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NICHOLAS-APPLEGATE (R) MUTUAL FUNDS
MINI CAP GROWTH INSTITUTIONAL PORTFOLIO
600 West Broadway
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
August 2, 1996
Nicholas-Applegate Mutual Funds (the "Trust") is a diversified, open-end
management investment company currently offering a number of separate series
(each a "Portfolio" and collectively the "Portfolios"). This Statement of
Additional Information contains information regarding one of those Portfolios:
Nicholas-Applegate Mini-Cap Growth Institutional Portfolio (the "Mini-Cap
Portfolio").
The Mini Cap Portfolio may from time to time be referred to as part of
the "Nicholas-Applegate Advisory 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
Mini-Cap Portfolio's Prospectus and should be read in conjunction with such
Prospectus. The Prospectus may be obtained without charge by calling or writing
the Trust at the address and phone number given above.
TABLE OF CONTENTS
Page
General Information. . . . . . . . . . . . . . B-2
Investment Objectives and Policies . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . B-21
Principal Holders of Securities. . . . . . . . B-25
Trustees and Principal Officers. . . . . . . . B-25
Investment Adviser . . . . . . . . . . . . . . B-29
Administrator. . . . . . . . . . . . . . . . . B-30
Distributor. . . . . . . . . . . . . . . . . . B-32
Portfolio Transactions and Brokerage . . . . . B-32
Purchase and Redemption of Portfolio Shares. . B-34
Shareholder Services . . . . . . . . . . . . . B-34
Net Asset Value. . . . . . . . . . . . . . . . B-35
Taxes. . . . . . . . . . . . . . . . . . . . . B-37
Performance Information. . . . . . . . . . . . B-43
Custodian, Transfer and Dividend Disbursing
Agent, Independent Accountants and Legal
Counsel . . . . . . . . . . . . . . . .. . . B-44
Miscellaneous. . . . . . . . . . . . . . . . . B-44
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. The Trust offers shares of numerous
Portfolios with differing sales load, shareholder service plan and distribution
plan arrangements, including Series A Portfolios, Series B Portfolios, Series C
Portfolios, Institutional Portfolios and Qualified Portfolios. This Statement
of Additional Information contains information regarding one Portfolio, the
Mini-Cap Growth Institutional Portfolio.
The various Portfolios of the Trust seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
of the Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified
open-end management investment company organized as a Delaware business trust.
The Master Trust offers shares of fifteen series (each a "Fund" and
collectively the "Funds") to the Trust and other investment companies and
institutional investors, including the Nicholas-Applegate Mini-Cap Growth Fund
(the "Mini-Cap Fund"), in which the Mini-Cap Portfolio invests.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of the Mini-Cap
Portfolio's investment objective and policies as set forth in the Portfolio's
Prospectus. As the Mini-Cap Portfolio seeks to achieve its investment objective
by investing all of its assets in the Mini-Cap Fund, which has the same
investment objective as the Portfolio, the following discussion describes the
various investment policies and techniques employed by the Mini-Cap Fund. There
can be no assurance that the investment objective of the Mini-Cap Fund or the
Mini-Cap Portfolio can be achieved.
EQUITY SECURITIES OF SMALL GROWTH COMPANIES
The Mini-Cap Fund invests in equity securities of domestic 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. 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.
CONVERTIBLE SECURITIES AND WARRANTS
The Mini-Cap Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in an issuer's capital
structure, but are usually subordinated to similar non-convertible securities.
While providing a fixed income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar non-
convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.
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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 Mini-Cap Fund invests in non-convertible debt securities of foreign
and domestic companies over a cross-section of industries. The debt securities
in which the Fund may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
The value of a longer-term debt security fluctuates more widely in response to
changes in interest rates than do shorter-term debt securities.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields. The market prices of
debt securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of such portfolio investments,
and a decline in interest rates will generally increase the value of such
portfolio investments. The ability of the Mini-Cap Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
the debt securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due.
SHORT-TERM INVESTMENTS
The Mini-Cap Fund may invest in any of the following securities and
instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the
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time of purchase have capital, surplus and undivided profits in excess of
$100 million (including assets of both domestic and foreign branches), based
on latest published reports, or less than $100 million if the principal
amount of such bank obligations are fully insured by the U.S. Government.
The Fund's holdings of instruments of foreign banks or financial
institutions may be subject to additional investment risks that are different in
some respects from those incurred by a fund which invests only in debt
obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers
acceptances, to the extent permitted under its investment objective and policies
stated above and in its Prospectus, the Fund may make interest-bearing time or
other interest-bearing deposits in commercial or savings banks. Time deposits
are non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
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Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
MONEY MARKET FUNDS.
The Fund may under certain circumstances invest a portion of its assets
in money market funds. The Investment Company Act prohibits the Fund from
investing more than 5% of the value of its total assets in any one investment
company, or more than 10% of the value of its total assets in investment
companies as a group, and also restricts its investment in any investment
company to 3% of the voting securities of such investment company. The
Investment Adviser will not impose an advisory fee on assets of the Fund
invested in a money market mutual fund. However, an investment in a money
market mutual fund will involve payment by the Fund of its pro rata share of
advisory and administrative fees charged by such fund.
GOVERNMENT OBLIGATIONS.
The Fund may make short-term investments in U.S. Government obligations.
Such obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
VARIABLE AND FLOATING RATE INSTRUMENTS.
The Fund may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however, unrated
variable and floating rate instruments purchased by the Fund will be determined
by the Investment
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Adviser under guidelines established by the Master Trust's Board of Trustees
to be of comparable quality at the time of the purchase and rated instruments
eligible for purchase by the Fund. In making such determinations, the
Investment Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuers of such instruments (such issuers include
financial, merchandising, bank holding and other companies) and will monitor
their financial condition. An active secondary market may not exist with
respect to particular variable or floating rate instruments purchased by the
Fund. The absence of such an active secondary market could make it difficult
for the Fund to dispose of the variable or floating rate instrument involved
in the event of the issuer of the instrument defaulted on its payment
obligation or during periods in which the Fund is not entitled to exercise
its demand rights, and the Fund could, for these or other reasons, suffer a
loss to the extent of the default. Variable and floating rate instruments
may be secured by bank letters of credit.
FOREIGN INVESTMENTS
The Mini-Cap Fund may invest in securities of foreign issuers that are
not publicly traded in the United States. The Fund may also invest in
depository receipts.
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 Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest substantially all of its assets in United
States securities. In such event, the Board of Trustees of the Trust would
consider alternative arrangements, including reevaluation of the Mini-Cap
Portfolio's investment objective and policies, investment of all of the
Portfolio's assets in another investment company with different investment
objectives and policies than the Fund or hiring on investment adviser to manage
the Portfolio's assets. However, the Portfolio would adopt any revised
investment objective and fundamental policies only after approval by the
shareholders holding a majority (as defined in the Investment Company Act) of
the shares of the Portfolio.
DEPOSITORY RECEIPTS. 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
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dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment by
these trading partners of protectionist trade legislation could have a
significant adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
MARKET CHARACTERISTICS. The Investment Adviser expects that most
foreign securities in which the Fund invests will be purchased in over-the-
counter markets or on exchanges located in the countries in which the principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign exchanges and markets may be more volatile than
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets, and the Fund's portfolio securities
may be less liquid and more volatile than U.S. Government securities. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets, and may include delays beyond periods customary in the
United States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Fund to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.
Transactions in 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 the
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Portfolio's shareholders. A
shareholder otherwise subject to United States federal income taxes may, subject
to certain limitations, be entitled to claim a credit or deduction of U.S.
federal income tax purposes for his proportionate share of such foreign taxes
paid by the Fund.
COSTS. The expense ratio of the Fund is likely to be higher than those
of investment companies investing in domestic securities, since the cost of
maintaining the custody of foreign securities is higher.
