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 a Portfolio to invest in securities of a
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 such 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 Texas, that the International Growth Fund
will not make short sales of securities or maintain a short position if to do
so could create liabilities or require collateral deposits and segregation of
assets aggregating more than 25% of the Fund's net assets.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of Ohio, that no Fund will invest more than
50% of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years continuous operation or
securities of issuers which are restricted as to disposition (including
without limitation securities issued pursuant to Rule 144A under the
Securities Act of 1933).
PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1996, the following persons held of record more than
5% of the outstanding shares of the Portfolios:
CORE GROWTH PORTFOLIO A: Merrill Lynch Pierce Fenner & Smith, Mutual Fund
Operations, Attn: Bank Reconciliations, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246 ("Merrill Lynch") (74.12%).
EMERGING GROWTH PORTFOLIO A: Merrill Lynch (79.50%).
B-29
<PAGE>
INCOME & GROWTH PORTFOLIO A: Merrill Lynch (57.89%); First Union National
Bank of Florida, Custodian for Attorney Title Insurance Fund Corp.,
Jacksonville, Florida 32231 (20.90%); North Shore Medical Center Inc., 1100
N.W. 95 Street, Miami, Florida 33150 (7.36%).
BALANCED GROWTH PORTFOLIO A: Merrill Lynch (75.60%); Van Dijk, Pace Westlake
& Partners Profit Sharing Plan & Trust dated 12/27/94, 700 West St. Clair,
Suite 400, Cleveland, Ohio 44113 (5.22%).
WORLDWIDE GROWTH PORTFOLIO A: Merrill Lynch (83.02%).
INTERNATIONAL GROWTH PORTFOLIO A: Merrill Lynch (46.86%); Beverly R. Peake,
Janice Mellecker JT TEN, 9131-C Derbyshire Road, Richmond, VA 23229 (5.99%)
Louis D. MacEwan, Carolyn D. MacEwan, Trustees, MacEwan Enterprises, Inc.
Defined Benefit Plan, 8440 Westcliff Drive, Las Vegas, Nevada 89128 (5.21%);
Mark A. Warren, Trustee, Arnetta F. Warren Irrevocable Life Insurance Trust,
650 College Street, Milton, Wisconsin 53563 (17.69%).
EMERGING COUNTRIES PORTFOLIO A: Merrill Lynch (70.45%); Robert A. Warren,
TTEE, Robert A. Warren Rev. Trust U/A/D 2/2/93, 5518 Isleworth Country Club
Dr., Windermere, Florida 34786 (5.96%).
GOVERNMENT INCOME PORTFOLIO A: Merrill Lynch (35.50%); Paine Webber for the
Benefit of Helen E. Lawson, Tod Paul E. Lawson and John A. Lawson, 739 Birch
Street, Anoka, Minnesota 55303 (20.33%); Nicholas-Applegate 401K Profit
Sharing Plan c/o Thomas Pindelski, Trustee, 600 West Broadway, San Diego,
California 92101 (18.57%); Van Dijk, Pace Westlake & Partners Profit Sharing
Plan & Trust dated 12/27/94, 700 West St. Clair, Suite 400, Cleveland, Ohio
44113 (12.10%).
CORE GROWTH PORTFOLIO B: Merrill Lynch (42.23%).
INCOME & GROWTH PORTFOLIO B: Merrill Lynch (17.66%); R.H. Marlin Profit
Sharing Plan, Charley Robertson Trustee, 2202 West Thompson Road,
Indianapolis, Indiana 40217 (10.03%).
BALANCED GROWTH PORTFOLIO B: Merrill Lynch (26.27%); Coylene Stidman, Lela M.
Collier Trustees, Lela M. Collier Intervivos Trust, 18757 Wood Drive,
Nagalia, California 95954 (15.43%); James P. Cuonet Trustee, Meat Processors
Inc. 401(k) -- Balanced, 136 North Maple Drive. Greenbay, Wisconsin 54305
(7.09%); Delta M. Walton, 5305 River Thames Road, Jackson, Mississippi 39211
(6.57%).
GOVERNMENT INCOME PORTFOLIO B: Delta M. Walton, 5305 River Thames Road,
Jackson, Mississippi 39211 (12.89%); Lewco Securities Corp., 34 Exchange
Place, 4th Floor, Jersey City, N.J. 07302 (28.46%); Rausher Pierce Refnes FBO
Tamara L. Ford, 6311 Pemberton Drive, Dallas, Texas 75230 (15.06%); Rauscher
Perce Refnes FBO The Jishi First Family Limited Partnership, 6015 Rosegrove
Court, Dallas, Texas 75248 (15.35%).
CORE GROWTH PORTFOLIO C: Merrill Lynch (86.84%).
EMERGING GROWTH PORTFOLIO C: Merrill Lynch (90.60%).
INCOME & GROWTH PORTFOLIO C: Merrill Lynch (90.72%).
BALANCED GROWTH PORTFOLIO C: Merrill Lynch (87.81%).
WORLDWIDE GROWTH PORTFOLIO C: Merrill Lynch (84.33%)
INTERNATIONAL GROWTH PORTFOLIO C: Merrill Lynch (53.00%).
EMERGING COUNTRIES PORTFOLIO C: Merrill Lynch (80.66%); Advest, Inc., 90
State House Square, Hartford, Connecticut 06103 (5.41%).
B-30
<PAGE>
WORLDWIDE GROWTH PORTFOLIO B: Merrill Lynch (51.70%).
INTERNATIONAL GROWTH PORTFOLIO B: Merrill Lynch (10.03%); Donaldson Lufkin
Jenrette Securities Corporation Inc., P.O. Box 2052, Jersey City, New Jersey
07303 (26.10%); Smith Barney Inc., 388 Greenwich Street, New York, New York
10013 (6.99%).
EMERGING GROWTH PORTFOLIO B: Merrill Lynch (75.57%).
EMERGING COUNTRIES PORTFOLIO B: Merrill Lynch (48.98%).
GOVERNMENT INCOME PORTFOLIO C: Merrill Lynch (70.29%); Betty Elliot, 22386
Estallens, Mission Viejo, California 92692 (6.35%).
CORE GROWTH INSTITUTIONAL PORTFOLIO: Metz Baking Co. Pension Trust, Attn:
William K. Stoneburg, 1014 Nebraska St., P.O. Box 448, Sioux City, Iowa 51102
(5.79%); Robert Bosch Corp., Master Retirement Trust, Attn: RBUS/TRS, 2800 S.
25th Avenue, Broadview, Illinois 60153 (12.07%); U.S. National Bank of Oregon
FBO Ford Family Foundation, Security Processing, P.O. Box 3168, Portland,
Oregon 97208 (7.99%); LIBCO Liberty Bank & Trust Co. of Oklahoma City, P.O.
Box 25848, Oklahoma City, Oklahoma 73125 (10.09%); NBD Bank TTEE Consumers
Power Co. Employees' Savings Plan, P.O. Box 771072, Detroit, Michigan, 48277
(7.85%); Pacificorp Veba Trust, 700 North East Multnomah, Suite 1600,
Portland, Oregon 97232 (7.64%).
EMERGING GROWTH INSTITUTIONAL PORTFOLIO: KPMG Peat Marwick, Partner &
Employee Benefits, 3 Chestnut Ridge Road, Bldg. 3, Floor 2, Montvale, New
Jersey 07645 (5.82%); Bankers Trust Co. TTEE Johnson & Johnson Retirement
Trust DTD 8/1/82, 34 Exchange Place, Jersey City, New Jersey 07302 (24.88%);
U.S. National Bank of Oregon FBO The Ford Family Foundation, c/o Trust Group,
P.O. Box 3168, Portland, Oregon 97208 (5.82%); City of Sarasota General
Employees' Pension Fund, P.O. Box 1058, Sarasota, Florida 34230 (5.21%).
INCOME & GROWTH INSTITUTIONAL PORTFOLIO: Dalton L. Knauss, TTEE Elaine V.
Knauss Revocable Trust dated 7/21/89, P.O. Box 2173, Carefree, Arizona 85377
(8.11%); Edyth Bush Charitable Foundation Inc., P.O. Box 1967, Winter Park,
Florida 32790 (20.31%); Charles Johnston, 706 Ocean Drive, Juno Beach,
Florida 33408 (5.23%); Nicholas-Applegate 401K Profit Sharing Plan, c/o
Thomas Pindelski, Trustee, 600 West Broadway, San Diego, California 92101
(5.96%); Butler Family Fund 501(c)(3) Exempt Private Foundation, 1600 20th
Street NW, Washington, D.C. 20009 (19.42%); Dalton L. Knauss TTEE Dalton L.
