<PAGE>
As filed with the Securities and Exchange Commission
on January 3, 1997
Registration No. 33-56094
811-7428
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. __ [ ]
POST-EFFECTIVE AMENDMENT NO. 38 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 40
(Check appropriate box or boxes)
---------------------
NICHOLAS-APPLEGATE MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Address of Principal Executive Offices, including Zip Code)
ARTHUR E. NICHOLAS
C/O NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Name and Address of Agent for Service)
COPY TO: ROBERT E. CARLSON
PAUL, HASTINGS, JANOFSKY & WALKER
555 S. FLOWER STREET, TWENTIETH FLOOR
LOS ANGELES, CALIFORNIA 90071
---------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVE DATE.
---------------------
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ______________ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on ____________ pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii), of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has registered an indefinite number of shares by this Registration Statement.
Registrant filed a Notice under such Rule for its fiscal year ended March 31,
1996 on May 30, 1996. This Registration Statement has been executed by the
trustees and principal officers of the Registrant and of Nicholas-Applegate
Investment Trust.
---------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
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PART A
Item 1. Cover Page. . . . . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . . . . . . . . . . Summary of Expenses;
Prospectus Summary
Item 3. Condensed Financial Information . . . . . . . Financial Highlights
Item 4. General Description of Registrant . . . . . . Cover Page;
Prospectus Summary;
Investment
Objectives and
Policies;
Organization and
Management; Appendix
Item 5. Management of Fund. . . . . . . . . . . . . . Organization and
Management
Item 6. Capital Stock and Other Securities. . . . . . Dividends,
Distributions and
Taxes; Purchasing
Shares
Item 7. Purchase of Securities Being Offered. . . . . Purchasing Shares;
Reducing Your Sales
Charge; Redeeming
Shares; Shareholder
Services
Item 8. Redemption of Repurchase. . . . . . . . . . . Redeeming Shares;
Shareholder Services
Item 9. Pending Legal Proceedings . . . . . . . . . . Not Applicable
PART B
Item 10. Cover Page. . . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . . . . General Information
Item 13. Investment Objectives and Policies. . . . . . Investment
Objectives and
Policies; Investment
Restrictions
Item 14. Management of the Fund. . . . . . . . . . . . Trustees and
Officers;
Administrator;
Distributor
Item 15. Control Persons and Principal Holders of
Securities. . . . . . . . . . . . . . . . . . Principal Holders of
Securities
Item 16. Investment Advisory and Other Services. . . . Administrator;
Investment Adviser;
Distributor;
Custodian, Transfer
and Dividend
Disbursing Agent,
Independent Auditors
and Legal Counsel
Item 17. Brokerage Allocation and Other Practices. . . Portfolio
Transactions and
Brokerage
Item 18. Capital Stock and Other Securities. . . . . . Miscellaneous
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered . . . . . . . . . . . . . . . . Purchase and
Redemption of
Portfolio Shares;
Shareholder Services
Item 20. Tax Status. . . . . . . . . . . . . . . . . . Dividends,
Distributions and
Taxes
Item 21. Underwriters. . . . . . . . . . . . . . . . . Distributor
Item 22. Calculation of Performance Data . . . . . . . Performance
Information
Item 23. Financial Statements. . . . . . . . . . . . . Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
-------------------------------------------------
SERIES A, B & C INTERNATIONAL
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CORE GROWTH PORTFOLIOS
PROSPECTUS
Nicholas-Applegate Mutual Funds is an open-end management investment company
consisting of a number of diversified investment portfolios, including the
Series A, Series B and Series C International Core Growth Portfolios
("Portfolios") offered hereby. The Portfolios seek to maximize long-term capital
appreciation. They invest in the Nicholas-Applegate International Core Growth
Fund, which in turn invests primarily in equity securities of international
companies. The Fund emphasizes investment in foreign issuers with larger market
capitalizations (above $1 billion) which its Investment Adviser believes have
above-average growth potential. The Series A, B and C Portfolios have identical
investment objectives and policies. However, the Series A Portfolio is sold
subject to an initial sales charge and lower operating expenses, and the Series
B and C Portfolios are sold subject to a contingent deferred sales charge and
higher operating expenses.
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EACH PORTFOLIO, UNLIKE MANY OTHER INVESTMENT COMPANIES WHICH DIRECTLY ACQUIRE
AND MANAGE THEIR OWN PORTFOLIOS OF SECURITIES, SEEKS TO ACHIEVE ITS INVESTMENT
OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN A CORRESPONDING SERIES ("FUND") OF
NICHOLAS-APPLEGATE INVESTMENT TRUST, WHICH HAS THE SAME OBJECTIVE AS THE
PORTFOLIO. THE FUND IN TURN INVESTS ITS ASSETS, INCLUDING THOSE OF THE
PORTFOLIOS, IN PORTFOLIO SECURITIES. ACCORDINGLY, THE INVESTMENT EXPERIENCE OF
EACH PORTFOLIO WILL CORRESPOND DIRECTLY WITH THE INVESTMENT EXPERIENCE OF THE
FUND. INVESTORS SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. SEE
"INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS-SPECIAL CONSIDERATIONS
REGARDING MASTER/FEEDER STRUCTURE" FOR ADDITIONAL INFORMATION REGARDING THIS
UNIQUE STRUCTURE. THERE CAN BE NO ASSURANCE THAT EITHER PORTFOLIO OR THE FUND
WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
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SHARES OF THE PORTFOLIOS ARE NOT BANK DEPOSITS AND ARE NOT FEDERALLY INSURED
BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENT IN A PORTFOLIO INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
This Prospectus presents information you should know before investing in
either of the Portfolios. It should be retained for future reference. A
Statement of Additional Information for the Portfolios dated , 1997 has
been filed with the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. The Statement may be obtained, without charge,
by writing to the Trust, 600 West Broadway, 30th Floor, San Diego, California
92101, or by calling (800) 551-8045. Inquiries regarding the Portfolios can also
be made by calling (800) 551-8043.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
<PAGE>
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
, 1997
<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
-------------------------------------------------
SERIES A, B & C INTERNATIONAL
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CORE GROWTH PORTFOLIOS
TABLE OF CONTENTS
Summary of Expenses......................................... 3
Prospectus Summary.......................................... 5
Investment Objectives, Policies and Risk
Considerations............................................ 8
Organization and Management................................. 12
Purchasing Shares........................................... 15
Alternative Purchase Arrangements........................... 17
Shareholder Services........................................ 22
Redeeming Shares............................................ 24
Dividends, Distributions and Taxes.......................... 27
General Information......................................... 28
Appendix:
Investment Policies, Strategies
and Risks............................................... 30
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE PORTFOLIOS OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION.
2
<PAGE>
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SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in each of
the Portfolios. These are based on the expected expenses of each Portfolio for
its first year of operations, and because each Portfolio invests all of its
assets in the Fund, each Portfolio's estimated expenses include its
proportionate share of the operating expenses of the Fund. Actual expenses may
be more or less than those shown.