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In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics
of the particular company, differences between economic trends and the
performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental
and social conditions of the country or countries where the company is
located. The extent to which the Fund will be invested in foreign companies
and countries, and depository receipts will fluctuate from time to time
within the limitations described in the Prospectus, depending on the
Investment Adviser's assessment of prevailing market, economic and other
conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. The Mini-Cap Fund is authorized to
purchase covered "put" and "call" options with respect to securities which
are otherwise eligible for purchase by the Fund and with respect to various
stock indices subject to certain restrictions. The Fund will engage in
trading of such derivative securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to
sell the underlying security at a specified price at any time during the term
of the option (for "American-style" options) or on the option expiration date
(for "European-style" options). Purchasing put options may be used as a
portfolio investment strategy when the Investment Adviser perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an insurance policy, as it
protects against significant downward price movement while it allows full
participation in any upward movement. If the Fund is holding a stock which
it feels has strong fundamentals, but for some reason may be weak in the near
term, the Fund may purchase a put option on such security, thereby giving
itself the right to sell such security at a certain strike price throughout
the term of the option. Consequently, the Fund will exercise the put only if
the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the
underlying security on the date the Fund exercises the put, less transaction
costs, will be the amount by which the Fund will be able to hedge against a
decline in the underlying security. If during the period of the option the
market price for the underlying security remains at or above the put's strike
price, the put will expire worthless, representing a loss of the price the
Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of
the security will be reduced by the premium paid for the put option less any
amount for which the put may be sold.
If the 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,
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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 Fund 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 Mini-Cap Fund 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 the 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.
The 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. The Fund will realize a loss from a
closing transaction if the cost of the closing transaction is more than the
premium received from writing the option or if the proceeds from the closing
transaction are less than the premium paid to purchase the option. However,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss to the
Fund resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
STOCK INDEX OPTIONS. The Fund 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 the 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.
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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 the 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 Fund 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 the 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 "Taxes."
In addition, when trading options on foreign exchanges, many of the
projections afforded to participants in United States option exchanges will
not be available. For
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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, the 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 Mini-Cap Fund will engage in transactions
involving dealer options as well as exchange-traded options. Certain risks
are specific to dealer options. While the Fund might look to a clearing
corporation to exercise exchange-traded options, if the 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, the 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 the
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 Fund'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.
The 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.
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FUTURES CONTRACTS AND RELATED OPTIONS
The Mini-Cap Fund may invest in futures contracts and options on
futures contracts as a hedge against changes in market conditions or interest
rates. The Fund will trade in such derivative securities for bona fide
hedging purposes and otherwise in accordance with the rules of the Commodity
Futures Trading Commission ("CFTC"). The Fund will segregate liquid assets
in a separate account with the Custodian when required to do so by CFTC
guidelines in order to cover its obligation in connection with futures and
options transactions.
No price is paid or received by the Fund upon the purchase or
sale of a futures contract. When it enters into a domestic futures contract,
the Fund will be required to deposit in a segregated account with its
Custodian an amount of cash or liquid assets equal to approximately 5%
of the contract amount. This amount is known as initial margin. The margin
requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions 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 Mini-Cap Fund 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.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because
of the imperfect correlation between movements in the price of the futures
contract and movements in the price of the securities which are the subject
of the hedge. The price of the future may move more or less than the price of
the securities being hedged. If the price of the future moves less than the
price of the securities which are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position
than if it had not hedged at all. If the price of the securities being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the future. If the price of the future moves more than
the price of the hedged securities, the Fund will experience either a loss or
a gain on the future which will not be completely offset by movements in the
price of the securities which are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures
contract, the Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the prices of such securities has been greater than the
historical volatility over such time period of the future. Conversely, the
Fund may buy or sell fewer futures contracts if the historical volatility of
the price of the securities being hedged is less than the historical
volatility of the futures contract being used. It is possible that, when the
Fund has sold futures to hedge its portfolio against a decline in the market,
the market may advance while the value of securities held in the Fund's
portfolio may decline. If this occurs, the Fund will lose money on the
future and also experience a decline in value in its portfolio securities.
However, the Investment Adviser believes that over time the value of a
diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase
in the price of securities before the Fund is able to invest its cash (or
cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead. If the Fund then decides not
to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the stock index or cash market due to certain market
distortions. All participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship between
the index or cash market and futures markets. In addition, the deposit
requirements in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by speculators
in the futures market may also cause temporary price distortions. As a
result of price distortions in the futures market and the imperfect
correlation between movements in the cash market and the price of securities
and movements in the price of futures, a correct forecast of general trends
by the Investment Adviser may still not result in a successful hedging
transaction over a very short time frame.
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<PAGE>
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends 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 Fund would continue to be required to make daily cash
payments of variation margin. When futures contracts have been used to hedge
portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset to losses on a futures
contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a price beyond
that limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of futures positions and subjecting some futures traders to substantial
losses.
Successful use of futures by the Fund is also subject to the
Investment Adviser's ability to predict correctly movements in the direction
of the market. For example, if the Fund has hedged against the possibility of
a decline in the market adversely affecting stocks held in its portfolio and
stock prices increase instead, the Fund will lose part or all of the benefit
of the increased value of the stocks which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous
to do so.
In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits
with the broker.
OPTIONS ON FUTURES CONTRACTS. As described above, the Mini-Cap Fund
may purchase options on the futures contracts they can purchase or sell, as
described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period
of the option. Upon exercise, the writer of the option is obligated to pay
the difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract, the holder
or writer of an option has the right to
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<PAGE>
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. There is
no guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option. Depending on the pricing of the
option compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or may not be
less risky than ownership of the futures contract or such securities. In
general, the market prices of options can be expected to be more volatile
than the market prices on the underlying futures contracts. Compared to the
purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to
the Fund because the maximum amount at risk is limited to the premium paid
for the options (plus transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which
it intends to purchase and where the transactions are economically
appropriate to the reduction of risks inherent in the ongoing management of
the Fund. The Fund may not purchase or sell futures or purchase related
options if, immediately thereafter, more than 25% of its net assets would be
hedged. The Fund also may not purchase or sell futures or purchase related
options if, immediately thereafter, the sum of the amount of margin deposits
on the Fund's existing futures positions and premiums paid for such options
would exceed 5% of the market value of the Fund's net assets.
Upon the purchase of futures contracts by the Fund, an amount of cash
and cash equivalents, equal to the market value of the futures contracts,
will be deposited in a segregated account with the Custodian or in a margin
account with a broker to collateralize the position and thereby insure that
the use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and may be changed by the Trustees of the Master
Trust if applicable law permits such a change and the change is consistent
with the overall investment objective and policies of the Fund.
The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the Mini-Cap Portfolio as a regulated investment company.
See "Taxes."
REPURCHASE AGREEMENTS
The Mini-Cap Fund may enter into repurchase agreements with respect to
its portfolio securities. Pursuant to such agreements, the Fund acquires
securities from
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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
The Mini-Cap Fund may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to satisfy a purchase commitment. In such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because the Fund will set aside cash or liquid portfolio securities to
satisfy its purchase commitments in the manner described, the Fund's
liquidity and the ability of the Investment Adviser to manage it may be
affected in the event the Fund's forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceeded 15% of the value
of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy,
however, the Fund may dispose of or renegotiate a commitment after it is
entered into, and may sell securities it has committed to purchase before
those securities are delivered to the Fund on the settlement date. In these
cases the Fund may realize a taxable capital gain or loss. When the Fund
engages in when-issued, forward commitment and delayed settlement
transactions, it relies on the other party to consummate the trade. Failure
of such party to do so may result in the Fund's incurring a loss or missing
an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees
to purchase the securities. The Fund does
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<PAGE>
not earn interest on the securities it has committed to purchase until they
are paid for and delivered on the settlement date.
BORROWING
The Mini-Cap Fund is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of
transactions in amounts up to 20% of the value of its total assets at the
time of such borrowings. The use of borrowing by the Fund involves special
risk considerations that may not be associated with other funds having
similar objectives and policies. Since substantially all of the Fund's
assets fluctuate in value, whereas the interest obligation resulting from a
borrowing will be fixed by the terms of the Fund's agreement with its lender,
the asset value per share of the Fund will tend to increase more when its
portfolio securities increase in value and to decrease more when its
portfolio assets decrease in value than would otherwise be the case if the
Fund did not borrow funds. In addition, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions,
the Fund might have to sell portfolio securities to 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 Credit Facility, and may at any time terminate the Credit
Agreement Agreement or reduce the lenders' commitment thereunder in
increments of $2,500,000.