Knauss Revocable Trust dated 7/21/89, P.O. Box 2173, Carefree, Arizona 85377
(8.11%).
BALANCED GROWTH INSTITUTIONAL PORTFOLIO: Nicholas-Applegate Capital
Management, Attention Thomas Pindelski, 600 West Broadway, San Diego,
California 92101 (19.46%); Nicholas-Applegate 401K Profit Sharing Plan, c/o
Thomas Pindelski Trustee, 600 West Broadway, San Diego, California 92101
(32.28%); Neil F. Marley, MD, Dianne Wylie Marley TTEES N. Marley MD PS Keogh
Plan, 732 Grimswood Court, San Jose, California 95120 (9.88%); Nicholas
Applegate Pension Plan, c/o Thomas Pindelski Trustee, 600 West Broadway, San
Diego, CA 92101 (12.66%); George C. Kenney, Olga Kitsakos-Kenney, 1934 Via
Casa Alta, La Jolla, California 92037 (7.93%); New Orleans Museum of Art,
P.O. Box 19123, New Orleans, Louisiana 70179 (10.80%).
WORLDWIDE GROWTH INSTITUTIONAL PORTFOLIO: Nicholas-Applegate 401K Profit
Sharing Plan, c/o Thomas Pindelski Trustee, 600 West Broadway, San Diego,
California 92101
B-31
<PAGE>
(15.54%); Panpipes International Ltd., c/o A.H. Haynes & Co., 245 Park
Avenue, New York, New York 10167 (10.49%); Nicholas-Applegate Pension Plan,
c/o Thomas Pindelski, Trustee, 600 West Broadway, San Diego, California 92101
(10.03%); Panpipes Offshore Ltd., 48 Par-la-Ville Road, Suite 464, Hamilton,
NMI Bermuda (8.58%); Edyth Bush Charitable Foundation, Inc., P.O. Box 1967,
Winter Park, Florida 32790 (29.16%).
INTERNATIONAL GROWTH INSTITUTIONAL PORTFOLIO: Bankers Trust TTEE, FBO Mary
Kay Cosmetics Inc., Employees PSP & Savings Plan & Money Purchase Plan, 8787
Stemmons Frwy., Dallas, Texas 75247 (12.73%); Arthur E. Nicholas, P.O. Box
2169, Del Mar, California 92014 (10.12%); Sherryl A. Nicholas, P.O. Box 2295,
Rancho Santa Fe, California 92067 (8.89%); Austin Fire Fighters Relief &
Retirement Fund, 3305 Northland Drive, Ste. 203, Austin, Texas 78731
(43.86%); New Orleans Museum of Art, P.O. Box 9123, New Orleans, Louisiana
70179 (5.19%); Nicholas Applegate 401K Profit Sharing Plan, c/o Thomas
Pindelski Trustee, 600 West Broadway, San Diego, California 92101 (6.0%).
EMERGING COUNTRIES INSTITUTIONAL PORTFOLIO: Sherryl A. Nicholas, P.O. Box
2295, Rancho Santa Fe, California 92067 (25.16%); Firstcinco, P.O. Box 1118
Mail Location 6120, Cincinnati, Ohio 45201 (5.54%); Arthur E. Nicholas, P.O.
Box 2169, Del Mar, California 92014 (33.70%); Nicholas-Applegate 401K Profit
Sharing Plan, c/o Thomas Pindelski, Trustee, 600 West Broadway, San Diego,
California 92101 (13.18%).
MONEY MARKET PORTFOLIO: Martin C. Zetterberg, 99 Ridgeview Road, Princeton,
New Jersey 08540 (8.33%); Citicorp U.S.A., Inc., Custodian for Marlboro
Equity Partners, L.P. 153 East 53rd St., 5th Floor, Zone 3, New York, New
York 10043 (26.71%); Van Dijk Pace Westlake Partners Profit Sharing Plan &
Trust DID 12/27/94, 700 West St. Clair, Suite 400, Cleveland, Ohio 44113
(18.14%); Nicholas-Applegate Capital Management Holdings L.P.,
Nicholas-Applegate Capital Management Holdings, L.P., P.O. Box 2169, Del Mar,
California 92014 (13.13%).
As of such date, the Trustees and officers of the Trust, as a group,
owned beneficially and of record less than 1% of the outstanding shares of
each of the Portfolios, except as follows: Government Income Portfolio A -
18.57%; Income & Growth Institutional Portfolio, 5.96%; Balanced Growth
Institutional Portfolio, 64.40%; Emerging Countries Institutional Portfolio,
13.18%; Worldwide Growth Institutional Portfolio, 25.57%; International
Growth Institutional Portfolio, 6.00%; Money Market Portfolio, 13.13%. The
Portfolios currently own beneficially and of record substantially all of the
outstanding shares of the corresponding Funds.
B-32
<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 of Nicholas-Applegate Fund, Inc. (since 1987). Mr. Applegate's
interests in Nicholas-Applegate Capital Management, Inc., the general partner
of the Investment Adviser, were acquired by Mr. Nicholas in 1991 and 1992.
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, Calport Asset
Management, Inc. (since 1992); formerly Distinguished University Professor
and Director, Pepperdine University (from Sept. 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
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); Director, Nicholas-Applegate
Fund, Inc. (since 1992); 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, Nicholas-Applegate Capital Management
(since January 1993), and Chief
B-33
<PAGE>
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
Services/Marketing, Nicholas-Applegate Capital Management (since January
1992) and Vice President, Nicholas-Applegate Securities (since December
1995); formerly, Marketing Director, Pacific Financial Asset Management
Company, an investment management firm (from July 1989 to December 1991), 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.
E. BLAKE MOORE, JR., SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities
(since 1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989
to 1993). Mr. Moore is also the 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 $14,000 for services rendered as a Trustee of the Trust, and $1,000
for each meeting attended ($2,000 per Committee meeting for Committee
chairmen). 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>
Pension or
Aggregate Retirement Benfits Estimated Annual Total Compensation from
Compensation Accrued as Part of Benefits Upon Trust and 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 $31,500 (45*)
</TABLE>
* Indicates total number of funds in Trust complex, including the Portfolios.
B-34
<PAGE>
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), and Director and Chairman of the Board,
Nicholas-Applegate Securities. 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 to 1987) and University Counselor to the President (since 1987),
University of Southern California (since 1987); Director, Public Storage,
Inc., a real estate investment trust (since 1980), Storage Properties, a real
estate investment trust (since 1989), Datametrics Corporation, a producer of
computer peripherals and communication products (since 1993), SEDA Specialty
Packaging, Inc. (since 1993) and Bonded Motors, Inc., an automotive engine
remanufacturer (since 1996).
WALTER E. AUCH, TRUSTEE. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio
communications company (since 1987); Express America Corporation, a mortgage
banking company (since 1992); Fort Dearborn Fund (since 1987); Brinson Funds
(since 1994), Smith Barney Trak Fund (since 1992), registered investment
companies; Pimco L.P., an investment manager (since 1994); and Banyan Realty
Fund (since 1987), Banyan Strategic Land Fund (since 1987), Banyan Strategic
Land Fund II (since 1988), and Banyan Mortgage Fund (since 1988), real estate
investment trusts. Formerly Chairman and Chief Executive Officer, Chicago
Board Options Exchange (1979 to 1986) and Senior Executive Vice President,
Director and Member of the Executive Committee, PaineWebber, Inc. (until
1979).
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co. an investment banking firm (since
1991), and student, Harvard Graduate School of Education (since September
1991). Director, Nicholas-Applegate Fund, Inc. (since 1987), Emerging Germany
Fund (since 1991), Premiere Radio Networks, Inc. (since 1991); Sage Analytics
International (since 1991), 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 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 $100,736 in 1995 and $54,247
in 1994 from the Investment Adviser as compensation for consulting services
provided in connection with its institutional business.
B-35
<PAGE>
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);
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.
E. BLAKE MOORE, JR., SECRETARY.
Each Trustee of the Trust (or 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 $14,000 for services rendered as a
Trustee of the Trust (or Master Trust), and $1,000 for each meeting attended
($2,000 per Committee meeting for Committee chairmen). Each Trustee is also
reimbursed for out-of-pocket expenses incurred as a Trustee.
The following table sets for 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 all other funds in the "Master Trust complex" (as defined in
Schedule 14A under the Securities Exchange Act of 1934):
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement Benefits from Master Trust
Aggregate Accrued as Part of Estimated Annual and Master Trust
Compensation from Master Trust Benefits Upon Complex Paid to
Name Master Trust Expenses Retirement 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*)
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Darlene DeRemer $15,000 None N/A $15,000 (12*)
George F. Keane $15,000 None N/A $15,000 (12*)
</TABLE>
* Indicates total number of funds in Master Trust complex, including the Master
Trust Funds.