<TABLE>
<CAPTION>
INTERNATIONAL
CORE GROWTH
Portfolio Portfolio Portfolio
A B C
<S> <C> <C> <C>
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SHAREHOLDER TRANSACTION
EXPENSES:
Maximum sales charge on purchases (as a percentage of offering
price)(1) 5.25% None None
Sales charge on reinvested dividends None None None
Deferred sales charge (as a percentage of original purchase price
or redemption proceeds, whichever is lower)(2) None 5.00% 1.00%
Redemption fee(3) None None None
Exchange fee None None None
- -------------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET
ASSETS:
(after expense deferral)(4)
Management fees 1.00% 1.00% 1.00%
12b-1 expenses(5) 0.25% 0.75% 0.75%
All other expenses (after expense deferral)(4)
Shareholder service expenses 0.10% 0.25% 0.25%
Other expenses 0.60% 0.60% 0.60%
Total other expenses 0.70% 0.85% 0.85%
Total operating expenses (after expense deferral)(4) 1.95% 2.60% 2.60%
</TABLE>
The Board of Trustees of the Trust believes that the aggregate per share
expenses of each Portfolio are no greater than the expenses that the Portfolio
would incur if it retained the services of an investment adviser and the assets
of the Portfolio were invested directly in the types of securities held by the
Fund. For a detailed description of the expenses of the Portfolios and the Funds
in which they invest, see "Organization and Management."
- ---------------------------
(1)
Sales charges are reduced for purchases of $50,000 or more of shares of the
Series A Portfolio. The Trust may sell shares of the Series A Portfolio to
certain persons at net asset value. There is no initial sales charge on
purchases of shares of the Series B or C Portfolios. The National Association
of Securities Dealers, Inc. limits total annual sales charges (including 12b-1
expenses) to all purchasers of shares of a Portfolio to 6.25% of new sales
plus an interest factor. However, long-term shareholders may pay more than the
economic equivalent of such maximum sales charges. See "Alternative Purchase
Arrangements."
(2) Although purchases of $1 million or more of shares of the Series A Portfolio
are not subject to an initial sales charge, a contingent deferred sales
charge of 1.00% applies on certain redemptions made less than one year
following such purchases. A contingent deferred sales charge applies on
certain redemptions of shares of the Series B Portfolio, ranging from 5.00%
of redemptions made within 12 months of purchase to zero for redemptions
made more than six years after purchase. A contingent deferred sales charge
of 1.00% also applies on certain redemptions of shares of a Series C
Portfolio made less than 12 months following their purchase, but without
regard to the size of the purchase. See "Redeeming Shares."
(3) A $10 charge will be imposed on redemptions requested to be paid by wire
transfer. See "Redeeming Shares-Redemption Payments."
(4) The Investment Adviser of Nicholas-Applegate Investment Trust has agreed to
defer its management fees payable by the Fund, and to absorb other operating
expenses payable by the Fund and the Portfolios, to ensure that the expenses
(other than interest, taxes, brokerage commissions and other portfolio
transaction expenses, capital expenditures and extraordinary expenses) for
each Portfolio will not exceed the following respective percentage of such
Portfolio's average net assets on an annual basis through March 31, 1998:
International Core
3
<PAGE>
Growth
Portfolio A, B and C-1.95%, 2.60% and 2.6%. In subsequent years, overall
operating expenses for each Portfolio will not fall below the applicable
percentage limitation until the Investment Adviser has fully recouped fees
deferred or expenses paid by the Investment Adviser under this agreement, as
each Portfolio will reimburse the Investment Adviser in subsequent years
when operating expenses (before recoupment) are less than the applicable
percentage limitation set forth above. Accordingly, until all such deferred
fees or expenses have been recouped by the Investment Adviser, the
Portfolios' expenses will be higher, and their yields will be lower, than
would otherwise be the case. See "Organization and Management-Expense
Limitation." Actual operating expenses for the Series A, B and C Portfolios
for their first year of operations are estimated to be the following
respective percentages of such Portfolios' average net assets: International
Core Growth Portfolios A, B and C-10.06%, 16.15% and 16.15%. The various
operating expenses of the Portfolios are further described under
"Organization and Management."
(5) After a substantial period, these expenses with respect to the Series B and
C Portfolios may total more than the maximum sales expenses that would have
been permissible if imposed entirely as an initial sales charge. See
"Organization and Management-Distributor."
EXAMPLE OF PORTFOLIO EXPENSES. The following table illustrates the expenses that
a shareholder would pay on a hypothetical $1,000 investment in each of the
Portfolios over various time periods, assuming a 5% annual return. The
Portfolios charge no redemption fees. However, a contingent deferred sales
charge of 1.00% applies on redemptions of shares of the Series A Portfolio made
less than one year after a $1 million purchase of such shares, and a contingent
deferred sales charge applies on redemptions of shares of the Series B Portfolio
(ranging from 5.00% of redemptions made within 12 months of purchase to zero for
redemptions made more than six years after purchase), and a contingent deferred
sales charge of 1.00% applies on redemption of shares of a Series C Portfolio
made less than one year after any purchase of such shares.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
- ----------------------------------------------------------------
INTERNATIONAL CORE GROWTH
Portfolio A(1) $71 $111
Portfolio B:(2)
Assuming redemption at end of time period $78 $113
Assuming no redemption $26 $ 81
Portfolio C:(2)
Assuming redemption at end of time period $37 $ 81
Assuming no redemption $26 $ 81
- ----------------------------------------------------------------
</TABLE>
(1)Assumes redemption at the end of the time period, and deduction at the time
of purchase of the maximum applicable initial sales charge. The contingent
deferred sales charge on the Series A Portfolio is not applicable to the
hypothetical investment of $1,000; it only applies on redemptions of $1 million
purchases.
(2)Assumes deduction at the time of redemption of a contingent deferred sales
charge, if applicable and no exchange of Portfolio B shares for Portfolio A
shares seven or more years after purchase.
This Example assumes that all dividends and other distribution are reinvested
and that the percentage amounts listed under "Annual Portfolio Operating
Expenses" in the fee table on page 3 remain the same in the years shown.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OF FUTURE
EXPENSES, AND A PORTFOLIO'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN. The hypothetical 5% annual return is used for illustrative purposes only
and should not be interpreted as an estimate of a Portfolio's annual return, as
there can be no guarantee of a Portfolio's future performance.
4
<PAGE>
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PROSPECTUS SUMMARY
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment portfolios,
including the Series A, Series B and Series C International Core Growth
Portfolios ("Portfolios") offered hereby. The Series A, B and C Portfolios have
identical investment objectives and policies. However, the Series A Portfolios
are sold subject to a front end sales charge and the Series B and C Portfolios
are sold subject to a contingent deferred sales charge.
INVESTMENT OBJECTIVES. The investment objectives of the Portfolios are described
on the front cover of this Prospectus. There can be no assurance that any
Portfolio will achieve its investment objective. See "Investment Objectives,
Policies and Risk Considerations" and "Appendix: Investment Policies, Strategies
and Risks."