While outstainding, 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 guidelines 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
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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
The Mini-Cap Fund may lend its portfolio securities in an amount not
exceeding 30% of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable
regulations. Under the present regulatory requirements which govern loans of
portfolio securities, the loan collateral must, on each business day, at
least equal the value of the loaned securities and must consist of cash,
letters of credit of domestic banks or domestic branches of foreign banks, or
securities of the U.S. Government or its agencies. To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demand by
the Fund if the demand meets the terms of the letter. Such terms and the
issuing bank would have to be satisfactory to the Fund. Any loan might be
secured by any one or more of the three types of collateral. The terms of
the Fund's loans must permit the Fund to reacquire loaned securities on five
days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code.
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 Fund is
authorized to make short sales of securities it owns or has the right to
acquire at no added cost through conversion or exchange of other securities
it owns (referred to as short sales "against the box") and to make short
sales of securities which it does not own or has the right to acquire.
In a short sale that is not "against the box," the 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).
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<PAGE>
Short sales by the 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 the 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, the 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.
The 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.
The extent to which the Fund may enter into short sales transactions
may be limited by the Internal Revenue Code requirements for qualification of
the Mini-Cap Portfolio as a regulated investment company. See "Taxes."
ILLIQUID SECURITIES
The Mini-Cap Fund may not invest more than 15% of the value of its net
assets in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. 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.
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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 Investment Adviser 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.
INVESTMENT TECHNIQUES AND PROCESSES
The Investment Adviser's investment techniques and processes, which it
has used in managing institutional portfolios for many years, are described
generally in the Portfolios' prospectuses under "Investment Objectives and
Policies -- Investment Techniques and Processes." In making decisions with
respect to equity securities for the Fund, GROWTH OVER TIME -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 "bottum-up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is
guided by three critical questions: Is there positive change? Is it
sustainable? Is it timely? The Investment Adviser uses these three factors
because it focuses on discovering positive developments when they first show
up in an issuer's earnings, but before they are fully reflected in the price
of the issuer's securities. The
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Investment Adviser is always looking for companies that are driving change
and surpassing analysts' expectations. It seeks to identify companies poised
for rapid growth. The Investment Adviser focuses on recognizing successful
companies, regardless of their capitalizations or whether they are domestic
or foreign.
As indicated in the Mini-Cap Portfolio's Prospectus, the Investment
Adviser's techniques and processes include relationships with an extensive
network of brokerage research firms located throughout the world. These
analysts are often located in the same geographic regions as the companies
they follow, have followed those companies for a number of years, and have
developed excellent sources of information about them. The Investment
Adviser does not employ in-house analysts other than the personnel actually
engaged in managing investments for the Master Trust and the Investment
Adviser's other clients. However, information obtained from a brokerage
research firm is confirmed with other research sources or the Investment
Adviser's computer-assisted quantitative analysis (including "real time"
pricing data) of a substantial universe of potential investments.
As indicated in the Mini-Cap Portfolio's prospectus, the equity
investments of the Fund are diversified, as with respect to at least 75% of
the Fund's assets the Fund may not invest more than 5% of its total assets in
the equity securities of any one issuer. The equity securities of each
issuer that are included in the investment portfolio of the Fund are
purchased by the Investment Adviser in approximately equal amounts, and the
Investment Adviser attempts to stay fully invested within the applicable
percentage limitations set forth in the prospectus. In addition, for each
issuer whose securities are added to an investment portfolio, the Investment
Adviser sells the securities of one of the issuers currently included in the
portfolio.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Mini-Cap Portfolio, and the Master Trust,
on behalf of the Mini-Cap Fund have adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the Portfolio or Fund, respectively (as defined in
the Investment Company Act). Whenever the Mini-Cap Portfolio is requested to
vote on a change in the investment restrictions of the Fund, the Trust will
hold a meeting of its shareholders and will cast its vote as instructed by
the shareholders. If the investment restrictions of the Fund are changed,
the Mini-Cap Portfolio may withdraw its investment in the Fund if the Trust's
Board of Trustees determines that withdrawal is in the best interests of the
Portfolio and its shareholders, but only upon shareholder approval. Upon
such withdrawal, the Trust's Board would consider alternative investments,
including investing all of the Mini-Cap 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.
B-21
<PAGE>
Neither the Mini-Cap Fund nor the Mini-Cap Portfolio:
1. May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of the Portfolio or the Fund's total assets may
be invested without regard to this restriction and the Portfolio will be
permitted to invest all or a portion of its assets in the Fund or another
diversified, open-end management investment company with substantially the
same investment objective, policies and restrictions as the Portfolio. This
restriction also does not apply to investments by the Portfolio or the Fund
in securities of the U.S. Government or any of its agencies and
instrumentalities.
2. May purchase more than 10% of the outstanding voting securities,
or of any class of securities, of any one issuer, or purchase the securities
of any issuer for the purpose of exercising control or management, except
that the Portfolio will be permitted to invest all or a portion of its assets
in the Fund or another diversified, open-end management investment company
with substantially the same investment objective, policies and restrictions
as the Portfolio.
3. May invest 25% or more of the market value of its total assets in
the securities of issuers in any one particular industry, except that the
Portfolio will be permitted to invest all or a portion of its assets in the
Fund or another diversified, open-end management investment company with
substantially the same investment objective, policies and restrictions as the
Portfolio. This restriction does not apply to investments by the Portfolio
or the Fund in securities of the U.S. Government or its agencies and
instrumentalities.
4. May purchase or sell real estate. However, the Portfolio or the
Fund may invest in securities secured by, or issued by companies that invest
in, real estate or interests in real estate.
5. May make loans of money, except that the Portfolio or the Fund may
purchase publicly distributed debt instruments and certificates of deposit
and enter into repurchase agreements. The Portfolio and the Fund each
reserves the authority to make loans of its portfolio securities in an
aggregate amount not exceeding 30% of the value of its total assets.
6. May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the
extent that the value of the Fund's total assets, less its liabilities other
than borrowings, is equal to at least 300% of all borrowings (including the
proposed borrowing). If such asset coverage of 300% is not maintained, the
Portfolio or Fund will take prompt action to reduce its borrowings as
required by applicable law.
7. May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Portfolio or
Fund from engaging in options, futures and foreign currency transactions.
B-22
<PAGE>
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid.
10. May purchase securities on margin, except for initial and
variation margin on options and futures contracts, and except that the
Portfolio or the Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities.
11. May invest in securities of other investment companies, except (a)
that the Portfolio may invest all or a portion of its assets in the Fund or
another diversified, open-end management investment company with the same
investment objective policies and restrictions as the Portfolio; (b) in
compliance with the Investment Company Act and applicable state securities
laws, or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Portfolio or Fund.
12. May issue senior securities, except that the Portfolio or the Fund
may borrow money as permitted by restrictions 6 and 7 above. This
restriction shall not prohibit the Portfolio or Fund from engaging in short
sales, options, futures and foreign currency transactions.
13. May enter into transactions for the purpose of arbitrage, or
invest in commodities and commodities contracts, except that the Fund or the
Portfolio may invest in stock index, currency and financial futures contracts
and related options in accordance with any rules of the Commodity Futures
Trading Commission.
14. May purchase or write options on securities, except for hedging
purposes and then only if (i) aggregate premiums on call options purchased by
the Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put
options purchased by the Fund do not exceed 5% of its net assets, (iii) not
more than 25% of the Fund's net assets would be hedged, and (iv) not more
than 25% of the Fund's net assets are used as cover for options written by
the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust and the Master Trust, neither the Mini-Cap Portfolio
nor the Mini-Cap Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships,
although the Portfolio or the Fund may invest in the securities of companies
which invest in or sponsor such programs.
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
B-23
<PAGE>
companies (including predecessors) having a record of less than three years
of continuous operation, except (a) that the Portfolio may invest all or a
portion of its assets in the Fund or another diversified, open-end management
investment company with the same investment objective, policies and
restrictions as the Portfolio in compliance with the Investment Company Act
or (b) as part of a merger, consolidation, acquisition or reorganization
involving the Portfolio or Fund.
3. May purchase securities of any issuer if any officer or trustee of
the Portfolio or Fund, or of the Administrator, the Distributor, the
Investment Adviser, or the Sub-Adviser owning more than 1/2 of 1% of the
outstanding securities of such issuer, own in the aggregate more than 5% of
the outstanding securities of such issuer.
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.