INVESTMENT ADVISER
The Trust has not engaged the services of an investment adviser with
respect to the Portfolios because the 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, the general partner of which is Nicholas-Applegate
Capital Management Holdings, Inc., a California corporation owned by Mr.
Nicholas. The Investment Adviser currently has fourteen partners (including
Mr. Nicholas) who manage a staff of approximately 325 employees, including 28
portfolio managers.
Personnel of the Investment Adviser may invest in securities for their
own accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Funds, establishes
procedures for personal investing, and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance, and
participation in initial public offerings is prohibited. In addition,
restrictions on the timing of personal investing in relation to trades by the
Funds and on short-term trading having been adopted.
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Master Trust and
the Investment Adviser with respect to the Funds, the Master Trust retains
the Investment Adviser to manage the Funds' investment portfolios, 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 Funds 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 a
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 Investment Advisory Agreement. The Master
Trust has agreed to indemnify the Investment Adviser against liabilities,
costs and expenses that the Investment
B-37
<PAGE>
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 shareholders by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or of its reckless disregard of its duties and obligations under the
Investment Advisory Agreement.
The amounts of the advisory fees paid to the Investment Adviser for the
fiscal year ended March 31, 1996, and the amounts of the reductions in fees (or
recoupment of fees previously deferred) as a result of the expense limitations
and fee waivers described below under "Expense Limitation" were as follows:
Fund Advisory Fees Fee Reductions
- ---- ------------- --------------
Core Growth Fund $2,563,061 $ -0-
Emerging Growth Fund 5,190,853 -0-
Income & Growth Fund 723,032 (4,263)
Balanced Growth Fund 75,048 94,371
Worldwide Growth Fund 922,328 58,228
International Growth Fund 69,849 117,278
Government Fund -0- 80,735
Money Market Fund -0- 93,976
Emerging Countries Fund 49,827 57,853
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 any 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 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 each Fund
for a period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in conformity with the
Investment Company Act.
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<PAGE>
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of each Portfolio
(including administrative fees and distribution expenses for the Portfolio,
and the Portfolio's allocable share of the operating expenses of the
corresponding 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 Series A Portfolios
do not exceed the amounts specified in the Portfolios' prospectuses.
In addition, each of the Portfolios is subject to certain limitations
on expenses imposed by state securities laws. At present, the only expense
limitation in effect is in California. Under California law, each Portfolio
will be subject to an annual expense limitation equal to the sum of 2.5% of
the first $30 million of the Portfolio's average net assets, 2.0% of the next
$70 million of average net assets, and 1.5% of the remaining average net
assets. If a Portfolio's expenses (excluding interest, brokerage commissions
litigation expenses and certain other items), including its allocable share
of the expenses incurred by the corresponding Fund, were to exceed such limit
in any fiscal year, the Investment Adviser has agreed to bear the amount of
such excess to the extent required by such limitations.
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 a grouping of two similar portfolios and $5,000 for one portfolio, except
as follows: The Administrator receives $15,000 for its services with respect
to the Emerging Growth Portfolios. 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 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.
B-39
<PAGE>
In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel
and pays all expenses incurred in connection with managing the ordinary
course of the business of the Trust, other than expenses assumed by the Trust
as described below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with the
Administrator, the Investment Adviser, (c) out-of-pocket travel expenses for
the officers and Trustees of the Trust and other expenses of Board of
Trustees' meetings, (d) the fees and certain expenses of the Custodian, (e)
the fees and expenses of the Transfer and Dividend Disbursing Agent that
relate to the maintenance of each shareholder account, (f) the charges and
expenses of the Trust's legal counsel and independent accountants, (g)
brokerage commissions and any issue or transfer taxes chargeable to Trustees
and officers of the Trust in connection with securities transactions, (h) all
taxes and corporate fees payable by the Trust to federal, state and other
governmental agencies, (i) the fees of any trade association of which the
Trust may be a member, (j) the cost of maintaining the Trust's existence,
taxes and interest, (k) the cost of fidelity and liability insurance, (l) 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 only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
B-40
<PAGE>
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.
DISTRIBUTION AGREEMENT
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.
Sales charges on sales of Series A Portfolio shares are payable only
with respect to purchases of less than $1,000,000. However, the Distributor
pays an initial commission to broker-dealers and others on purchases of
Series A Portfolios of $1 million or more, and on purchases made at net asset
value by certain retirement plans. See "Purchase and Redemption of Portfolio
Shares -- Dealer Commissions."
The aggregate commissions received by the Distributor in connection
with sales of the Portfolios for the fiscal year ended March 31, 1996 were
$1,446,918, and the aggregate payments received by the Distributor pursuant
to the Distribution Plan for the fiscal year ended March 31, 1996, were as
follows:
Payments under
Distribution
Portfolio Plan
- --------- --------------
Core Growth Portfolio A $ 175,655
Core Growth Portfolio B 27,248
Core Growth Portfolio C 1,210,723
Emerging Growth Portfolio A 305,011
Emerging Growth Portfolio B 40,174
Emerging Growth Portfolio C 1,354,501
Income & Growth Portfolio A 77,118
Income & Growth Portfolio B 5,372
Income & Growth Portfolio C 447,785
Balanced Portfolio A 13,884
Balanced Portfolio B 2,587
Balanced Portfolio C 122,238
Worldwide Portfolio A 59,962
Worldwide Portfolio B 3,870
Worldwide Portfolio C 531,203
International Portfolio A 2,087
B-41
<PAGE>
International Portfolio B 2,108
International Portfolio C 2,574
Emerging Countries Portfolio A 6,256
Emerging Countries Portfolio B 6,687
Emerging Countries Portfolio C 11,112
Government Portfolio A 2,846
Government Portfolio B 205
Government Portfolio C 17,881
Money Market Portfolio 5,585
DISTRIBUTION PLAN
Under a plan of distribution for the Trust with respect to the Series
A Portfolios, Series B Portfolios and Series C Portfolios (the "Distribution
Plan") adopted pursuant to Rule 12b-1 under the Investment Company Act and
distribution agreement (the "Distribution Agreement"), the Distributor incurs
the expense of distributing shares of the Portfolios. The Distribution Plan
provides for compensation to the Distributor for the services it provides,
and the costs and expenses it incurs, related to marketing shares of the
Portfolios. The Distributor is paid for: (a) expenses incurred in connection
with advertising and marketing shares of the Portfolios including but not
limited to any advertising by radio, television, newspapers, magazines,
brochures, sales literature, telemarketing or direct mail solicitations; (b)
periodic payments of fees or commissions for distribution assistance made to
one or more securities brokers, dealers or other industry professionals such
as investment advisers, accountants, estate planning firms and the
Distributor itself in respect of the average daily value of shares owned by
clients of such service organizations, and (c) expenses incurred in
preparing, printing and distributing the Portfolios' prospectuses and
statements of additional information.
The Distribution Plan continues in effect from year to year, provided
that each such continuance is approved at least annually by a vote of the
Board of Trustees of the Trust, including a majority vote of the Rule 12b-1
Trustees, cast in person at a meeting called for the purpose of voting on
such continuance. The Distribution Plan may be terminated with respect to
any Portfolio at any time, without penalty, by the vote of a majority of the
Rule 12b-1 Trustees or by the vote of the holders of a majority of the
outstanding shares of the Portfolio. The Distribution Plan may not be
amended to increase materially the amounts to be paid by a Portfolio for the
services described therein without approval by the shareholders of the
Portfolio, and all material amendments are required to be approved by the
Board of Trustees in the manner described above. The Distribution Plan will
automatically terminate in the event of its assignment. A Portfolio will not
be contractually obligated to pay expenses incurred under the Distribution
Plan if the Plan is terminated or not continued with respect to the Portfolio.
Under the Distribution Plan, the Distributor is compensated for
distribution-related expenses with respect to the Portfolios at the following
annual rates, payable monthly, based on the average daily net assets of each
Portfolio: for the Series A Portfolios, 0.25%; for the Money Market
Portfolio, 0.15%; for the Series B and C Portfolios (other than the
Government Portfolio B and C), 0.75%; for the Government Portfolio B and C,
0.50%. The Distributor recovers the distribution expenses it incurs through
the receipt of
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<PAGE>
compensation payments from the Trust under the Distribution Plan and the
receipt of that portion of initial sales charges on purchases of shares of
the Portfolios remaining after the Distributor's reallowance to selected
dealers. No separate compensation is paid to the Distributor for
distributing shares of the Institutional Portfolios.
If the Distributor incurs expenses greater than the maximum
distribution fees payable under the Distribution Plan, as described above,
with respect to a Portfolio, the Portfolio will not reimburse the Distributor
for the excess in the subsequent fiscal year. However, because the
Distribution Plan is a "compensation-type" plan, the distribution fees are
payable even if the Distributor's actual distribution related expenses are
less than the percentages described above.