MASTER/FEEDER STRUCTURE. The Portfolios seek to achieve their respective
investment objectives by investing all of their assets in the International Core
Growth Fund ("Fund") of Nicholas-Applegate Investment Trust (the "Master
Trust"), a diversified, open-end management investment company. The Fund has the
same investment objectives as the Portfolios. The Fund in turn holds investment
securities. Although the "master/feeder" structure employed by the Portfolios to
achieve their investment objectives could provide certain efficiencies and
economies of scale, it could also have potential adverse effects such as those
resulting from large-scale redemptions by other investors of their interests in
the Fund, or from the failure by shareholders of a Portfolio to approve a change
in investment objectives and policies that has been approved by the shareholders
of the Fund. There may also be other investment companies through which you can
invest in the Fund which may have higher or lower fees and expenses than those
of the Portfolios. See "Investment Objectives, Policies and Risk
Considerations-Special Considerations Regarding Master/Feeder Structure."
A Portfolio may cease investing in the Fund only if the Trust's Board of
Trustees determines that this is in the best interests of the Portfolio and its
shareholders, and only with the approval of the Portfolio's shareholders. In
such event the Board of Trustees would consider alternative arrangements such as
investing all of the Portfolio's assets in another investment company with the
same investment objective as the Portfolio or hiring an investment adviser to
manage the Portfolio's assets in accordance with the Portfolio's investment
policies. No assurance exists that satisfactory alternative arrangements would
be available.
INVESTMENT RISKS AND CONSIDERATIONS. INVESTMENT RISKS AND OTHER CONSIDERATIONS
RELEVANT TO THE SECURITIES IN WHICH THE PORTFOLIOS INVEST THROUGH THE FUND ARE
DESCRIBED UNDER "INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS" AND IN
THE APPENDIX--INVESTMENT POLICIES, STRATEGIES AND RISKS. They include the
following:
The value of the Portfolios' shares will fluctuate with the market value of the
Fund's investments, so that the value of your shares when sold may be less than
your original purchase price.
Investments by the Fund in securities of foreign companies and governments
involve special risks in addition to the usual risks inherent in domestic
investments, including fluctuations in foreign exchange rates, political or
economic instability in the country of issue, and the possible imposition of
exchange controls or other laws or restrictions. Settlement of transactions in
foreign markets may be delayed or less frequent than in the U.S., and foreign
governments may withhold taxes from dividends and interest paid on securities
held by the
5
<PAGE>
Fund. There is also likely to be less publicly available information about
certain foreign issuers than is available about U.S. companies, and foreign
companies are not generally subject to uniform financial reporting standards
comparable to those applicable to U.S. companies.
The Fund may invest without limitation in emerging market countries. These
investments involve greater risks than other foreign investments, including
less-developed economic and legal structures; less stable political systems;
illiquid securities markets; possible expropriations, nationalization or
confiscatory taxation; and possible foreign currency devaluations and
fluctuations.
The investment approach of Nicholas-Applegate Capital Management (the
"Investment Adviser") results in above-average portfolio turnover for the Fund.
A high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses, and may also result in the realization and distribution to
shareholders of net capital gains which are taxable to them as ordinary income
for federal tax purposes.
For hedging purposes, the Fund may purchase or write put and call options on
securities and securities indices, effect transactions in futures contracts and
related options on stock indices, and enter into foreign exchange forward
contracts, currency futures or related options. These are derivative
instruments, whose value derives from the value of an underlying security, index
or currency. Risks associated with the use of such instruments include the
possibility that the Investment Adviser's forecasts of market values, currency
rates of exchange and other factors are not correct; imperfect correlation
between the Fund's hedging technique and the asset or liability being hedged;
default by the other party to the transaction; and inability to close out a
position because of the lack of a liquid market. Investment in such derivative
instruments may not be successful, and may reduce the returns and increase the
volatility of the Fund. See "Appendix: Investment Policies, Strategies and
Risks" in this Prospectus and "Investment Objectives, Policies and Risks" in the
Statement of Additional Information."
THE FUND MAY ENGAGE IN SHORT SALES, WHICH THEORETICALLY INVOLVE UNLIMITED LOSS
POTENTIAL AND MAY BE CONSIDERED A SPECULATIVE TECHNIQUE. See the description of
the risks of short sales under "Short Sales" in "Appendix: Investment Policies,
Strategies and Risks."
The Fund may invest up to 15% of its net assets in illiquid securities. The Fund
may enter into repurchase agreements and lend its portfolio securities, which
involve the risk of loss upon the default of the seller or borrower. The Fund
may also borrow money from banks for temporary purposes which, among other
risks, may require the Fund to sell portfolio securities to meet interest and
principal payments at an unfavorable time. See "Illiquid Securities,"
"Repurchase Agreements," "Securities Lending" and "Borrowing" in "Appendix:
Investment Policies, Strategies and Risks."
INVESTMENT ADVISER. The Trust has not retained the services of an investment
adviser for the Portfolios, as the Portfolios seek to achieve their investment
objectives by investing all of their assets in the Fund. Nicholas-Applegate
Capital Management serves as investment adviser to the Fund. The Investment
Adviser has been in the investment advisory business since 1984 and currently
manages approximately $31 billion of discretionary assets for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations and other institutional investors,
and individuals. The Investment Adviser is compensated for its services to the
Fund in the form of monthly fees at the annual rate of 1.00% of the first $500
million of the Fund's net assets, 0.90% of the next $500 million and 0.85% of
net assets in excess of $1 billion. See "Organization and Management."
6
<PAGE>
DISTRIBUTOR. Nicholas-Applegate Securities (the "Distributor"), an affiliate of
the Investment Adviser, serves as distributor of shares of the Portfolios. Under
a Distribution Plan, the Distributor receives compensation for providing
distribution services for the Portfolios at the following annual rates: for the
Series A Portfolio-0.25% of the Portfolio's net assets; for the Series B
Portfolio-0.75% of the Portfolio's net assets; and for the Series C
Portfolio-0.75% of the Portfolio's net assets. Under a Shareholder Service Plan,
the Distributor is reimbursed for shareholder services it provides and for
payments made to broker-dealers and others for related support and recordkeeping
services at an annual rate of up to 0.10% of the Series A Portfolio's net
assets, 0.25% of the Series B Portfolio's net assets, and 0.25% of the Series C
Portfolio's net assets. See "Organization and Management." Under a Distribution
Agreement, the Distributor will also retain a portion of the initial sales
charge on purchases of shares of the Series A Portfolio and the contingent
deferred sales load on redemptions of shares of the Portfolios. See
"Organization and Management" and "Alternative Purchase Arrangements."
ADMINISTRATORS, TRANSFER AGENT AND CUSTODIAN. The Investment Adviser and
Investment Company Administration Corporation ("ICAC") are the administrators
for the Trust, with responsibility for managing the daily business operations of
the Portfolios, subject to the supervision of the Trust's Board of Trustees.
ICAC also acts as administrator for the Master Trust. PNC Bank (the "Custodian")
is the custodian for the Trust and the Master Trusts, and State Street Bank and
Trust Company (the "Transfer Agent") is the transfer and dividend disbursing
agent for the Trust.