BLUE SKY RESTRICTIONS
In order to permit the sale of shares of a Portfolio in certain
states, the Boards of Trustees of the Trust and the Master Trust may, in
their sole discretion, adopt additional restrictions on investment policies
more restrictive than those described above. Should either of such Boards
determine that any such restrictive policy is no longer in the best interests
of such respective Trust or its investors, the Trust may cease offering
shares of a Portfolio in the state involved and the Boards of Trustees may
revoke such restrictive policy. Moreover, if the states involved no longer
require any such restrictive policy, the Boards of Trustees may, at their
sole discretion, revoke such policy.
The Master Trust has agreed in connection with certain undertakings
given by the Trust to the State of South Dakota, that (i) the Fund will not
invest more than 10% of its total assets in interests in real estate
investments trusts, (ii) the Fund will not invest more than 15% of its total
assets in equity securities of issuers which are not readily marketable, in
securities of issuers which the Portfolio or Fund is restricted from selling
without registration under the Securities Act (other than restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933 that have been determined by the Master Trust's Board of Trustees to
be liquid based upon the trading markets for the securities), and securities
of unseasoned issuers referred to in restriction 2 above (these restrictions
will not affect the ability of the Portfolio to invest in securities of the
corresponding Fund or other diversified, open-end management investment
companies with the same investment objectives, policies and restrictions as
the Portfolio), and (iii) the Master Trust will provide adequate notice to
the Trust of changes in such restrictions to enable the Trust to provide at
least 30 days advance notice of such changes to its shareholders.
B-24
<PAGE>
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of Ohio, that the Fund will not invest more
than 50% of its total assets in the securities of issuers which together with
any predecessors have a record of less than three years' continuous operation
or securities of issuers which are restricted as to disposition (including
without limitation securities issued pursuant to Rule 144A under the
Securities Act of 1933).
PRINCIPAL HOLDERS OF SECURITIES
As of June 30, 1996, the following persons held of record more than 5%
of the outstanding shares of the Mini-Cap Growth Institutional Portfolio:
U.S. National Bank of Oregon, FBO Ford Family Foundation, P.O. Box 3168,
Portland, Oregon 97208 (23.8%); Arthur E. Nicholas, P.O. Box 2169, Del Mar,
California 92014 (10.2%). Charles Schwab & Co. Inc., 101 Montgomery Street,
San Francisco, California (13.4%); First Interstate Bank of Oregon; TTEE
Northwest Natural Gas Retirement Trust, P.O. Box 9300, Calabasas, California
91372 (14.8%); Wake Forrest University, P.O. Box 7334, Winston-Salem, North
Carolina 27109 (21.1%). As of such date, The Trustees and officers of the
Trust, as a group, owned beneficially and of record 0% of the Portfolio. The
Portfolio owns beneficially and of record substantially all of the interests
of the Fund.
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). 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 Advisers
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 September 1985 to May 1988) and
Professor of Business Economics, University of Southern California (1976 to
1984). Mr. Laffer is considered to be an "interested person" of the Trust
because A.B. Laffer, V.A. Canto & Associates received
B-25
<PAGE>
$100,000 in 1994 and $0 in 1995 from the Investment Adviser as compensation
for consulting services provided from time to time to the Investment Adviser.
CHARLES E. YOUNG, TRUSTEE. UCLA, 2147 Murphy Hall, Los Angeles,
California. Chancellor, UCLA (since 1968); Trustee, Nicholas-Applegate
Growth Equity Fund; Director, Intel Corp. (since 1974), Academy of Television
Arts and Sciences Foundation (since October 1988), Los Angeles World Affairs
Council (since 1977) and Town Hall of California (since 1982).
JOHN D. WYLIE, PRESIDENT. Partner (since January 1994), Chief
Investment Officer - Investor Services Group (since December 1995), and
Portfolio Manager (since January 1990), Nicholas-Applegate Capital
Management. Mr. Wylie is also the President of the Master Trust.
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER. Partner (since January
1996) and Chief Financial Officer, Nicholas-Applegate Capital Management
(since January 1993), and Chief Financial Officer, Nicholas-Applegate
Securities (since January 1993); formerly Chief Financial Officer, Aurora
Capital Partners/WSGP Partners L.P., an investment partnership (from November
1988 to January 1993), and Vice President and Controller, Security Pacific
Merchant Banking Group (from November 1986 to November 1988). Mr. Pindelski
is also the Chief Financial Officer of the Master Trust.
PETER J. JOHNSON, VICE PRESIDENT. Partner and Director, Client
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 and 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):
B-26
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Estimated Compensation
Aggregate Retirement Benefits Annual from Trust and
Compensation Accrued as Part of Benefits Upon Trust Complex
Name from Trust Trust Expenses Retirement Paid to Trustee
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $15,000 None N/A $29,000 (45*)
Arthur B. Laffer $15,500 None N/A $31,500 (45*)
Charles E. Young $15,000 None N/A $31,500 (45*)
</TABLE>
* Indicates total number of funds in Trust complex, including the Portfolio.
MASTER TRUST
The names and addresses of the Trustees and principal officers of the
Master Trust, including their positions and principal occupations during the
past five years, are shown below. The positions and principal occupations of
the officers during the past five years, are set forth above. Trustees whose
names are followed by an asterisk are "interested persons" of the Trust (as
defined by the Investment Company Act). Unless otherwise indicated, the
address of each Trustee and officer is 600 West Broadway, 30th Floor, San
Diego, California 92101.
ARTHUR E. NICHOLAS, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.*/
DANN V. ANGELOFF, TRUSTEE. 727 West Seventh Street, Los Angeles,
California. President, The Angeloff Company, corporate financial advisers
(since 1976); Trustee, Nicholas-Applegate Fund, Inc. (since 1987); Trustee
(1979 to 1987) and University Counselor to the President (since 1987),
University of Southern California; Director, Public Storage, Inc., a real
estate investment trust (since 1980), Storage Properties, a real estate
investment trust (since 1989), Datametrics Corporation, a provider of
computer peripherals and communications products (since 1993), SEDA Specialty
Packaging, Inc. (since 1993) and Bonded Motors, Inc., an automotive engine
remanufacturer (since 1996).
WALTER E. AUCH, TRUSTEE. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio
communications company (since 1987); Fort Dearborn Fund (since 1987), Brinson
Funds (since 1994), 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), Premier Radio
B-27
<PAGE>
Networks (since 1991); Sage Analytics International (since 1991), Tonights
Feature Ltd. (since 1995). Formerly Managing Director of Global Equity
Transactions Group and member of Board of Directors, Prudential Securities
(from 1986 to June 1991).
DARLENE DEREMER, TRUSTEE.*/ 155 South Street, Wrentham,
Massachusetts. President and Founder, DeRemer Associates, a marketing
consultant for the financial services industry (since 1987); formerly Vice
President and Director, Asset Management Division, State Street Bank and
Trust Company (from 1982 to 1987), and Vice President, T. Rowe Price &
Associates (1979 to 1982); Director, Nicholas-Applegate Strategic
Opportunities Ltd. (since 1994), Nicholas-Applegate Securities International
(since 1994), Jurika & Voyles Fund Group (since 1994) and King's Wood
Montessori School (since 1995); Member of Advisory Board, Financial Women's
Association (since 1995). Ms. DeRemer is considered to 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.
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 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 Master Trust, and $1,000 for each meeting attended ($2,000 per
Committee meeting for Committe 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
Master Trust for the fiscal year ended March 31, 1996, to the Trustees who
are not affiliated with
B-28
<PAGE>
the Investment Adviser and the aggregate compensation paid to such Trustees
for service on the Master Trust's board and that of all other funds in the
"Master Trust complex" (as defined in Schedule 14A under the Securities
Exchange Act of 1934):
B-29
<PAGE>
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated from Master
Compensation as Part of Annual Benefits Trust and Master
from Master Master Trust Upon Trust Complex
Name Trust Expenses Retirement Paid to Trustee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dann V. Angeloff $17,000 None N/A $32,500 (13*)
Walter E. Auch $11,500 None N/A $15,000 (12*)
Theodore J. Coburn $16,000 None N/A $29,000 (13*)
Darlene DeRemet 15,000 None N/A $15,000 (12*)
George K. Keane $16,000 None N/A $15,000 (12*)
</TABLE>
* Indicates total number of funds in Master Trust complex, including the Master
Trust Portfolio.
INVESTMENT ADVISER
The Trust has not engaged the services of an investment adviser
because its Portfolios invest all of their assets in corresponding Funds.