The Distributor pays broker-dealers and others out of its distribution
fees quarterly trail commissions of up to the following annual percentages of
the average daily net assets attributable to shares of respective Portfolios
held in the accounts of their customers: 0.25% for the Series A and B
Portfolios; 0.15% for the Money Market Portfolio; 0.75% for the Series C Core
Growth, Emerging Growth, Income & Growth, Balanced, Worldwide, International
Growth, and Emerging Countries Portfolios; and 0.50% for the Series C
Government Portfolio.
SHAREHOLDER SERVICE PLAN
The Trust has also adopted a Shareholder Service Plan with respect to
the Portfolios. Under the Shareholder Service Plan, the Distributor is
compensated at the annual rate of 0.10% of each Series A Portfolio's average
daily net assets, 0.10% of the Money Market Portfolio's average daily net
assets, and 0.25% of each Series B and C Portfolio's average daily net
assets, for certain shareholder service expenses provided by the Distributor
and fees paid to broker-dealers and others for the provision of support
services to their clients who are beneficial owners of shares of the
Portfolios.
Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in
Portfolio shares; processing dividend and distribution payments from the
Portfolios on behalf of clients; preparing tax reports; arranging for bank
wires; responding to client inquiries concerning their investments in
Portfolio shares; providing the information to the Portfolios necessary for
accounting and subaccounting; preparing tax reports, forms and related
documents; forwarding shareholder communications from the Trust (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to clients; assisting in processing
exchange and redemption requests from clients; assisting clients in changing
dividend options, account designations and addresses; and providing such
other similar services.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote
of the Board of Trustees of the Trust, including a majority of the Trustees
who have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder
Service Plan (the "Independent Trustees"), cast in person at a meeting called
for the purpose of voting on such continuance. The Shareholder Service Plan
may be amended at any time by the Board, provided that any material
amendments of the terms of the Plan will become effective only upon the
approval by a majority of the Board and a majority of the Independent
Trustees pursuant to a vote cast in person at a meeting called for the
purpose of voting on the
B-43
<PAGE>
Plan. The Shareholder Service Plan may be terminated with respect to any
Portfolio at any time, without penalty, by the Board.
Under the Shareholder Service Plan, the Distributor pays
broker-dealers and others an account servicing fee of up to 0.25% annually of
the average daily net assets of the Series C Portfolios, attributable to
shares in the accounts of their customers, as compensation for providing
certain shareholder-related services.
MISCELLANEOUS
Pursuant to the Distribution Plan and Shareholder Service Plan, the
Board of Trustees will review at least quarterly a written report of the
distribution and service expenses incurred on behalf of shares of the
Portfolios by the Distributor. The report will include an itemization of the
distribution and service expenses and the purposes of such expenditures. In
addition, as long as the Plans remain in effect, the selection and nomination
of Trustees who are not interested persons of the Trust will be committed to
the Trustees who are not interested persons of the Trust.
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 Funds' portfolio transactions and the allocation of the brokerage
business. In executing such transactions, the Investment Adviser will seek
to obtain the best price and execution for the Funds, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Funds
invest may be traded in the over-the-counter markets, and the Funds deal
directly with the dealers who make markets in such securities except in those
circumstances where better prices and execution are available elsewhere.
Commission rates are established pursuant to negotiation with brokers or
dealers based on the quality or quantity of services provided in light of
generally prevailing rates, and while the Investment Adviser generally seeks
reasonably competitive commission rates, the Funds do not necessarily pay the
lowest commissions available. The allocation of orders among brokers and the
commission rates paid are reviewed periodically by the Board of Trustees of
the Master Trust.
The Funds have no obligation to deal with any broker or group of
brokers in executing transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who 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 Funds. Such information,
services and products are those which brokerage houses customarily provide to
institutional investors, and include items such as statistical and economic
data, research reports on particular companies and industries, and computer
software used for research with respect to investment decisions. Information,
services and products so received are in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the
Investment Advisory Agreement, and the expenses of the Investment Adviser are
not necessarily reduced as a result of the receipt of such supplemental
information, services and products. Such information, services and products
may be useful to the Investment Adviser in providing services to clients
other than the Master
B-44
<PAGE>
Trust, and not all such information, services and products are used by the
Investment Adviser in connection with the Funds. Similarly, such
information, services and products provided to the Investment Adviser by
brokers and dealers through whom other clients of the Investment Adviser
effect securities transactions may be useful to the Investment Adviser in
providing services to the Funds. The Investment Adviser is authorized to pay
higher commission on brokerage transactions for the Funds to brokers in order
to secure the information, services and products described above, subject to
review by the 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 Funds may often also be made by
such other accounts. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Funds and one or more other
accounts managed by the Investment Adviser, available investments are
allocated in the discretion of the Investment Adviser by such means as, in
its judgment, result in fair treatment. The Investment Adviser aggregates
orders for purchases and sales of securities of the same issuer on the same
day among the Funds and its other managed accounts, and the price paid to or
received by the Funds and those accounts is the average obtained in those
orders. In some cases, such aggregation and allocation procedures may affect
adversely the price paid or received by the Funds or the size of the position
purchased or sold by the Funds.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at
a fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's commission or discount. On
occasion, certain money market instruments and agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid.
During the fiscal year ended March 31, 1996, the following Funds
acquired securities of their regular brokers or dealers (as defined in Rule
10b-1 under the Investment Company Act) or their parents: Income & Growth
Fund -- Merrill, Lynch & Co., Inc., Donaldson, Lufkin & Jenrette, and J.P.
Morgan & Co., Inc; Balanced Growth Fund -- Bear, Stearns, Inc., Salomon
Brothers, Inc., Lehman Brothers, Inc., and Morgan Stanley Group, Inc.; Core
Growth Fund -- Lehman Brothers, Inc., Bear Stearns, Inc., Alex Brown, Inc.,
Morgan Stanley Group, Inc., and J.P. Morgan & Co., Inc.; Government Income
Fund -- J.P. Morgan & Co., Inc.; Worldwide Growth Fund -- Morgan Stanley
Group, Inc. and Lehman Brothers, Inc.; International Growth Fund -- J.P.
Morgan & Co., Inc.; and Money Market Fund -- J.P. Morgan & Co., Inc. The
holdings of which were as follows as of March 31, 1996: Core Growth Fund -
J.P. Morgan & Co., Inc. ($8,197,548); Money Market Fund - J.P. Morgan & Co.,
Inc. ($1,962,750); Balanced Growth Fund - Salomon, Inc. ($150,000), Bear
Stearns ($150,975), Lehman Bros. ($139,100); Worldwide Growth Fund - Lehman
Bros. ($358,450), Morgan Stanley ($372,600); Government Income Fund - J.P.
Morgan & Co., Inc. ($103,846).
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<PAGE>
The aggregate dollar amount of brokerage commissions paid by the Funds
during the last three fiscal years of the Trust were as follows:
Year Ended
----------------------------------------------
March 31, 1996 March 31, 1995 March 31, 1994
----------------------------------------------
Worldwide Fund $ 484,310 $344,167 $390,163
International Growth Fund 116,735 69,187 3,146
Core Growth Fund 862,396 728,347 698,807
Emerging Growth Fund 1,038,140 649,053 525,555
Income & Growth Fund 83,459 174,247 131,675
Balanced Fund 51,038 44,386 51,142
Government Fund 3 0 516
Money Market Fund 0 0 0
Emerging Countries Fund 169,728 20,701 N/A
Of the total commissions paid during the fiscal year ended March 31, 1996,
$2,136,382 (75.1%) were paid to firms which provided research, statistical or
other services to the Investment Adviser.
PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the Portfolios may be purchased and redeemed at their net
asset value without any initial or deferred sales charge by former partners
of Whitehall Partners and Coventry Partners, California limited partnerships,
who received shares of the Core Growth Institutional Portfolio and Income &
Growth Institutional Portfolio, respectively, in the reorganization and
conversion of such partnerships into such Portfolios. Similarly, shares of
the Portfolios may be purchased and redeemed at their net asset value without
any initial or deferred sales charge by former partners and participants of
Stratford Partners and Nicholas-Applegate Emerging Growth Pooled Trust who
received shares of the Emerging Growth Institutional Portfolio in the
reorganization and conversion of such partnerships and pooled trust into such
Portfolio.
The price paid for purchase and redemption of shares of the Portfolios
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 prior to the time of determination of net
asset value. Dealers are 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 Portfolios' 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.
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<PAGE>
REDUCED SALES CHARGES
Sales charges on purchases of Series A Portfolio shares are subject to
a reduction in certain circumstances, as indicated in the Prospectuses for
the Series A Portfolios.