PURCHASE OF SHARES. Shares of the Portfolios may be purchased directly from the
Trust through its Transfer Agent or through selected dealers. Shares are
purchased at the next offering price, less a sales charge if applicable, after
an order is received in proper form by the Transfer Agent. The minimum initial
investment is $2,000 and the minimum subsequent investment is $100, but reduced
investment minimums are available in certain cases. See "Purchasing Shares."
ALTERNATIVE PURCHASE ARRANGEMENTS. Shares of the Series A Portfolio are sold
subject to a maximum sales charge of 5.25%. Reduced sales charges are available
for purchases of $50,000 or more of shares of the Series A Portfolio. No initial
sales charge applies on a purchase of $1 million or more of shares of the Series
A Portfolio, but a contingent deferred sales charge of 1.00% is imposed on
redemptions made within 12 months after the $1 million purchase. The Trust
offers a number of ways shareholders in the Series A Portfolio can reduce their
sales charges, including aggregation, concurrent purchases, rights of
accumulation and letters of intent. See "Purchasing Shares."
Although shares of the Series B Portfolio and Series C Portfolio may be
purchased without an initial sales charge, a contingent deferred sales charge is
imposed on redemptions of shares of the Series B Portfolio (ranging from 5.00%
of redemptions made within 12 months of the purchase to zero for redemptions
made more than six years after purchase) and a contingent deferred sales charge
of 1.00% is imposed on redemptions of Series C Portfolio made less than one year
after purchase. Shares of Series B Portfolio may be exchanged for shares of the
Series A Portfolio seven years after purchase. See "Alternative Purchase
Arrangements-Series B Portfolio" and "-Series C Portfolio."
SHAREHOLDER SERVICES. The following services are provided to shareholders of the
Portfolios for their convenience and flexibility: an automatic investment plan;
automatic reinvestment and cross-reinvestment of dividends and capital gains
distributions; an exchange privilege, including automatic exchanges; and
automatic withdrawals. See "Shareholder Services." The Trust also offers various
retirement plans through which you can invest in the Portfolios. See "Purchasing
Shares."
7
<PAGE>
REDEEMING SHARES. Shares of a Portfolio may be redeemed by writing to the
Transfer Agent, directly or through a selected dealer, or by telephone if
telephone redemption privileges have been established. Redemption proceeds of
$5,000 or more may be wired; otherwise proceeds will be sent by check. The price
received for Portfolio shares redeemed is at the next determined net asset value
after the request is received in proper form by the Transfer Agent, which may be
more or less than the purchase price, except that a contingent deferred sales
charge may apply to certain redemptions. See "Redeeming Shares."
DIVIDENDS, DISTRIBUTIONS AND TAXES. The Portfolios declare and pay annual
dividends of net investment income. The Portfolios make distributions at least
annually of any net capital gains. All dividends and distributions will be paid
in the form of additional shares at net asset value unless cash payment is
requested.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The investment objective and policies of each Portfolio are discussed below and
in the "Appendix: Investment Policies, Strategies and Risks."
SPECIAL CONSIDERATIONS REGARDING MASTER/FEEDER STRUCTURE. The Portfolios seek to
achieve their investment objectives by investing all of their assets in the
Fund, which has the same objectives as the Portfolios. The Fund in turn holds
investment securities. Accordingly, the investment experience of each Portfolio
will correspond directly with the investment experience of the Fund. For a
description of the Fund's objectives, policies, restrictions, management and
expenses, see "Investment Objectives, Policies and Risk Considerations" below,
the Appendix and "Organization and Management." There can be no assurance that
either Portfolio or the Fund will achieve its investment objective. Each
Portfolio's and the Fund's investment objective is a fundamental policy which
may not be changed without the approval of the holders of a majority of the
outstanding shares of the Portfolio or Fund, respectively, as defined in the
Investment Company Act of 1940 (the "Investment Company Act"). Upon any such
approval, each Portfolio will provide at least 30 days' written notice to its
shareholders before any change is made to its or the Fund's investment
objective.
There are certain risks to the Portfolios related to the use of the
"master/feeder" structure. Such risks include, but are not limited to, the
following: Large-scale redemptions by other investment companies of their
interests in the Fund could have adverse effects, such as lack of portfolio
diversity and decreased economics of scale, and could result in the shareholders
of a Portfolio, as the remaining investor in the Fund, bearing all the operating
costs of the Fund and thus experiencing higher pro rata operating expenses and
lower returns than would otherwise be the case. In addition, the total
withdrawal by another investment company as an investor in the Fund will cause
the Fund to terminate automatically in 120 days, unless the Portfolios and any
other investors in the Fund unanimously agree to continue the business of the
Fund. As each Portfolio is required to submit such matters to a vote of its
shareholders, it will be required to incur the expenses of shareholder meetings
in connection with such withdrawals. If unanimous agreement is not reached to
continue the Fund, the Board of Trustees of the Trust would need to consider
alternative arrangements for the Portfolios, including investing all of the
Portfolios' assets in another investment company with the same investment
objective as the Portfolios or hiring an investment adviser to manage the
Portfolios' assets in accordance with the investment policies described below
and in "Appendix: Investment Policies, Strategies and Risks." The absence of
substantial experience with the master/feeder structure could result in
accounting or other difficulties. Failure by shareholders
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of a Portfolio to approve a change in the investment objective and policies of
the Portfolio parallel to a change that has been approved by the shareholders of
the Fund would require the Portfolio to redeem its shares of the Fund; this
could result in a distribution in kind to the Portfolio of the portfolio
securities of the Fund (rather than a cash distribution), causing the Portfolio
to incur brokerage fees or other transaction costs in converting such securities
to cash, reducing the diversification of the Portfolio's investments and
adversely affecting its liquidity. Other shareholders in the Fund may have a
greater ownership interest in the Fund than the Portfolios' interest, and could
thus have effective voting control over the operation of the Fund.
The Trust's Board of Trustees believes that the Portfolios will achieve certain
efficiencies and economies of scale through the "master/feeder" structure, and
that the aggregate expenses of the Portfolios will be less than if the
Portfolios invested directly in the securities held by the Fund. However, other
investment companies that offer their shares to the public also may invest all
or substantially all of their assets in the Fund. Accordingly, there may be
other investment companies through which you can invest indirectly in the Fund.
The fees charged by such other investment companies may be higher or lower than
those charged by the Portfolios, which may reflect, among other things,
differences in the nature and level of the services and features offered by such
companies to their shareholders. Information about the availability of other
investment companies that invest in the Fund can be obtained by calling (800)
551-8045.
A Portfolio may cease investing in the Fund only if the Board of Trustees of the
Trust determines that such action is in the best interests of the Portfolio and
its shareholders, and only with the approval of the Portfolio's shareholders. In
that event, the Board of Trustees would consider alternative arrangements,
including investing all of the Portfolio's assets in another investment company
with the same investment objective as the Portfolio or hiring an investment
adviser to manage the Portfolio's assets in accordance with the investment
policies described below and in "Appendix: Investment Policies, Strategies and
Risks."
INTERNATIONAL CORE GROWTH FUND. The Fund seek long-term capital appreciation.