The Investment Adviser to the Master Trust is Nicholas-Applegate Capital
Management, a California limited partnership, with offices at 600 West
Broadway, 30th Floor, San Diego, California 92101.
The Investment Adviser was organized in August 1984 to manage
discretionary accounts investing primarily in publicly traded equity
securities and securities convertible into or exercisable for publicly traded
equity securities, with the goal of capital appreciation. Its general
partner is Nicholas-Applegate Capital Management Holdings, L.P., a California
limited partnership, 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 Mini-Cap Fund, the Master Trust
retains the Investment Adviser to manage the Mini-Cap Fund's investment
portfolio, subject to the
B-30
<PAGE>
direction of the Master Trust's Board of Trustees. The Investment Adviser is
authorized to determine which securities are to be bought or sold by the Fund
and in what amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by the
Mini-Cap 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 Adviser may incur in connection with
any action, suit, investigation or other proceeding arising out of or
otherwise based on any action actually or allegedly taken or omitted to be
taken by the Investment Adviser in connection with the performance of its
duties or obligations under the Investment Advisory Agreement or otherwise as
an investment adviser of the Master Trust. The Investment Adviser is not
entitled to indemnification with respect to any liability to the Master Trust
or its investors by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or of its reckless disregard of
its duties and obligations under the Investment Advisory Agreement.
The amount of the advisory fees earned by the Investment Adviser for
the fiscal year ended March 31, 1996, and the amount of the reduction in fees
as a result of the expense limitations and waivers described below under
"Expense Limitation" were as follows: advisory fees: $97,817; fee
reductions: $40,723.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to the Mini-Cap
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 Mini-Cap Fund,
as defined in the Investment Company Act) or the Investment Adviser upon not
more than 60 days' written notice, without payment of any penalty. The
Investment Advisory Agreement provides that it will continue in effect with
respect to the Mini-Cap Fund only so long as such continuance is specifically
approved at least annually in conformity with the Investment Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of the Mini-Cap
Portfolio (including administrative fees and distribution expenses for the
Portfolio, and the Portfolio's allocable share of the operating expenses of
the Fund, but excluding interest, taxes, brokerage commissions and other
costs incurred in connection with portfolio securities transactions,
organizational expenses and other capitalized expenditures and extraordinary
expenses), to ensure that the operating expenses for the Portfolio do not
exceed 1.56% of the average net assets of the Portfolio through March 31, 1997.
ADMINISTRATOR
The Administrator of the Trust is Investment Company Administration
Corporation, 4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018.
B-31
<PAGE>
Pursuant to an Administration Agreement with the Trust, the
Administrator is responsible for performing all administrative services
required for the daily business operations of the Trust, subject to the
supervision of the Board of Trustees of the Trust. The Administrator has no
supervisory responsibility over the investment operations of the Portfolios.
The management or administrative services of the Administrator for the Trust
are not exclusive under the terms of the Administration Agreement and the
Administrator is free to, and does, render management and administrative
services to others. Investment Company Administration Corporation also serves
as the Administrator for the Master Trust.
For its services, the Administrator receives under the Administration
Agreement $35,000 for each grouping of five similar portfolios (e.g., Core
Growth Portfolio A, Portfolio B, Portfolio C, Institutional and Qualified
Portfolios), $25,000 for each grouping of three similar portfolios, $20,000
for each grouping of two similar portfolios and $5,000 for one portfolio. As
a result, the Administrator currently receives aggregate compensation at the
rate of $230,000 per year for all of the series of the Trust. Such fees will
be allocated among the series in each grouping based on relative net asset
values. For its services to the Master Trust, the Administrator receives,
pursuant to an Administration Agreement, a monthly fee at the following
annual rates: 0.05% on the first $100 million of aggregate net assets of the
Funds, 0.04% on the next $150 million, 0.03% on the next $300 million, 0.02%
on the next $300 million, and 0.01% on the portion of the aggregate net
assets of the Funds in excess of $850 million. The Administrator will
receive a minimum of $150,000 per year allocated among the Funds based on
average net assets.
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 or the Sub-Adviser, (c) out-of-pocket
travel expenses for the officers and Trustees of the Trust and other expenses
of Board of Trustees' meetings, (d) the fees and certain expenses of the
Custodian, (e) the fees and expenses of the Transfer and Dividend Disbursing
Agent that relate to the maintenance of each shareholder account, (f) the
charges and expenses of the Trust's legal counsel and independent
accountants, (g) brokerage commissions and any issue or transfer taxes
chargeable to Trustees and officers of the Trust in connection with
securities transactions, (h) all taxes and corporate fees payable by the
Trust to federal, state and other governmental agencies, (i) the fees of any
trade association of which the Trust may be members, (j) the cost of
maintaining the Trust's existence, taxes and interest, (k) the cost of
fidelity and liability insurance, (l) the fees and expenses involved in
registering and maintaining the registration of the Trust and of its shares
with the Commission and registering the Trust as a broker or dealer and
qualifying their shares under state securities laws, including the
preparation and printing of the Trust's registration statement, prospectuses
and statements of additional information, (m) allocable communication
expenses with respect to investor services and all expenses of shareholders'
and Board of Trustees' meetings and of preparing, printing and mailing
prospectuses and reports to shareholders, (n) litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course
of the business of the Trust, and (o) expenses assumed
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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.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for
distributing shares of the Portfolios. The Distributor is a California
limited partnership organized in 1992 to distribute shares of registered
investment companies. Its general partner is Nicholas-Applegate Capital
Management Holdings, L.P., the general partner of the Investment Adviser.
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the
Portfolios, but is not obligated to sell any specified number of shares. The
Distribution Agreement contains provisions with respect to renewal and
termination similar to those in the Investment Advisory Agreement discussed
above. Pursuant to the Distribution Agreement, the Trust has agreed to
indemnify the Distributor to the extent permitted by applicable law against
certain liabilities under the Securities Act.
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 Mini-Cap Fund's portfolio transactions and the allocation of the
brokerage business. In executing such transactions, the Investment Adviser
will seek to obtain the best price and execution for the Fund, taking into
account such factors as price, size of order, difficulty and risk of
execution and operational facilities of the firm involved. Securities in
which the Fund invest may be traded in the over-the-counter markets, and the
Fund deals directly with the dealers who make markets in such securities
except in those circumstances where better prices and execution are available
elsewhere. Commission rates are established pursuant to negotiation with
brokers or dealers based on the quality or quantity of services provided in
light of generally prevailing rates, and while the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commissions available. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Board of Trustees of the Master Trust.
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The Mini-Cap Fund has no obligation to deal with any broker or group
of brokers in executing transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who sell shares of the
Portfolios or provide supplemental research, market and statistical
information and other research services and products to the Investment
Adviser may receive orders for transactions by the Fund. Such information,
services and products are those which brokerage houses customarily provide to
institutional investors, and include items such as statistical and economic
data, research reports on particular companies and industries, and computer
software used for research with respect to investment decisions.
Information, services and products so received are in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement, and the expenses of the Investment Adviser
are not necessarily reduced as a result of the receipt of such supplemental
information, services and products. Such information, services and products
may be useful to the Investment Adviser in providing services to clients
other than the Master Trust, and not all such information, services and
products are used by the Investment Adviser in connection with the Fund.
Similarly, such information, services and products provided to the Investment
Adviser by brokers and dealers through whom other clients of the Investment
Adviser effect securities transactions may be useful to the Investment
Adviser in providing services to the Fund. The Investment Adviser is
authorized to pay higher commission on brokerage transactions for the Fund to
brokers in order to secure the information, services and products described
above, subject to review by the Master Trust's Board of Trustees from time to
time as to the extent and continuation of this practice.
Although investment decisions for the Master Trust are made
independently from those of the other accounts managed by the Investment
Adviser, investments of the kind made by the Mini-Cap Fund may often also be
made by such other accounts. When a purchase or sale of the same security is
made at substantially the same time on behalf of the Fund and one or more
other accounts managed by the Investment Adviser, available investments are
allocated in the discretion of the Investment Adviser by such means as, in
its judgment, result in fair treatment. The Investment Adviser aggregates
orders for purchases and sales of securities of the same issuer on the same
day among the Fund and its other managed accounts, and the price paid to or
received by the Fund and those accounts is the average obtained in those
orders. In some cases, such aggregation and allocation procedures may affect
adversely the price paid or received by the Fund or the size of the position
purchased or sold by the Fund.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at
a fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's commission or discount. On
occasion, certain money market instruments and agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid.