RIGHTS OF ACCUMULATION. Each Series A Portfolio makes available to
its shareholders the ability to aggregate the value (at the current maximum
offering price on the date of the purchase) of their existing holdings of all
Series A Portfolio shares to determine the reduced sales charge, provided the
shares are held in a single account. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the
maximum offering price (net asset value plus sales charge) as of the previous
business day. The Transfer Agent must be notified at the time of purchase
that the shareholder is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investor's
holdings.
CONCURRENT PURCHASES. Purchasers may combine concurrent purchases of
shares of two or more Series A Portfolios to qualify for a reduced sales
charge. If the shares of the Portfolios purchased concurrently are subject to
different sales charges, the concurrent purchases are aggregated to determine
the reduced sales charge applicable to each Portfolio purchased, and each
separate reduced sales charge is imposed on the amount of shares purchased
for that Portfolio.
To illustrate, suppose an investor concurrently purchases $40,000 of
the Series A Core Growth Portfolio and $20,000 of the Series A Government
Income Portfolio, for an aggregate concurrent purchase of $60,000. Because
the sales charges are reduced for purchases of $50,000 or more and because
concurrent purchases can be combined, the applicable sales charge imposed on
the $40,000 purchase of shares of the Core Growth Portfolio would be reduced
to 4.50% (from 5.25%), and the sales charge imposed on the concurrent $20,000
purchase of shares of the Government Income Portfolio would be reduced to
4.00% (from 4.75%).
LETTER OF INTENT. Reduced sales charges are available to purchasers
of Series A Portfolio shares who enter into a written Letter of Intent
providing for the purchase, within a 13-month period, of shares of the Series
A Portfolios, provided the shares are held in a single account. All shares
of the Series A Portfolios which were previously purchased and are still
owned are also included in determining the applicable reduction. The Letter
of Intent privilege may be withdrawn by the Distributor or the Transfer Agent
for future purchases upon receipt of information that any shares subject to
the Letter of Intent have been transferred or redeemed during the 13-month
Period.
A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments over a 13-month period.
Each investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Investors should refer to their Letter of Intent when placing
orders for shares of a Series A Portfolio. During the 13-month period, an
investor may increase his or her Letter of Intent goal and all subsequent
purchases will be treated as a new Letter of Intent except as to the 13-month
period, which does not change. The sales charge paid on purchases made
before the increase to the Letter of Intent goal will be retroactively
reduced at the end of the period.
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<PAGE>
Shares of the Series A Portfolios totaling 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent in the name
of the purchaser. Any dividends and capital gains distributions on the
escrowed shares will be paid to the investor or as otherwise directed by the
investor. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of
Intent goal. Upon completion of the Letter of Intent goal within the
13-month period, the escrowed shares will be promptly delivered to the
investor or as otherwise directed by the investor.
The Letter of Intent does not obligate the investor to purchase, or
any Series A Portfolio to sell, the indicated amount. In the event the
Letter of Intent goal is not achieved within the 13-month period, the
investor is required to pay the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges
actually paid. Such payment may be made directly to the Transfer Agent or,
if not paid within 20 days after written request, the Transfer Agent will
liquidate sufficient escrowed shares to obtain such difference. If the
redemption or liquidation proceeds are inadequate to cover the differences,
investors will be liable for the extent of the inadequacy. By executing the
Letter of Intent, investors irrevocably appoint the Transfer Agent as
attorney in fact with full power of substitution in the premises to surrender
for redemption any or all escrowed shares. If the goal Letter of Intent is
exceeded in an amount which qualified for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the 13-month period.
DEALER COMMISSIONS
The following commissions will be paid by the Distributor to dealers
who initiate and are responsible for purchases of Portfolio shares of $1
million or more and for purchases made at net asset value by certain
retirement plans of organizations with 50 or more eligible employees. Such
commissions are paid twice monthly at the following annual rates:
Current Market Value of Account(s)
Commission Rate at Time of Purchase
--------------- ----------------------------------
1.00% $1,000,000 up to $2,000,000.
.80% over $2,000,000 up to $5,000,000.
.50% over $5,000,000 up to $25,000,000.
.25% over $25,000,000
For this purpose, exchanges between Portfolios are not considered to be
purchases. The Distributor reserves the right to require reimbursement of any
such commissions paid with respect to such purchases if such shares redeemed
within twelve months after purchase. Dealers requesting further information
may call (800) 551-8045.
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<PAGE>
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of a Portfolio, a Shareholder
Investment Account is established for each investor under which the shares
are held for the investor by the Transfer Agent. If a share certificate is
desired, it must be requested in writing for each transaction. Certificates
are issued only for full shares and may be redeposited in the Account at any
time. There is no charge to the investor for issuance of a certificate.
Whenever a transaction takes place in the Shareholder Investment Account, the
shareholder will be mailed a statement showing the transaction and the status
of the Account. No certificates will be issued for shares of the Money
Market or Institutional Portfolios.
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 applicable
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. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such distribution at net
asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the
net asset value per share next determined after receipt of the check or
proceeds by the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of a 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. Stock certificates are not issued to participants of
the Automatic Investment Plan. 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 one Portfolio may elect to cross-reinvest dividends
or dividends and capital gain distributions paid by that Portfolio (the
"paying Portfolio") into any other Portfolio (the "receiving Portfolio")
subject to the following conditions: (i) the aggregate value of the
shareholder's account(s) in the paying Portfolio(s) must equal or exceed
$5,000 (this condition is waived if the value of the account in the receiving
Portfolio equals or exceeds that Portfolio's minimum initial investment
requirement), (ii) as long as the value of the account in
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the receiving Portfolio is below that Portfolio's minimum initial investment
requirement, dividends and capital gain distributions paid by the receiving
Portfolio must be automatically reinvested in the receiving Portfolio, (iii)
there is no cross-reinvestment from a Portfolio of one series to a Portfolio
of another series, and (iv) if this privilege is discontinued with respect to
a particular receiving Portfolio, the value of the account in that Portfolio
must equal or exceed the Fund's minimum initial investment requirement or the
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 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 a Portfolio
redeemed, but when the Master Trust makes payment to a 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 of 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 a Portfolio is calculated by
dividing (i) the value of the securities held by the Portfolio (I.E., the
value of its investments in a 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 a Fund is calculated in the same manner. The value
of the investments and assets of the Portfolio or a Fund is determined each
business day.
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Investment securities, including ADRs and EDRs, 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.
In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are 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
Portfolio or the 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 and asked 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 Portfolio or the 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.
Options, futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale or settlement price as of the close
of such exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. If an options or futures exchange closes
later than 4:00 p.m. New York time, the options or futures traded on it are
valued based on the sale price, or on the mean between the bid and ask
prices, as the case may be, as of 4:00 p.m. New York time.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of
business day in New York. In addition, foreign securities trading may not
take place on all business days in New York, and may occur in various foreign
markets on days which are not business days in New York and on which net
asset value is not calculated. The calculation of net asset value may not
take place contemporaneously with the determination of the prices of
portfolio securities used in such
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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 values from dealers and other market data. Such services may
use electronic data processing techniques and/or a matrix system to determine
valuations. The procedures of such services are reviewed periodically by the
officers of the 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 Funds to do so.
MONEY MARKET PORTFOLIO
The calculation of the net asset value per share of the Money Market
Portfolio, as well as the Money Market Fund, is based upon the penny-rounding
method of pricing pursuant to Rule 2a-7 under the Investment Company Act.
Under the rule, the Money Market Portfolio and its corresponding Fund must
maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase instruments having remaining maturities of 13 months or less only
(25 months or less in the case of U.S. Government securities), and invest
only in securities determined by the Board of Trustees to be of high quality
with minimal credit risks. The net asset value per share of the Money Market
Portfolios and Fund will normally remain constant at $1.00.
The Money Market Fund determines the value of its portfolio securities
by the amortized cost method. This method involves valuing an instrument at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Money Market Fund would
receive if it sold the instrument. During these periods, the yield to an
existing shareholder may differ somewhat from that which could be obtained
from a similar fund which marks its portfolio securities to market each day.
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TAXES
MASTER TRUST'S TAX STATUS
Each Fund of the Master Trust 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 each Fund
will be deemed to have been "passed through" to the Trust and other investors
in such Fund, regardless of whether such interest, dividends or gains have
been distributed by the Fund or such losses have been realized and recognized
by the Trust and other investors. Therefore, to the extent a 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 Funds of interest, dividends, gains or losses allocable to the Funds
without a corresponding distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify each Portfolio as a regulated
investment company under Subchapter M of the Code, and intends that each
Portfolio will remain so qualified.