Assets of the Fund are invested primarily in a diversified portfolio of equity
securities of international companies with larger market capitalizations (above
$1 billion, which currently includes the top 75th percentile worldwide of
publicly traded companies). Equity securities include common stocks, preferred
stocks, debt securities that are convertible into common stocks, and warrants.
The portion of the Fund's total assets invested in common stock, preferred
stock, and convertible securities will vary according to the Investment
Adviser's assessment of market and economic conditions and outlook.
The Fund may invest in securities issued by companies based or operating in any
country, including the United States. Under normal market conditions, as a
fundamental policy which cannot be changed without shareholder approval, at
least 65% of the Fund's total assets will be invested in securities of issuers
located in at least three countries other than the United States. Under normal
market conditions, the Fund may invest up to 35% of its total assets in
securities of U.S. issuers. With these exceptions, the Fund is not driven by
allocation considerations with respect to any particular countries, geographic
regions or economic sectors. Countries in which investment opportunities will be
sought include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and
the United States. However, the Fund may also invest in securities issued by
companies based in other countries such as the countries of Eastern Europe and
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South America, Indonesia, Korea, Mexico, the Philippines, Portugal and Thailand.
See "Appendix: Investment Policies, Strategies and Risks" for a discussion of
the risks associated with investment in foreign securities.
Under normal market conditions, at least 75% of the Fund's total assets will be
invested in equity securities (common and preferred stocks, warrants and
securities convertible into equity securities). The remainder of the Fund's
assets will be invested in debt securities of U.S. and foreign companies and
U.S. and foreign governments and their agencies and instrumentalities which the
Investment Adviser believes present attractive opportunities for capital growth,
as well as in various other securities and instruments described in the
"Appendix: Investment Policies, Strategies and Risks." The debt securities in
which the Fund may invest will be rated at the time of purchase "Baa" or higher
by Moody's Investors Service, Inc. ("Moody's"), "BBB" or higher by Standard &
Poor's Corporation ("S&P") or equivalent ratings by other recognized rating
agencies, or will be unrated if determined by the Investment Adviser to be of
comparable quality. These securities are of investment grade, which means that
their issuers are believed to have adequate capacity to pay interest and repay
principal, although certain of such securities in the lower grades have
speculative characteristics, and changes in economic conditions or other
circumstances may be more likely to lead to a weakened capacity to pay interest
and principal then would be the case with higher rated securities. The
Investment Adviser will evaluate securities downgraded below investment grade on
a case by case basis to determine whether the security continues to be an
acceptable investment. If not, the Fund will sell the security as promptly as
practicable. The Fund will not apply ratings limitations to convertible debt
securities. The Fund may also make short sales, which is considered a
speculative technique. See "Appendix: Investment Policies, Strategies and Risks"
for a discussion of the risks associated with short sale transactions.
INVESTMENT TECHNIQUES AND PROCESSES. The focus of the Investment Adviser's
investment program is GROWTH OVER TIME-Registered Trademark-. In making
decisions with respect to equity securities for the Fund, the Investment Adviser
uses a proprietary investment methodology which is designed to capture positive
change at an early stage. It adheres rigorously to this methodology, and applies
it to various segments of the capital markets, domestically and internationally.
This methodology consists of investment techniques and processes designed to
identify companies with attractive earnings and dividend growth potential and to
evaluate their investment prospects. These techniques and processes include
relationships with an extensive network of brokerage and research firms located
throughout the world; computer-assisted fundamental analysis of thousands of
domestic and foreign companies; established criteria for the purchase and sale
of individual securities; portfolio structuring and rebalancing guidelines;
securities trading techniques; and continual monitoring and reevaluation of all
holdings with a view to maintaining the most attractive mix of investments. The
Investment Adviser collects data on approximately 26,000 companies in 35
countries (adjusting for reporting and accounting differences). There can be no
assurance that use of this proprietary investment methodology will be
successful.
The decision to invest assets of the Fund in any particular debt security will
be based on such factors as the Investment Adviser's analysis of the effect of
the yield to maturity of the security on the average yield to maturity of the
total debt security portfolio of the Fund, the Investment Adviser's assessment
of the credit quality of the issuer and other factors the Investment Adviser
deems relevant. In managing the Fund's debt security investments, the Investment
Adviser seeks to capture major moves in interest rates and utilizes a
proprietary model to identify interest rate trends in the bond market. There can
be no assurance that use of these techniques will be successful.
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INVESTMENT POLICIES, STRATEGIES AND RISKS. The primary risk of investing in the
Portfolios is market risk, which means that the market value of the equity
securities held by the Fund may decline over short or even extended periods of
time. You should also expect periods when market prices generally rise and
periods when market prices generally decline. The Fund is also subject to the
risks associated with foreign investing. Among these are country risk (the
chance that a country's economy will be hurt by political or financial problems
or natural disasters) and currency risk (the chance that Americans investing
abroad could lose money because of a rise in the value of the U.S. dollar versus
foreign currencies). These risks are generally intensified for investments in
emerging markets.
The Appendix and the Statement of Additional Information describe certain
investment securities and techniques of the Funds and the associated risks.
These include short-term investments in cash and cash equivalents; investment in
sovereign debt securities of U.S. and foreign governments and their agencies and
instrumentalities; floating and variable rate demand notes and bonds; commercial
paper; non-convertible corporate debt securities; convertible securities and
warrants; closed-end country funds; depository receipts; over-the-counter
securities; when-issued securities and firm commitment agreements; foreign
exchange contracts; put and call options on securities and securities indices;
stock index futures and options contracts; repurchase agreements; illiquid
securities; securities lending; and borrowing.
INVESTMENT RESTRICTIONS. Each Portfolio and the Fund is subject to certain
investment restrictions which constitute fundamental policies. Fundamental
policies may not be changed without the approval of the holders of a majority of
the outstanding shares of the Portfolio or Fund, respectively, as defined in the
Investment Company Act. An investment policy or restriction which is not
described as fundamental in this Prospectus or the Statement of Additional
Information may be changed or modified by the Board of Trustees of the Trust or
Master Trust, as the case may be, without shareholder approval.
Certain of the investment restrictions which are fundamental policies are set
forth below. Additional investment restrictions are discussed in the Appendix
and Statement of Additional Information.
1. Neither Portfolio nor the Fund may invest more than 5% of its total assets
in the securities of any one issuer. However, up to 25% of a Portfolio's
or the Fund's total assets can be invested without regard to this
limitation, and this limitation does not apply to investments in
securities of the U.S. Government or its agencies and instrumentalities.
2. Neither Portfolio nor the Fund may purchase more than 10% of the
outstanding voting securities of any one issuer, or purchase the
securities of any issuer for the purpose of exercising control.
3. Neither Portfolio nor the Fund may invest 25% or more of its total assets
in any one particular industry; however, this restriction does not apply
to the securities of the U.S. Government, its agencies and
instrumentalities.
4. Neither Portfolio nor the Fund may make loans of its portfolio securities
in an aggregate amount exceeding 30% of the value of its total assets, or
borrow money (except from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions and in an aggregate amount
not exceeding 20% of the value of its total assets).
5. Neither Portfolio nor the Fund may invest more than 15% of its net assets
in illiquid securities.