During the fiscal year ended March 31, 1996, the Fund acquired no
securities of its regular brokers or dealers (as defined in Rule 10b-1 under
the Investment Company Act) or their parents. The Fund held no securities of
such brokers or dealers as of March 31, 1996. The aggregate dollar amount of
brokerage commissions paid by the Fund during such fiscal year was $40,185.
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PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the Mini-Cap Portfolio may be purchased and redeemed at
their net asset value without any initial or deferred sales charge. The
price paid for shares of the Portfolio is based on the net asset value per
share, which is calculated once daily at the close of trading (currently 4:00
P.M. New York time) each day the New York Stock Exchange is open. The New
York Stock Exchange is currently closed on weekends and on the following
holidays: New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas Day. The offering
price is effective for orders received by the Transfer Agent or dealers prior
to the time of determination of net asset value and, in the case of orders
placed with dealers, accepted by the Transfer Agent prior to the close of its
business. The dealer is responsible for promptly transmitting purchase
orders to the Transfer Agent. The Trust reserves the right in its sole
discretion to suspend the continued offering of the Portfolio's shares and to
reject purchase orders in whole or in part when such rejection is in the best
interests of the Trust and the Portfolio.
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Mini-Cap Portfolio, a
Shareholder Investment Account is established for each investor under which
the shares are held for the investor by the Transfer Agent. No certificates
will be issued for shares of the Portfolio.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Mini-Cap
Portfolio at net asset value. An investor may direct the Transfer Agent in
writing not less than five full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of the Mini-Cap Portfolio on a
monthly or quarterly basis on any day of the month or quarter by authorizing
his or her bank account to be debited to invest specified dollar amounts in
shares of the Portfolio. The investor's bank must be a member of the
Automatic Clearing House System. Participation in the Plan will begin within
30 days after receipt of the account application. If the investor's bank
account cannot be charged due to insufficient funds, a stop-payment order or
closing of the account, the investor's Plan may be terminated and the related
investment reversed. The investor may change the amount of the investment or
discontinue the Plan at any time by writing to the Transfer Agent. Further
information about this program and an application form can be obtained from
the Transfer Agent or the Distributor.
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CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in the Mini-Cap Portfolio may elect to cross-reinvest
dividends or dividends and capital gain distributions paid by the Portfolio
into any other Institutional Portfolio (the "receiving Portfolio") subject to
the following conditions: (i) as long as the value of the account in the
receiving Portfolio is below that receiving Portfolio's minimum initial
investment requirement, dividends and capital gain distributions paid by the
receiving Portfolio must be automatically reinvested in the receiving
Portfolio, (ii) there is no cross-reinvestment, and (iii) if this privilege
is discontinued with respect to a particular receiving Portfolio, the value
of the account in that receiving Portfolio must equal or exceed the receiving
Portfolio's minimum initial investment requirement or the receiving Portfolio
will have the right, if the shareholder fails to increase the value of the
account to such minimum within 90 days after being notified of the
deficiency, automatically to redeem the account and send the proceeds to the
shareholder. These cross-reinvestments of dividends and capital gain
distributions will be at net asset value (without a sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Mini-Cap
Portfolio of sufficient shares, deposited by the shareholder with the
Transfer Agent, to provide the withdrawal payment specified. Withdrawal
payments should not be considered as dividends, yield or income. Automatic
investments may not be made into a shareholder account from which there are
automatic withdrawals. Withdrawals of amounts exceeding reinvested dividends
and distributions and increases in share value will reduce the aggregate
value of the shareholder's account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of the Mini-Cap
Portfolio redeemed, but when the Master Trust makes payment to the Portfolio
in readily marketable investment securities, the Trust reserves the right to
make payment wholly or partly in shares of such securities. In such cases, a
shareholder may incur brokerage costs in converting such securities to cash.
However, the Trust has elected to be governed by the provisions of Rule 18f-1
under the Investment Company Act, pursuant to which it is obligated to pay in
cash all requests for redemptions by any shareholder or record, limited in
amount with respect to each shareholder during any 90-day period to the
lesser of $250,000 or 1% of the net asset value of the Trust at the beginning
of such period.
INSTITUTIONAL PORTFOLIOS
The services offered by the Trust to shareholders of the Institutional
Portfolios can vary, depending on the needs of the qualified retirement plan
or other institutional investor, and should be arranged by contacting the
Trust, the Distributor, the Administrator or the Transfer Agent.
NET ASSET VALUE
The net asset value of a share of the Mini-Cap Portfolio is calculated
by dividing (i) the value of the securities held by the Portfolio (I.E., the
value of its investments in the Mini-Cap Fund), plus any cash or other
assets, minus all liabilities (including accrued
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estimated expenses on an annual basis), by (ii) the total number of shares of
the Portfolio outstanding. The net asset value of an interest in the
Mini-Cap Fund is calculated in the same manner. The value of the investments
and assets of the Portfolio or the Fund is determined each business day.
Investment securities, including ADRs, that are traded on a domestic
or foreign stock exchange or on the NASDAQ National Market System are valued
at the last sale price as of the close of business on the New York Stock
Exchange (normally 4:00 P.M. New York time) on the day the securities are
being valued, or lacking any sales, at the mean between the closing bid and
asked prices. Securities listed or traded on certain foreign exchanges whose
operations are similar to the United States over-the-counter market are
valued at the price within the limits of the latest available current bid and
asked prices deemed by the Investment Adviser best to reflect fair value. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such
security by the Investment Adviser. Listed securities that are not traded on
a particular day and other over-the-counter securities are valued at the mean
between the closing bid and asked prices.
In the event that the New York Stock Exchange 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
Mini-Cap Portfolio or the Mini-Cap 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 Mini-Cap Portfolio or the Mini-Cap
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 asked
prices, as the case may be, as of 4:00 p.m. New York time.
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Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of
business day in New York. In addition, foreign securities trading may not
take place on all business days in New York, and may occur in various foreign
markets on days which are not business days in New York and on which net
asset value is not calculated. The calculation of net asset value may not
take place contemporaneously with the determination of the prices of
portfolio securities used in such calculation. Events affecting the values
of portfolio securities that occur between the time their prices are
determined and the close of the New York Stock Exchange will not be reflected
in the calculation of net asset value unless the Board of Trustees of the
Master Trust deems that the particular event would materially affect net
asset value, in which case an adjustment will be made. Assets or liabilities
initially expressed in terms of foreign currencies are translated prior to
the next determination of the net asset value into U.S. dollars at the spot
exchange rates at 1:00 p.m. New York time or at such other rates as the
Investment Adviser may determine to be appropriate in computing net asset
value.
Securities and assets for which market quotations are not readily
available, or for which the Master Trust's Board of Trustees or persons
designated by the Board determine that the foregoing methods do not
accurately reflect current market value, are valued at fair value as
determined in good faith by or under the direction of the Master Trust's
Board of Trustees. Such valuations and procedures will be reviewed
periodically by the Board of Trustees.
The Master Trust may use a pricing service approved by its Board of
Trustees. Prices provided by such a service represent evaluations of the
mean between current bid and asked market prices, may be determined without
exclusive reliance on quoted prices, and may reflect appropriate factors such
as institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, individual trading characteristics,
indications of value from dealers, and other market data. Such services may
use electronic data processing techniques and/or a matrix system to determine
valuations. The procedures of such services are reviewed periodically by the
officers of the Master Trust under the general supervision and responsibility
of its Board of Trustees, which may replace a service at any time if it
determines that it is in the best interests of the Fund to do so.
TAXES
MASTER TRUST'S TAX STATUS
The Mini-Cap Fund will be treated as a partnership rather than as a
regulated investment company or a corporation under the Internal Revenue Code
(the "Code"). As a partnership under the Code, any interest, dividends and
gains or losses of the Master Trust attributable to the Fund will be deemed
to have been "passed through" to the Trust and other investors in such Fund,
regardless of whether the interest, dividends or gains have been distributed
by the Fund or such losses have been realized and recognized by the Trust and
other investors. Therefore, to the extent the Fund were to accrue but not
distribute any interest, dividends or gains, the Trust and other investors in
the Fund would be deemed to have realized and recognized their proportionate
shares of interest, dividends, gains or losses realized and recognized by the
Fund without receipt of any corresponding distribution. However, the Master
Trust will seek to minimize recognition by investors in the
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Fund of interest, dividends, gains or losses allocable to the Fund without a
corresponding distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify the Mini-Cap Portfolio as a regulated
investment company under Subchapter M of the Code, and intends that the
Portfolio will remain so qualified.