As a regulated investment company, a 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 each 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.
A 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, a
Portfolio must distribute during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income and net capital gain (not
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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 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 Portfolios intend to make timely distributions of their income in
compliance with these requirements and anticipate that they will not be
subject to the excise tax.
Dividends paid by a 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 Portfolios is derived from dividends on common or preferred
stock of domestic corporations. Dividend income earned by a Portfolio will
be eligible for the dividends received deduction only if the Portfolio and
corresponding 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 a 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 a
Portfolio.
Any loss realized on a sale, redemption or exchange of shares of a
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 a 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 a Portfolio of
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the Trust 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 Portfolio is considered tax exempt in their particular
states.
With respect to investments in STRIPS and CUBES (as defined in the
Appendix) made by the Money Market Fund that are sold at original issue
discount and thus do not make periodic cash interest payments, the Fund and
the Money Market Portfolios will be required to include as part of their
current income the imputed interest on such obligations even though the Fund
and the Portfolios have not received any interest payment on such obligations
during that period. Because the Fund may have to sell portfolio securities to
distribute such imputed income, which may occur at a time when the Investment
Adviser would not have chosen to sell such securities and which may result in
a taxable gain or loss.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Funds are "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character.
Also, section 1256 contracts held by the Funds at the end of each taxable
year (and, for purposes of the 4% excise tax, on certain other dates as
prescribed under the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as ordinary or 60/40 gain or loss,
depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the
Funds may result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by the
Portfolios. 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 options, 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 Portfolios may make one or more of the elections available under
the Code which are applicable to straddles. If the Portfolios make any of
the elections, the amount, character and timing of the recognition of gains
or losses from the affected straddle positions
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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 Portfolios' and the
Funds' assets may limit the extent to which the Funds will be able to engage
in transactions in options, futures contracts or forward contracts.
SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Portfolio's investment company taxable
income to be distributed to the shareholders.
FOREIGN TAX. Income received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes. In addition, the Investment Adviser intends to
manage the Funds with the intention of minimizing foreign taxation in cases
where it is deemed prudent to do so. If more than 50% of the value of a
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 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 Portfolio's taxable year whether the foreign taxes
paid by the Fund will be "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income will flow through to
shareholders of the Portfolio. With respect to such election, gains from the
sale of
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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.
SHORT SALES. Generally, capital gain or loss realized by the Fund in
a short sale may be long-term or short-term depending on the holding period
of the short position. Under a special rule, however, the capital gain will
be short-term gain if (1) as of the date of the short sale, the Fund owned
property for the short-term holding period that was substantially identical
to that which the Fund used to close the sale or (2) after the short sale and
on or before its closing, the Fund acquired substantially similar property.
Similarly, if property substantially identical to that sold short was held by
the Fund for the long-term holding period as of the date of the short sale,
any loss on closing the short position will be long-term capital loss. These
special rules do not apply to substantially similar property to the extent
such property exceeds the property used by the Fund to close its short
position.
ORIGINAL ISSUE DISCOUNT. Some of the debt securities (with a fixed
maturity date of more than one year from the date of issuance) that may be
acquired by the Funds may be treated as debt securities that are issued
originally at a discount. Generally, the amount of the original issue
discount ("OID") is treated as interest income and is included in income over
the term of the debt security, even though payment of that amount is not
received until a later time, usually when the debt security matures. A
portion of the OID includable in income with respect to certain high-yield
corporation debt securities may be treated as a dividend for Federal income
tax purposes.
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Funds in the
secondary market may be treated as having market discount. Generally, any
gain recognized on the disposition of, and any partial payment of principal
on, a debt security having market discount is treated as ordinary income to
the extent the gain, or principal payment, does not exceed the "accrued
market discount" on such debt security. Market discount generally accrues in
equal daily installments. The Funds may make one or more of the elections
applicable to debt securities having market discount, which could affect the
character and timing the recognition of income.
Some of the debt securities (with a fixed maturity date of one year or
less from the date of issuance) that may be acquired by the Funds may be
treated as having an acquisition discount, or OID in the case of certain
types of debt securities. Generally, a Fund will be required to include the
acquisition discount, or OID, in income over the term of the debt security,
even though payment of that amount is not received until a later time,
usually when the debt security matures. The Fund 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 Portfolios generally will be required to distribute dividends to
shareholders representing discount on debt securities that is currently
includible in income, even though cash
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representing such income may not have been received by the Funds. Cash to
pay such dividends may be obtained from sales proceeds of securities held by
the Funds.
OTHER TAX INFORMATION
The Portfolios may be required to withhold for U.S. federal income
taxes 31% of all taxable distributions payable to shareholders who fail to
provide the Portfolios 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 a 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 total returns and yields for
the Portfolios, compare Portfolio performance to various indices, and publish
rankings of the Portfolios prepared by various ranking services. Any
performance information should be considered in light of the Portfolio's and
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 a 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
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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.
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YIELD
The yield for a Portfolio (other than the Money Market Portfolios) is
calculated based on a 30-day or one-month period, according to the following
formula:
6
Yield = 2[{a - b + 1) -1]
{c x d }
For purposes of this formula, "a" is total dividends and interest
earned during the period; "b" is total expenses accrued for the period (net
of reimbursements); "c" is the average daily number of shares outstanding
during the period that were entitled to receive dividends; and "d" is the
maximum offering price per share on the last day of the period.
Yields for the following Portfolios for the thirty-day period ended
June 30, 1996 were as follows:
Income & Growth Portfolio A 2.3701%
Income & Growth Portfolio B 1.8765%
Income & Growth Portfolio C 1.8604%
Income & Growth Institutional
Portfolio 3.1004%
Balanced Growth Portfolio A 1.4884%
Balanced Growth Portfolio B 0.9636%
Balanced Growth Portfolio C 0.9390%
Balanced Growth Institutional
Portfolio 2.1822%
Government Income Portfolio A 5.5250%
Government Income Portfolio B 5.5145%
Government Income Portfolio C 5.4359%
The Money Market Portfolio will prepare a current quotation of yield
daily. The yield quoted will be the simple annualized yield for an
identified seven-calendar-day period. The yield calculation will be based on
a hypothetical account having a balance of exactly one share at the beginning
of the seven-day period. The base return will be the change in the value of
the hypothetical account during the seven-day period, including dividends
declared on any shares purchased with dividends on the shares, but excluding
any capital changes. The yield will vary as interest rates and market
conditions change. Yield also depends on the quality, length of maturity and
type of instruments in the Money Market Fund, and its operating expenses.
The Money Market Portfolio may also prepare an effective annual yield
computed by compounding the unannualized seven-day period return as follows:
by adding 1 to the unannualized seven-day period return, raising the sum to a
power equal to 365 divided by 7, and subtracting 1 from the result. The
yield for the Money Market Portfolio for the seven days ended June 30, 1996
was 4.95%.
B-60
<PAGE>
PRIOR PERFORMANCE OF CERTAIN PORTFOLIOS AND THEIR PREDECESSORS
The following table sets forth historical performance information for
the Core Growth, Emerging Growth, Income & Growth and International Growth
Portfolios and the following predecessor investment partnerships and pooled
trust which were operated by the Investment Adviser prior to the organization
of such Portfolios: Core Growth Portfolio -- includes performance information
for Whitehall Partners, a California limited partnership the assets of which
were transferred to the Core Growth Fund on April 19, 1993; Emerging Growth
Portfolio -- includes performance information for Stratford Partners, a
California limited partnership, and Nicholas-Applegate Emerging Growth Pooled
Trust, a tax-exempt trust, the assets of which were transferred to the
Emerging Growth Fund on December 27, 1993; Income and Growth Portfolio --
includes performance information for Coventry Partners, a California limited
partnership the assets of which were transferred to the Income & Growth Fund
on April 19, 1993; International Growth Portfolio -- includes performance
information for Huntington Partners, a California limited partnership the
assets of which were transferred to the International Fund on August 31, 1994.
The Investment Adviser has advised the Trust that its net performance
results in the table are calculated as set forth above under "General
Information-Performance Information." All information set forth in the table
relies on data supplied by the Investment Adviser or from statistical
services, reports or other sources believed by the Investment Adviser to be
reliable. However, such information has not been verified and is unaudited.
See "Performance Information" in the Statement of Additional Information for
further information about calculation of total return.