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The investment restrictions described above do not apply to an investment by a
Portfolio of all of its assets in the Fund.
PORTFOLIO TURNOVER. The Investment Adviser's investment approach results in
above-average portfolio turnover, as the Investment Adviser sells portfolio
securities when it believes the reasons for their initial purchase are no longer
valid or when it believes that the sale of a security owned by the Fund and the
purchase of another security of better value can enhance principal or increase
income. A security may also be sold to avoid a prospective decline in market
value or purchased in anticipation of a market rise. Although it is not possible
to predict future portfolio turnover rates accurately, and such rates may vary
greatly from year to year, the Investment Adviser anticipates that the annual
portfolio turnover rate for the Fund may be up to 200%, which is substantially
greater than that of many other investment companies. A high rate of portfolio
turnover (100% or more) will result in the Fund paying greater brokerage
commissions on equity securities (other than those affected with dealers on a
principal basis) than would otherwise be the case, which will be borne directly
by the Fund and ultimately by the shareholders of the Portfolios. High portfolio
turnover should not result in the Fund paying greater brokerage commissions on
debt securities, as most transactions in debt securities are affected with
dealers on a principal basis. However, debt securities, as well as equity
securities traded on a principal basis, are subject to mark-ups by the dealers.
High portfolio turnover may also result in the realization of substantial net
capital gains, and any distributions derived from such gains may be ordinary
income for federal tax purposes.
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ORGANIZATION AND MANAGEMENT
ORGANIZATION. Each Portfolio is a series of Nicholas-Applegate Mutual Funds, a
Delaware business trust. The Board of Trustees of the Trust, in addition to
reviewing the actions of the Trust's administrators and Distributor, as set
forth below, decides upon matters of general policy with respect to each
Portfolio. See "General Information." The trustees and officers of the Trust and
of the Master Trust are described in the Statement of Additional Information.
None of the disinterested trustees of the Trust are same individuals as the
disinterested trustees of the Master Trust.
INVESTMENT ADVISER. The Trust has not retained the services of an investment
adviser for the Portfolios, as the Portfolios seek to achieve their investment
objectives by investing all of their assets in the Fund. Nicholas-Applegate
Capital Management, 600 West Broadway, 30th Floor, San Diego, California 92101,
serves as the Investment Adviser to the Fund. The Investment Adviser currently
manages approximately $31 billion of discretionary assets for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations and other institutional investors,
and individuals. The Investment Adviser was organized in 1984 as a California
limited partnership. Its general partner is Nicholas-Applegate Capital
Management Holdings, L.P., a California limited partnership controlled by Arthur
E. Nicholas. He and thirteen other partners manage a staff of approximately 350
employees.
As compensation for the services it provides, the Investment Adviser receives a
monthly fee at the annual rate of 1.00% on the first $500 million of the Fund's
net assets, 0.90% on the next $500 million of net assets, and 0.85% on net
assets in excess of $1 billion.
The Fund is managed under the general supervision of Mr. Nicholas, who has been
the chief executive officer of the Investment Adviser since its organization. In
addition, since December,
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1995, John D. Wylie, as Chief Investment Officer -- Investor Services Group, is
also responsible for general oversight of the Fund's portfolio. The global
management team headed by Lawrence S. Speidell and Catherine Somhegyi is
primarily responsible for the Investment Adviser's day-to-day management of the
Fund's portfolio. Mr. Speidell has been a portfolio manager with the Investment
Adviser since March 1994; from 1983 until he joined the Investment Adviser, he
was an institutional portfolio manager with Batterymarch Financial Management.
Ms. Somhegyi has managed institutional investments for the Investment Adviser
for more than the last five years.
ADMINISTRATORS. Investment Company Administration Corporation is the
administrator of each Portfolio. Pursuant to an Administration Agreement with
the Trust, and subject to the supervision of the Board of Trustees of the Trust,
ICAC supervises the overall administration of the Trust. Its responsibilities
include preparing and filing all documents required for compliance by the Trust
with applicable laws and regulations, arranging for the maintenance of books and
records of the Trust and supervision of other organizations that provide
services to the Trust. Certain officers of the Trust are also provided by the
ICAC. For the services it provides to the Trust, the ICAC receives an annual fee
of between $5,000 and $35,000 for each of the groups of portfolios of the Trust
investing in the various series of the Master Trust; the fee is allocated among
the various series of the Trust, including the Portfolios, in accordance with
relative net asset values. The ICAC provides similar services as the
administrator of the Master Trust, subject to the supervision of its Board of
Trustees, and is compensated separately for the services rendered to the Fund at
an annual rate of approximately .02% of the average daily net assets of the
Fund.
The Investment Adviser also provides administrative personnel and services to
the Trust pursuant to an Administrative Services Agreement with the Trust, and
is reimbursed for the cost of such services at the annual rate of up to 0.10% of
the average daily assets of the various series of the Trust, including the
Portfolios.
EXPENSE LIMITATION. To limit the expenses of each Portfolio, the Investment
Adviser has agreed to defer its management fees payable by the Fund, and to
absorb the other operating expenses payable by the Fund and the Portfolios, to
ensure that the expenses of each Portfolio (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures and
extraordinary expenses, but including such Portfolio's proportionate share of
the Fund's similar operating expenses) do not exceed the following respective
percentage of such Portfolio's average net assets on an annual basis through
March 31, 1998: International Core Growth Portfolio A-1.95%; International Core
Growth Portfolio B-2.60%; and International Core Growth Portfolio C-2.60%. Each
Portfolio will reimburse the Investment Adviser for fees deferred or other
expenses paid by the Investment Adviser pursuant to this agreement in later
years in which operating expenses for the Portfolio are less than the applicable
percentage limitation set forth above for any such year. No interest, carrying
or finance charge will be paid by a Portfolio with respect to any amounts
representing fees deferred or other expenses paid by the Investment Adviser. In
addition, neither Portfolio nor the Fund will be required to repay any
unreimbursed amounts to the Investment Adviser upon termination or non-renewal
of its Investment Advisory Agreement with the Master Trust.
DISTRIBUTOR. Nicholas-Applegate Securities, 600 West Broadway, 30th Floor, San
Diego, California 92101, a California limited partnership, serves as the
Distributor of shares of each Portfolio. The general partner of the Distributor
is Nicholas-Applegate Capital Management Holdings, L.P. and its limited partner
is the Investment Adviser.
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The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act with respect to the Portfolios. Under the Distribution
Plan, each Portfolio compensates the Distributor for services rendered and costs
incurred in connection with distribution of shares of such Portfolio. The Trust
has also adopted a Shareholder Service Plan under which each Portfolio
reimburses the Distributor for shareholder servicing expenses actually incurred
with respect to shares of such Portfolio.