As a regulated investment company, the Mini-Cap Portfolio will not be
liable for federal income tax on its income and gains provided it distributes
all of its income and gains currently. Qualification as a regulated
investment company under the Code requires, among other things, that the
Portfolio (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or other disposition of securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such
securities or currencies; (b) derive less than 30% of its gross income from
the sale or other disposition of stock, securities, options, futures, forward
contracts, certain foreign currencies and certain options, futures, and
forward contracts on foreign currencies held less than three months; (c)
diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of the Portfolio's assets is represented by
cash, U.S. Government securities and securities of other regulated investment
companies, and other securities (for purposes of this calculation generally
limited, in respect of any one issuer, to an amount not greater than 5% of
the market value of the Portfolio's assets and 10% of the outstanding voting
securities of such issuer) and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government or foreign government securities or the securities of other
regulated investment companies), or two or more issuers which the Trust
controls and which are determined to be engaged in the same or similar trades
or businesses; and (d) distribute at least 90% of its investment company
taxable income (which includes dividends, interest, and net short term
capital gains in excess of net long term capital losses) each taxable year.
The Mini-Cap Portfolio generally will be subject to a nondeductible
excise tax of 4% to the extent that it does not meet certain minimum
distribution requirements as of the end of each calendar year. To avoid the
tax, the Portfolio must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income and net capital gain
(not taking into account any capital gains or losses as an exception) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the twelve month period
ending on October 31 of the calendar year, and (3) all ordinary income and
capital gains for previous years that were not distributed during such years.
A distribution will be treated as paid on December 31 of the calendar year
if it is declared by the Portfolio in October, November, or December of that
year to shareholders of record on a date in such a month and paid by the
Portfolio during January of the following year. Such distributions will be
taxable to shareholders (other than those not subject to federal income tax)
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To avoid the excise
tax, the Portfolio intends to make timely distributions of its income in
compliance with these requirements and anticipate that it will not be subject
to the excise tax.
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Dividends paid by the Mini-Cap Portfolio from ordinary income, and
distributions of the Portfolio's net realized short-term capital gains, are
taxable to its shareholders as ordinary income. Distributions to corporate
shareholders will be eligible for the 70% dividends received deduction to the
extent that the income of the Portfolio is derived from dividends on common
or preferred stock of domestic corporations. Dividend income earned by the
Portfolio will be eligible for the dividends received deduction only if the
Portfolio and Mini-Cap Fund have satisfied a 46-day holding period
requirement with respect to the underlying portfolio security (91 days in the
case of dividends derived from preferred stock). In addition, a corporate
shareholder must have held its shares in the Portfolio for not less than 46
days (91 days in the case of dividends derived from preferred stock) in order
to claim the dividend received deduction. Not later than 60 days after the
end of its taxable year, the Portfolio will send to its shareholders a
written notice designating the amount of any distributions made during such
year which may be taken into account by its shareholders for purposes of such
deduction provisions of the Code. Net capital gain distributions are not
eligible for the dividends received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to the Mini-Cap Portfolio's shareholders as
long-term capital gains, regardless of the holding period of such
shareholders. Such distributions of net capital gains will be designated by
the Portfolio as a capital gains distribution in a written notice to its
shareholders which accompanies the distribution payment. Any loss on the
sale of shares held for less than six months will be treated as a long-term
capital loss for federal tax purposes to the extent a shareholder receives
net capital gain distributions on such shares. The maximum federal income
tax rate applicable to long-term capital gains is currently 28% for
individual shareholders and 35% for corporate shareholders. Dividends and
distributions are taxable as such whether received in cash or reinvested in
additional shares of the Portfolio.
Any loss realized on a sale, redemption or exchange of shares of the
Mini-Cap Portfolio by a shareholder will be disallowed to the extent the
shares are replaced within a 61-day period (beginning 30 days before the
disposition of shares). Shares purchased pursuant to the reinvestment of a
dividend will constitute a replacement of shares.
A shareholder who acquires shares of the Mini-Cap Portfolio and sells
or otherwise disposes of such shares within 90 days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares
for purposes of calculating gain or loss realized upon a sale or exchange of
shares of the Portfolio if the shareholder acquires shares in the Portfolio
pursuant to a reinvestment right that reduces the sales charges in the
subsequent acquisition of shares.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from a Portfolio provided that certain conditions are satisfied.
Interest received on repurchase agreements collateralized by U.S. Government
obligations normally is not exempt from state taxation. The Trust will
inform shareholders annually of the percentage of income and distributions
derived from direct U.S. Government obligations. Shareholders should consult
their tax advisers to determine whether any portion of the income dividends
received from the Mini-Cap Portfolio is considered tax exempt in their
particular states.
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SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Mini-Cap Fund are "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Fund at the end of each taxable year (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 Mini-
Cap Fund may result in "straddles" for U.S. federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by the
Mini-Cap Portfolio. In addition, losses realized by the Portfolio on positions
that are part of a straddle may be deferred under the straddle rules, rather
than being taken into account in calculating the taxable income for the taxable
year in which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences of
transactions in 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 Mini-Cap Portfolio may make one or more of the elections available
under the Code which are applicable to straddles. If the Portfolio makes any of
the elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because applications of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to the shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options, futures,
and forward contracts held less than three months and the qualifying income and
diversification requirements applicable to the Mini-Cap Portfolio's and the
Mini-Cap Fund's assets may limit the extent to which the Fund 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 the
Mini-Cap 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
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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 Mini-Cap
Portfolio's investment company taxable income to be distributed to the
shareholders.
FOREIGN TAX. Income received by the Mini-Cap Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. In addition, the Investment Adviser intends to manage the
Fund with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to elect to "pass-through" to the Mini-
Cap 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 Mini-Cap Portfolio's taxable year whether the foreign taxes paid by the
Mini-Cap 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 Mini-Cap Fund's income will flow through to
shareholders of the Portfolio. With respect to such election, gains from the
sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign currency
denominated debt securities, receivables and payables will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, and to certain
other types of income. Shareholders may be unable to claim a credit for the
full amount of their proportion at share of the foreign taxes paid by the Fund.
The foreign tax credit is modified for purposes of the federal alternative
minimum tax and can be used to offset only 90% of the alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
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 Mini-Cap Fund may be treated as debt securities that are issued
originally at a discount. Generally, the amount of the original issue discount
("OID") is treated as interest income and is included in income over the term of
the debt security, even though payment of that amount is not received until a
later time, usually when the debt security matures. A portion of the OID
includible in income with respect to certain high-yield corporation debt
securities may be treated as a dividend for Federal income tax purposes.
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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 Mini-Cap Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
securities having market discount, which could affect the character and timing
the recognition of income.
Some of the debt securities (with a fixed maturity date of one year or
less from the date of issuance) that may be acquired by the Mini-Cap Fund may be
treated as having an acquisition discount, or OID in the case of certain types
of debt securities. Generally, the Fund will be required to include the
acquisition discount, or OID, in income over the term of the debt security, even
though payment of that amount is not received until a later time, usually when
the debt security matures. The Fund may make one or more of the elections
applicable to the debt securities having acquisition discount, or OID, which
could affect the character and timing of recognition of income.
The Mini-Cap Portfolio generally will be required to distribute
dividends to shareholders representing discount on debt securities that is
currently includible in income, even though cash representing such income may
not have been received by the Mini-Cap Fund. Cash to pay such dividends may be
obtained from sales proceeds of securities held by the Fund.