The Investment Adviser has advised the Trust that such partnerships
and pooled trusts were operated in substantially the same manner as such
Portfolios, and their assets were transferred to the Portfolios prior to the
effective date of the Portfolios' registration statement. It has indicated
that such results for the prior partnerships and pooled trust have been
adjusted to reflect the deduction of the fees and expenses of the Portfolios
(including Rule 12b-1 fees), and their proportionate shares of the operating
expenses of the corresponding Funds (including advisory fees), as stated
under "Summary of Expenses" in the Portfolios' Prospectus, and give effect to
B-61
<PAGE>
transaction costs (such as sales loads) as well as reinvestment of income and
gains. However, the prior investment partnerships and pooled trust were not
registered under the 1940 act and were not subject to certain investment
restrictions imposed by such Act; if they had been so registered, their
performance might have been adversely affected.
The results presented on the following pages may not necessarily
equate with the return experienced by any particular shareholder, partner or
trust beneficiary as a result of the timing of investments and redemptions.
In addition, the effect of taxes on any shareholder, partner or trust
beneficiary will depend on such person's tax status, and the results have not
been reduced to reflect any income tax which may have been payable.
B-62
<PAGE>
<TABLE>
<CAPTION>
SERIES A PORTFOLIOS
---------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Growth
Performance Performance Performance Performance
---------------------- --------------------- ------------------------ ----------------------
Russell Income CS First Inter-
Core Emerging 2000 & Boston national MSCI
Growth S&P 500 Growth Growth Growth Covertible Growth EAFA
Year Portfolio Index(1) Portfolio Index(2) Portfolio Index(3) Portfolio Index(4)
- ---- --------- -------- --------- -------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1985(5) 18.02% 17.14% 5.20% 6.97%
1986 25.14 18.64 0.07 3.58
1987(5) (2.44) 5.27 (9.55) (10.48) (8.76%) (0.22%)
1988 6.12 16.55 19.46 20.37 12.92 13.41
1989 26.15 31.61 19.98 20.17 20.94 13.76
1990(5) (5.13) (3.04) (13.81) (17.41) (4.08) (6.89) (22.07%) (13.67%)
1991 46.51 30.46 46.92 51.19 30.33 29.11 5.34 12.13
1992 6.95 7.62 6.04 7.77 3.45 17.58 (17.42) (12.17)
1993 12.82 10.07 9.15 13.36 19.84 18.55 18.77 32.57
1994 (15.67) 1.32 (9.07) (2.43) (13.05) (4.72) 3.10 7.76
1995 30.41 37.60 27.79 31.06 15.29 23.72 (0.03) 11.02
1996(6) 7.49 10.09 11.53 11.92 4.99 8.10 7.44 4.52
Last
year(6) 24.43 25.99 28.06 26.81 15.44 15.78 14.52 13.12
Last 5
years(6) 17.91 15.73 18.32 15.97 13.78 14.87 7.80 9.96
Last 10
years(6) 14.79 13.81 12.85 9.12 N/A N/A N/A N/A
Since in-
ception(6) 14.72 16.50 15.21 11.03 13.40 11.23 3.50 5.82
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
(2) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock Index generally have higher price-to-book and
price-to-earnings ratios than the average
B-63
<PAGE>
for all companies in the 2000 Index. The Russell 2000 Index is a widely
regarded small-cap index of the 2,000 smallest securities in the Russell
3000 Index, which comprises the 3,000 largest U.S. securities as determined
by total market capitalization. The Index reflects the reinvestment of
income dividends and capital gains distributions, if any, but does not
reflect fees, brokerage commissions, or other expenses of investing.
(3) The CS First Boston Convertible Index is an unmanaged market weighted index
representing the universe of convertible securities, whether they are
convertible preferred stocks or convertible bonds. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or markups, or other
expenses of investing.
(4) The Morgan Stanley Capital International World Index consists of more than
1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index reflects
the reinvestment of income dividends and capital gains distributions, if
any, but does not reflect fees, brokerage commissions or other expenses of
investing.
(5) Inception dates are as follows: Core Growth Portfolio - September 30, 1985
(registration statement effective April 19, 1993); Emerging Growth
Portfolio - September 30, 1985 (registration statement effective December
27, 1993); Income & Growth Portfolio - December 31, 1986 (registration
statement effective April 19, 1993); International Growth Portfolio - June
7, 1990 (registration statement effective August 31, 1994).
(6) Through June 30, 1996.
B-64
<PAGE>
<TABLE>
<CAPTION>
SERIES B PORTFOLIOS
---------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Growth
Performance Performance Performance Performance
---------------------- --------------------- ------------------------ ----------------------
Russell Income CS First Inter-
Core Emerging 2000 & Boston national MSCI
Growth S&P 500 Growth Growth Growth Covertible Growth EAFA
Year Portfolio Index(1) Portfolio Index(2) Portfolio Index(3) Portfolio Index(4)
- ---- --------- -------- --------- -------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1985(5) 18.16% 17.14% 5.20% 6.97%
1986 24.68 18.64 (0.32) 3.58
1987(5) (2.82) 5.27 (9.91) (10.46) (9.12%) (0.22%)
1988 5.72 16.55 19.02 20.37 12.49 13.41
1989 25.68 31.61 19.53 20.17 20.49 13.76
1990(5) (5.50) (3.04) (14.15) (17.41) (4.45) (6.89) (22.17%) (13.67%)
1991 45.97 30.46 46.39 51.19 29.85 29.11 4.94 12.13
1992 6.55 7.62 5.64 7.77 3.06 17.58 (17.75) (12.17)
1993 12.44 10.07 8.74 13.36 19.24 18.55 18.32 32.57
1994 (16.06) 1.32 (9.64) (2.43) (13.31) (4.72) 1.96 7.76
1995 30.07 37.60 27.20 31.06 14.87 23.72 (0.49) 11.02
1996(6) 7.45 10.09 11.33 11.92 4.98 8.10 7.33 4.52
Last
year(6) 24.12 25.99 27.32 26.51 15.06 15.78 14.03 13.12
Last 5
years(6) 17.47 15.73 18.25 15.97 13.82 14.87 7.65 9.96
Last 10
years(6) 14.68 13.81 12.68 9.12 N/A N/A N/A N/A
Since in-
ception(6) 19.56 16.50 14.99 11.03 13.32 11.23 3.60 5.82
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects
the reinvestment of income dividends and capital gain distributions, if
any, but does not reflect fees, brokerage commissions, or other expenses
of investing.
(2) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock
B-65
<PAGE>
Index generally have higher price-to-book and price-to-earnings ratios
than the average for all companies in the 2000 Index. The Russell 2000
Index is a widely regarded small-cap index of the 2,000 smallest
securities in the Russell 3000 Index, which comprises the 3,000 largest
U.S. securities as determined by total market capitalization. The Index
reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions,
or other expenses of investing.
(3) The CS First Boston Convertible Index is an unmanaged market weighted
index representing the universe of convertible securities, whether they
are convertible preferred stocks or convertible bonds. The Index
reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions
or markups, or other expenses of investing.
(4) The Morgan Stanley Capital International World Index consists of more
than 1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index reflects
the reinvestment of income dividends and capital gains distributions,
if any, but does not reflect fees, brokerage commissions or other
expenses of investing.
(5) Inception dates are as follows: Core Growth Portfolio - September 30, 1985
(registration statement effective May 31, 1995); Emerging Growth Portfolio
- September 30, 1985 (registration statement effective May 31, 1995);
Income & Growth Portfolio - December 31, 1986 (registration statement
effective May 31, 1995); International Growth Portfolio - June 7, 1990
(registration statement effective May 31, 1995).
(6) Through June 30, 1996.
B-66
<PAGE>
<TABLE>
<CAPTION>
SERIES C PORTFOLIOS
---------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Growth
Performance Performance Performance Performance
---------------------- --------------------- ------------------------ ----------------------
Russell Income CS First Inter-
Core Emerging 2000 & Boston national MSCI
Growth S&P 500 Growth Growth Growth Covertible Growth EAFA
Year Portfolio Index(1) Portfolio Index(2) Portfolio Index(3) Portfolio Index(4)
- ---- --------- -------- --------- -------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1985(5) 23.13% 17.14% 9.63% 6.97%
1986 31.24 18.64 4.93 3.58
1987(5) 2.30 5.27 (5.17) (10.48) (4.33%) (0.22%)
1988 11.28 16.55 25.28 20.37 18.41 13.41
1989 32.30 31.61 25.82 20.17 26.83 13.76
1990(5) (0.52) (3.04) (9.63) (17.41) 0.57 (6.89) (18.89%) (13.67%)
1991 53.66 30.46 54.09 51.19 36.68 29.11 10.46 12.13
1992 12.15 7.62 11.20 7.77 8.48 17.58 (13.42) (12.17)
1993 18.23 10.07 14.46 13.36 25.51 18.55 24.55 32.57
1994 (11.53) 1.32 (4.73) (2.43) (8.75) (4.72) 8.77 7.76
1995 36.80 37.60 34.22 31.06 20.83 23.72 3.57 11.02
1996(6) 12.00 10.09 16.14 11.92 9.32 8.10 11.85 4.52
Last
year(6) 30.67 25.99 34.28 26.51 20.97 15.78 20.16 13.12
Last 5
years(6) 18.44 15.73 18.85 15.97 14.25 14.87 8.13 9.96
Last 10
years(6) 14.67 13.81 12.73 9.12 N/A N/A N/A N/A
Since in-
ception(6) 19.56 16.50 15.05 11.03 13.30 11.23 3.64 5.82
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects
the reinvestment of income dividends and capital gain distributions, if
any, but does not reflect fees, brokerage commissions, or other expenses
of investing.