Under the Distribution Plan and a related distribution agreement (the
"Distribution Agreement"), the Distributor incurs the expenses of distributing
each Portfolio's shares. These expenses include advertising and marketing
expenses, commissions and other payments to broker-dealers and others which have
entered into agreements with the Distributor, the expenses of preparing,
printing and distributing prospectuses for the Portfolios, and indirect and
overhead costs associated with the sale of Portfolio shares. The Distributor
recovers the distribution expenses it incurs through the receipt of compensation
payments from each Portfolio under the Distribution Plan at the following annual
rates: for the Series A Portfolio, 0.25% of such Portfolio's average daily net
assets; for the Series B Portfolio, 0.75% of such Portfolio's average daily net
assets; and for the Series C Portfolio, 0.75% of such Portfolio's average daily
net assets. Moreover, under the Distribution Agreement, the Distributor retains
a portion of an initial sales charge from purchases of shares of the Series A
Portfolios, and a contingent deferred sales charge from redemptions of shares of
the Series A, B and C Portfolios. The Distribution Plan is a "compensation"
plan, which means that the distribution fees paid by the Portfolios under the
Distribution Plan are intended to compensate the Distributor for services
rendered and commission fees borne even if the amounts paid exceed the
Distributor's actual expenses (in which case the Distributor would realize a
profit). If in any year the Distributor's expenses incurred in connection with
the distribution of a Portfolio's shares exceed the distribution fees paid by
the Portfolio, the Distributor will recover such excess if the Distribution Plan
with respect to such shares continues to be in effect in some later year when
the distribution fees exceed the Distributor's expenses with respect to the
Portfolio. There is no limit on the periods during which unreimbursed expenses
may be carried forward; neither Portfolio pays interest, carrying or other
finance charges on any carried forward amounts; and neither Portfolio will be
obligated to pay any unreimbursed expenses that may exist at such time, if any,
as the Distribution Plan terminates or is not continued.
Many of the Distributor's sales efforts involve the Trust as a whole, so that
distribution fees paid by one Portfolio may help finance sales efforts relating
to shares of the other Portfolio or other series of the Trust. In reporting its
expenses to the Trustees, the Distributor separately itemizes expenses that
relate to the distribution of shares of a single Portfolio, and allocates other
expenses among the Portfolios and other series of the Trust based on their
relative net assets.
Under the Shareholder Service Plan, which is a "reimbursement" plan, each Series
A Portfolio, Series B Portfolio and Series C Portfolio pays the Distributor an
annual fee of up to 0.10%, 0.25% and 0.25%, respectively, of the Portfolio's
average daily net assets as reimbursement for certain expenses actually incurred
in connection with shareholder services provided by the Distributor and payments
to broker-dealers and others for the provision of such services. Support
services with respect to the beneficial owners of Portfolio shares include
establishing and maintaining accounts and records relating to clients of the
Distributor, broker-dealers and others who invest in the Portfolio's shares,
preparing tax reports, assisting clients in processing exchange and redemption
requests and account designations, and responding to client inquiries concerning
their investments. If in any month the Distributor is due more monies for
shareholder services than are immediately payable because of the expense
limitations under the Shareholder Service Plan, the unpaid amount is carried
forward from
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month to month while the Shareholder Service Plan is in effect until such time
when it may be paid. However, no carried forward amount will be payable beyond
the fiscal year during which the amounts were incurred, and no interest,
carrying or other finance charge is borne by the Portfolios with respect to any
amount carried forward.
No fees or commissions will be paid by the Distributor to any broker-dealer or
others until amounts owed to such broker-dealer or others are at least $100. The
Distributor, at its expense, may from time to time pay additional cash bonuses
or other incentives to selected participating brokers or financial institutions
in connection with the sale, administration and servicing of the Portfolios. In
some cases, these bonuses or incentives may be offered only to certain brokers
or financial institutions which have sold or may sell significant amounts of
shares of the Portfolios or other series of the Trust. The Distributor currently
expects that any such additional bonuses or incentives will not exceed 0.50%.
Dealers may obtain further information by calling (800) 551-8045.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT. PNC Bank, Airport Business
Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania, 19113,
serves as Custodian for the Portfolios and the Fund. PFPC Inc., an affiliate of
the Custodian, provides accounting services to the Portfolios and the Fund.
State Street Bank and Trust Company, Mutual Funds Division, Nicholas-Applegate,
2 Heritage Drive, 7th Floor, North Quincy, Massachusetts 02171, is the Transfer
Agent and the Dividend Disbursing Agent for the Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE. The Investment Adviser is responsible for
the Fund's portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser seeks to obtain the best
price and execution for the Fund. Subject to obtaining the best price and
execution, the Investment Adviser may effect transactions through brokers who
sell shares of the Portfolios or provide research services to the Investment
Adviser, which may result in the payment of higher commissions than those
charged by other brokers. However, the selection of such brokers will be made in
accordance with Section 28(e) of the Securities Exchange Act of 1934. Section
28(e) requires the Investment Adviser to make a good faith determination that
the commissions paid are reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities with
respect to the accounts as to which it exercises investment discretion.
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PURCHASING SHARES
HOW TO PURCHASE SHARES. You may purchase shares of either Portfolio directly
from the Trust through its Transfer Agent, State Street Bank and Trust Company,
or through your dealer which has entered into a selling group agreement with the
Distributor. Account applications can be obtained from the Transfer Agent or
your dealer. The minimum initial investment is generally $2,000 and the minimum
subsequent investment is $100, but reduced investment minimums are available in
certain cases. See "Investment Minimums" below.
Purchases of shares of the Portfolios can be made by check or by wiring federal
funds to the Transfer Agent. Checks should be in U.S. dollars and made payable
to Nicholas-Applegate Mutual Funds or, in the case of a retirement account, the
custodian or trustee. Third party checks will not be accepted. Checks should be
sent to the Transfer Agent, State Street Bank and Trust Company, P.O. Box 8326,
Boston, Massachusetts 02266-8326, Attention: Nicholas-Applegate Mutual Funds.
Please specify the name of the Portfolio, the account number assigned by the
Transfer Agent, and your name. See "Purchase by Wire" below for wiring
instructions.
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You may make subsequent investments in either Portfolio by completing the
subsequent investments form at the bottom of a recent account statement, making
your check payable to the Trust, writing your account number on the check and
mailing it in the envelope provided with your account statement. Subsequent
investments may also be made by mailing your check directly to your dealer's
address printed on your account statement.
Each Portfolio reserves the right to reject any purchase order or to suspend or
modify the continuous offering of its shares. Your dealer is responsible for
forwarding payment promptly to the Transfer Agent. The Trust reserves the right
to cancel any purchase order for which payment has not been received by the
third business day following the investment. Transactions in Portfolio shares
made through dealers other than the Transfer Agent may be subject to postage and
handling charges imposed by the dealer.
PURCHASE BY WIRE. Shares of a Portfolio can be purchased by wiring federal funds
to the Transfer Agent. For an initial purchase of shares of a Portfolio by wire,
you must first telephone the Transfer Agent at (800) 551-8043 between the hours
of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day when the New York Stock
Exchange is open for normal trading to receive an account number. The following
information will be requested: your name, address, tax identification number,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to the
Transfer Agent, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, ABA Number 011000028, DDA Number 9904-645-0,
Attention: Nicholas-Applegate Mutual Funds, specifying on the wire the name of
the Portfolio, the account number assigned by the Transfer Agent and your name.