CONTRIBUTION LIMITS. Payments made to the Trust, by the employer
sponsoring a qualified profit-sharing plan (the "plan") which invests in the
Mini-Cap Portfolio, of such plan's pro rata share of the fees charged by the
Investment Adviser for management of the assets of the Portfolio invested in the
Mini-Cap Fund, may be treated as an employer "contribution" to the plan under
Sections 404 and 415 of the Code. Contributions to a qualified retirement plan
are subject to limitations under Sections 404 and 415 of the Code. Generally,
Section 404(a)(3) of the Code limits an employer's contribution to the plan to
an amount not exceeding 15% of the compensation paid to all plan participants
during the year, and Section 415 of the Code limits the total contributions made
by both the employer and the participants. Contributions in excess of these
limits may not be deducted by the employer and may result in an excise tax on
the employer equal to 10% of the non-deductible contributions. In addition, the
plan may become disqualified. Shareholders should consult with their own tax
and retirement plan advisers regarding this issue.
OTHER TAX INFORMATION
The Mini-Cap Portfolio may be required to withhold for U.S. federal
income taxes 31% of all taxable distributions payable to shareholders who fail
to provide the Portfolio with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal tax liability.
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The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of the
Mini-Cap Portfolio with respect to distributions by the Portfolio may differ
from federal tax treatment. Distributions to shareholders may be subject to
additional state and local taxes. Shareholders should consult their own tax
advisers regarding specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise the total return for the Mini-
Cap Portfolio. Any performance information should be considered in light of the
Portfolio's and the Mini-Cap Fund's investment objectives and policies,
characteristics and quality of the its portfolio, and the market conditions
during the given time period, and should not be considered to be representative
of what may be achieved in the future.
TOTAL RETURN
The total return for the Portfolio is computed by assuming a
hypothetical initial payment of $1,000. It is assumed that all investments are
made at net asset value (as opposed to market price) and that all of the
dividends and distributions by the Portfolio over the relevant time periods are
invested at net asset value. It is then assumed that, at the end of each
period, the entire amount is redeemed without regard to any redemption fees or
costs. The average annual total return is then determined by calculating the
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption. Total return does not take into account any
federal or state income taxes.
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or fractional
portion thereof) of a hypothetical $1,000 payment made at the
beginning of the period.
COMPARISON TO INDICES AND RANKINGS
Performance information for the Mini-Cap Portfolio may also be compared
to various unmanaged indices, such as the Standard & Poor's 500 Stock Price
Index, the Dow Jones Industrial Average, and indices prepared by Lipper
Analytical Services. Unmanaged indices (I.E., other than Lipper) generally do
not reflect deductions for administrative and management costs and expenses.
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.
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CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Portfolio and Fund and in that capacity maintains
certain financial and accounting books and records pursuant to agreements with
the Trust and Master Trust. PFPC Inc., 103 Bellevue Parkway, Wilmington,
Delaware, an affiliate of the Custodian, provides additional accounting services
to the Portfolio and Fund.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor, North
Quincy, Massachusetts, 02171, serves as the Transfer and Dividend Disbursing
Agent for the Portfolio and Fund. The Transfer Agent provides customary
transfer agency services to the Trust and Master Trust, including the handling
of shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, and related functions. The Dividend
Disbursing Agent provides customary dividend disbursing services to the Trust,
including payment of dividends and distributions and related functions.
The Charles Schwab Trust Company, 101 Montgomery Street, San
Francisco, California 94104, serves to co-transfer agent for shares of the
Portfolio. The following act as sub-transfer agents for the Portfolio:
Financial Data Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville,
Florida 32246; and William M. Mercer Plan Participant Services, Inc. 1417
Lake Cook Road, Deerfield, Illinois 60015; and Schwab Retirement Plan
Services, Inc., 101 Montgomery Street, San Francisco, California 94104.
Ernst & Young, L.L.P., 515 S. Flower Street, Los Angeles, California
90071, serves as the independent accountants for the Trust and Master Trust, and
in that capacity examines the annual financial statements of the Trust and
Master Trust.
Paul, Hastings, Janofsky & Walker, 555 South Flower Street, Los Angeles,
California 90071, is legal counsel for the Trust and Master Trust. It also acts
as counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 46 series of shares -- eight A
Portfolios, eight B Portfolios, eight C Portfolios, thirteen institutional
Portfolios, one Money Market Portfolio and eight Qualified Portfolios.
VOTING RIGHTS. On any matter submitted to a vote of shareholders of the
Trust, all shares then entitled to vote will be voted by the affected
Portfolio(s) unless otherwise required by the Investment Company Act, in which
case all shares of the Trust will be voted in the aggregate. For example, a
change in the Mini-Cap 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.
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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 trustees
may be effectively acted upon by the shareholders of the Trust voting without
regard to Portfolio.
As used in the Mini-Cap Portfolio's Prospectus and in this Statement of
Additional Information, the term "majority," when referring to approvals to be
obtained from shareholders of the Portfolio, means the vote of the lesser of (i)
67% of the shares of the Portfolio represented at a meeting if the holders of
more than 50% of the outstanding shares of the Portfolio are present in person
or by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio.
The term "majority," when referring to the approvals to be obtained from
shareholders of the Trust's shares represented at a meeting if the holders of
more than 50% of the Trust's outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Trust's outstanding shares. Shareholders
are entitled to one vote for each full share held and fractional votes for
fractional shares held. Unless otherwise provided by law (for example, by rule
18f-2 discussed above) or by the Trust's Declaration of Trust or Bylaws, the
Trust may take or authorize any action upon the favorable vote of the holders of
more than 50% of the outstanding shares of the Trust.
Whenever a Portfolio or the Trust is requested to vote on a matter with
respect to the Master Trust, the Trust will hold a meeting of its shareholders
and will cast its votes as instructed by such shareholders and, in the case of a
matter affecting only a specific Fund, as instructed by the shareholders of the
corresponding Portfolio(s).
The Trust will dispense with annual meetings of shareholders in any year
in which it is not required to elect Trustees under the Investment Company Act.
However, the Trust undertakes to hold a special meeting of its shareholders for
the purpose of voting on the question of removal of a Trustee or Trustees if
requested in writing by the holders of at least 10% of the Trust's outstanding
voting securities, and to assist in communicating with other shareholders as
required by Section 16(c) of the Investment Company Act.
Each share of a Portfolio represents an equal proportional interest in
the Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Portfolio
as are declared in the discretion of the Trustees. In the event of the
liquidation or dissolution of the Trust, shareholders of a Portfolio are
entitled to receive the assets attributable to such Portfolio that are available
for distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Trustees in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
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DECLARATIONS OF TRUST.
In accordance with Delaware law and in connection with the tax treatment
sought by the Master Trust, the Master Trust's Declaration of Trust provides
that its investors will be personally and jointly and severally responsible
(with rights of contribution INTER se in proportion to their respective
ownership interests in the Master Trust) for the Master Trust's liabilities and
obligations in the event that the Master Trust fails to satisfy such liabilities
and obligations. However, to the extent assets are available from the Master
Trust, the Master Trust will indemnify each investor from any claim or liability
to which the investor may become subject solely by reason of his or her having
been an investor to the extent such claim or liability imposes on the investor
an obligation or liability which is greater than his or her proportionate
ownership interest in the Master Trust, and will reimburse the investor for all
legal and other expenses reasonably incurred by him or her in connection with
any such claim or liability.
The Declarations of Trust of both the Trust and Master Trust provide
that obligations of the Trust and the Master Trust are not binding upon their
respective Trustees, officers, employees and agents individually and that the
Trustees, officers, employees and agents will not be liable to the trusts or
their respective investors for any action or failure to act, but nothing in the
Declarations of Trust protect a Trustee, officer, employee or agent against any
liability to the trusts or their respective investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declarations of Trust also provide that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Portfolio or Fund shall be enforceable against the assets and
property of such Portfolio or Fund only (and, in the case of the Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of the Portfolio, the investors therein).
FINANCIAL STATEMENTS.
The Trust's 1996 Annual Report to Shareholders of the Portfolio
accompanies 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 have been audited by the
Fund's independent auditors, Ernst & Young, L.L.P., whose report thereon appears
in such Annual Report and is incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such report given upon
their authority as experts in accounting and auditing. Additional copies of the
Trust's 1996 Annual Report 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.
REGISTRATION STATEMENT.
The Registration Statement of the Trust and the Master Trust, including
the Mini-Cap Portfolio's Prospectus, the Statement of Additional Information and
the exhibits filed therewith, may be examined at the office of the Commission in
Washington, D.C. Statements contained in the Portfolio's Prospectus or the
Statement of Additional Information as to the contents of any contract or other
document referred to herein or in the Prospectus are not necessarily complete,
and, in each instance, reference is made to the
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copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference.
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