B-67
<PAGE>
(2) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock Index generally have higher price-to-book
and price-to-earnings ratios than the average for all companies in the
2000 Index. The Russell 2000 Index is a widely regarded small-cap index
of the 2,000 smallest securities in the Russell 3000 Index, which
comprises the 3,000 largest U.S. securities as determined by total
market capitalization. The Index reflects the reinvestment of income
dividends and capital gains distributions, if any, but does not reflect
fees, brokerage commissions, or other expenses of investing.
(3) The CS First Boston Convertible Index is an unmanaged market weighted
index representing the universe of convertible securities, whether they
are convertible preferred stocks or convertible bonds. The Index
reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions
or markups, or other expenses of investing.
(4) The Morgan Stanley Capital International World Index consists of more
than 1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index reflects
the reinvestment of income dividends and capital gains distributions, if
any, but does not reflect fees, brokerage commissions or other expenses
of investing.
(5) Inception dates are as follows: Core Growth Portfolio - September 30,
1985 (registration statement effective April 19, 1993); Emerging Growth
Portfolio - September 30, 1985 (registration statement effective
December 27, 1993); Income & Growth Portfolio - December 31, 1986
(registration statement effective April 19, 1993); International Growth
Portfolio - June 7, 1990 (registration statement effective August 31,
1994).
(6) Through June 30, 1996.
B-68
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL PORTFOLIOS
---------------------------------------------------------------------------------------------------------
Core Growth Emerging Growth Income & Growth International Growth
Performance Performance Performance Performance
---------------------- --------------------- ------------------------ ----------------------
Russell Income CS First Inter-
Core Emerging 2000 & Boston national MSCI
Growth S&P 500 Growth Growth Growth Covertible Growth EAFA
Year Portfolio Index(1) Portfolio Index(2) Portfolio Index(3) Portfolio Index(4)
- ---- --------- -------- --------- -------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1985(5) 24.74% 17.14% 11.39% 6.97%
1986 32.85 18.64 6.44 3.58
1987(5) 3.59 5.27 (3.78) (10.48) (3.12%) (0.22%)
1988 12.67 16.55 27.05 20.37 19.88 13.41
1989 33.92 31.61 27.60 20.17 28.39 13.76
1990(5) 0.73 (3.04) (8.31) (17.41) 1.84 (6.89) (17.48%) (13.67%)
1991 55.52 30.46 56.23 51.19 38.36 29.11 11.78 12.13
1992 13.55 7.62 12.79 7.77 9.84 17.58 (12.36) 12.17
1993 19.77 10.07 16.09 13.36 27.08 18.55 26.03 32.57
1994 (10.52) 1.32 (3.51) (2.43) (7.59) (4.72) 8.61 7.76
1995 38.57 37.60 35.90 31.06 22.26 23.72 6.00 11.02
1996(6) 13.71 10.09 17.90 11.92 11.11 8.10 13.64 4.52
Last
year(6) 32.08 25.99 35.78 26.51 22.51 15.78 21.45 13.12
Last 5
years(6) 19.89 15.73 20.41 15.97 15.66 14.87 9.38 9.96
Last 10
years(6) 16.09 13.81 14.28 9.12 N/A N/A N/A N/A
Since in-
ception(6) 21.03 16.50 16.63 11.03 14.71 11.23 4.85 5.82
</TABLE>
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any,
but does not reflect fees, brokerage commissions, or other expenses of
investing.
B-69
<PAGE>
(2) The Russell 2000 Growth Stock Index contains those securities in the
Russell 2000 Index with a greater-than-average growth orientation.
Companies in the Growth Stock Index generally have higher price-to-book
and price-to-earnings ratios than the average for all companies in the 2000
Index. The Russell 2000 Index is a widely regarded small-cap index of the
2,000 smallest securities in the Russell 3000 Index, which comprises the
3,000 largest U.S. securities as determined by total market capitalization.
The Index reflects the reinvestment of income dividends and capital gains
distributions, if any, but does not reflect fees, brokerage commissions, or
other expenses of investing.
(3) The CS First Boston Convertible Index is an unmanaged market weighted index
representing the universe of convertible securities, whether they are
convertible preferred stocks or convertible bonds. The Index reflects the
reinvestment of income dividends and capital gains distributions, if any,
but does not reflect fees, brokerage commissions or markups, or other
expenses of investing.
(4) The Morgan Stanley Capital International World Index consists of more than
1,400 securities listed on exchanges in the U.S., Europe, Canada,
Australia, New Zealand and the Far East. The Index is a market-value
weighted combination of countries and is unmanaged. The Index reflects
the reinvestment of income dividends and capital gains distributions, if
any, but does not reflect fees, brokerage commissions or other expenses of
investing.
(5) Inception dates are as follows: Core Growth Portfolio - September 30, 1985
(registration statement effective April 19, 1993); Emerging Growth
Portfolio - September 30, 1985 (registration statement effective October 1,
1993); Income & Growth Portfolio - December 31, 1986 (registration
statement effective April 19, 1993); International Growth Portfolio - June
7, 1990 (registration statement effective January 3, 1994).
(6) Through June 30, 1996.
COMPARISON TO INDICES AND RANKINGS
Performance information for a Portfolio may be compared to various
unmanaged indices, such as the Standard & Poor's 500 Stock Price Index, the Dow
Jones Industrial Average, the IFC Emerging Markets Investible Index, the MSCI
Emerging Markets Free Index,
B-70
<PAGE>
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.
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 AUDITORS 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 Portfolios and Funds 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 Portfolios and Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor,
North Quincy, Massachusetts, 02171, serves as the Dividend Disbursing Agent
and as the Transfer Agent for the Portfolios and Funds. The Transfer Agent
provides customary transfer agency services to the 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 Portfolios:
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 South Flower Street, Los Angeles,
California 90071, serves as the independent auditors 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 legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 45 series of shares -- 8 A
Portfolios, 8 B Portfolios, 8 C Portfolios, 12 Institutional Portfolios, one
Money Market Portfolio, and 8 Qualified Portfolios.
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
B-71
<PAGE>
Investment Company Act, in which case all shares of the Trust will be voted
in the aggregate. For example, a change in a 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 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 directors may be effectively acted
upon by the shareholders of the Trust voting without regard to Portfolio.
As used in the Portfolios' prospectuses and in this Statement of
Additional Information, the term "majority," when referring to approvals to
be obtained from shareholders of a 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, means the vote of the lesser
of (i) 67% 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 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 the Portfolio that are
available for distribution, and a
B-72
<PAGE>
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, 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.
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 a Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of a Portfolio, the investors therein).
FINANCIAL STATEMENTS
The Trust's 1996 Annual Reports to Shareholders of the Portfolios
accompany this Statement of Additional Information. The financial statements
in such Annual Reports are incorporated in this Statement of Additional
Information by reference. Such financial statements for the fiscal year
ended March 31, 1996 have been audited by the Fund's independent auditors,
Ernst & Young L.L.P., whose reports thereon appear in such Annual Reports and
are incorporated herein by reference. Such financial statements for prior
periods have been audited by Coopers & Lybrand L.L.P., whose reports thereon
appear in the Trust's 1995 Annual Reports to Shareholders of the Portfolios
and are incorporated herein by reference. Such financial statements have
been incorporated herein in reliance upon such reports given upon their
authority as experts in accounting and auditing. Additional copies of the
Trust's 1996 Annual Reports to Shareholders may be obtained at no charge by
writing or telephoning the Trust at the address or number on the front page
of this Statement of Additional Information.
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REGISTRATION STATEMENT
The Registration Statement of the Trust and the Master Trust,
including the Portfolios' Prospectuses, the Statements 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
Portfolios' Prospectuses or the Statements of Additional Information as to
the contents of any contract or other document referred to herein or in the
Prospectuses 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
these Registration Statements, each such statement being qualified in all
respects by such reference.
B-74
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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.
A-1
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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-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.
A-2
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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
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:
A-3
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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.
A-4
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They are rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds 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-5
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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 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.
A-6
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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.
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.
A-7
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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.
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-8
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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.
A-9