If you arrange for receipt by the Transfer Agent of federal funds prior to the
close of trading (currently 4:00 P.M., Eastern time) of the New York Stock
Exchange on a day the Exchange is open for normal trading, you may purchase
shares of a Portfolio as of that day. Your bank may charge a fee for wiring
money on your behalf.
In making a subsequent purchase order by wire, you should wire funds to the
Transfer Agent in the manner described above and be sure that the wire specifies
the name of the Portfolio, your name and the account number. However, it is not
necessary to call the Transfer Agent to make subsequent purchase orders
utilizing federal funds. The minimum amount which may be invested by wire is
$100, except as noted below.
SHARE PRICE. Shares of a Portfolio are purchased at the next offering price
after an order in proper form is received by the Transfer Agent. An order in
proper form must include all correct and complete information, documents and
signatures required to process your purchase. The offering price is the net
asset value plus a sales charge, if applicable. The net asset value per share is
determined as of the close of trading of the New York Stock Exchange on each day
the Exchange is open for normal trading. Orders received before 4:00 P.M.
(Eastern time) on a day when the Exchange is open for normal trading will be
processed as of the close of trading on that day. Otherwise processing will
occur on the next business day. To determine a Portfolio's net asset value per
share, the current value of the Portfolio's total assets, less all liabilities,
is divided by the total number of shares outstanding, and the result is rounded
to the nearer cent.
SHARE CERTIFICATES. Shares are credited to your account and certificates are not
issued unless specifically requested. This eliminates the costly problem of lost
or destroyed certificates. If you would like certificates issued, please request
them by writing to the Transfer Agent. There is usually no charge for issuing
certificates in reasonable denominations, but certificates will be issued only
for full shares.
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INVESTMENT MINIMUMS. The minimum initial investment in each Portfolio is $2,000.
For retirement plan investments and custodial accounts under the Uniform
Gifts/Transfers to Minors Act, the minimum is $250. The minimum is reduced to
$50 for purchases through the Automatic Investment Plan or to $25 for purchases
by retirement plans through payroll deductions. The minimum is $100 for
additional investments (except as noted above).
RETIREMENT PLANS. You may invest in each Portfolio through various retirement
plans including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans (including 401(k) plans). For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please consult your tax adviser.
- --------------------------------------------------------------------------------
ALTERNATIVE PURCHASE ARRANGEMENTS
Purchases of shares of the Series A Portfolio are generally subject to a maximum
initial sales charge of 5.25% and lower distribution and shareholder service
fees than shares of the Series B or C Portfolio. Purchases of the Series B
Portfolio are subject to a contingent deferred sales charge, ranging from 5.00%
on redemptions made within 12 months after the shares were purchased to zero for
redemptions made more than six years after purchase, and higher distribution and
shareholder service fees than shares of the Series A Portfolio. Purchases of
shares of a Series C Portfolio are subject to a contingent deferred sales charge
of 1.00% imposed on redemptions made within 12 months after the shares were
purchased, and higher distribution and shareholder service fees than shares of a
Series A Portfolio. Shares of the Series B Portfolio may be exchanged for shares
of the Series A Portfolio seven years after purchase; an exchange will be
treated as a redemption and purchase for tax purposes.
You may choose the method of purchasing Portfolio shares that is most beneficial
given the amount of your intended purchase, the length of time you expect to
hold the shares, whether you qualify for any reduction or waiver of any
applicable sales charge, and other relevant circumstances. You should consider
which method of purchase best suits your individual circumstances, I.E., whether
it is more advantageous to incur an initial sales charge and lower annual fees
(Series A Portfolio) or to have the entire purchase price invested in Portfolio
shares with the investment thereafter being subject to a contingent deferred
sales charge for a period of six years and higher annual fees for a period of
seven years from date of purchase (Series B Portfolio), or to have the entire
purchase price invested in Portfolio shares with the investment thereafter being
subject to a contingent deferred sales charge for a period of one year from date
of purchase and higher annual fees (Series C Portfolios).
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances, and are based on
current fees and expenses being charged to the Portfolios:
If you intend to hold your investment in a Portfolio for less than seven years
and do not qualify for a reduced sales charge on Series A Portfolio shares, you
should consider purchasing Series C Portfolio shares rather than Series A or B
Portfolio shares, since Series A Portfolio shares are subject to a maximum
initial sales charge of 5.25% and Series B Portfolio shares are subject to a
contingent deferred sales charge of 5% which declines to zero over a six-year
period.
If you intend to hold your investment in a Portfolio for seven years or more and
do not qualify for a reduced sales charge on Series A Portfolio shares, you
should consider purchasing
17
<PAGE>
Series B Portfolio shares rather than Series A or C Portfolio shares, since
Series B Portfolio shares may be exchanged for Series A Portfolio shares in a
taxable transaction seven years after purchase and all of your money would be
invested initially in the case of Series B Portfolio shares.
If you qualify for a reduced sales charge on Series A Portfolio shares, it may
be more advantageous for you to purchase Series A Portfolio shares than Series B
or C Portfolio shares regardless of how long you intend to hold your investment.
However, unlike Series B and C Portfolio shares, you would not have all of your
money invested initially because the sales charge on Series A Portfolio shares
is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Series A Portfolio shares
and you purchase Series B or C Portfolio shares, you would have to hold your
investment for approximately eight years in the case of Series B or C Portfolio
shares for the higher cumulative distribution and shareholder service fees on
those shares to exceed the initial sales charge plus cumulative distribution and
shareholder service fees on Series A Portfolio shares. This does not take into
account the time value of money, which further reduces the impact of the higher
Series B or C Portfolio distribution and shareholder service fees on the
investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions at a time when the contingent
deferred sales charge is applicable.
Financial advisers and other sales agents who sell shares of the Trust will
receive different compensation for selling shares of the Series A, B and C
Portfolios, and will generally receive more compensation initially for selling
shares of the Series A Portfolio than for selling shares of the Series B or C
Portfolios.
SERIES A PORTFOLIO
The sales charges you pay when purchasing shares of the Series A Portfolio are
set forth below:
<TABLE>
<CAPTION>
Sales Charges as Percentage of the: Dealer Commission
Amount of Purchase NET AMOUNT OFFERING as Percentage of the
at the Offering Price INVESTED PRICE Offering Price
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Less than $50,000 5.54% 5.25% 4.50%
$50,000 but less than $100,000 4.71% 4.50% 3.75%
$100,000 but less than $250,000 3.63% 3.50% 2.75%
$250,000 but less than $500,000 2.56% 2.50% 2.00%
$500,000 but less than $1,000,000 2.04% 2.00% 1.60%
$1,000,000 or more None None (See below)
</TABLE>
In addition, although no initial sales charge applies on a purchase of $1
million or more of the Series A Portfolio, a contingent deferred sales charge of
1.00% is imposed on certain redemptions within one year of the $1 million
purchase. See "Redeeming Shares--Contingent Deferred Sales Charge on Redemptions
of Portfolio A Shares." Commissions will be paid by the Distributor to dealers
who initiate and are responsible for purchases of $1 million or more and for
purchases made at net asset value by certain retirement plans of organizations
with 50 or more eligible employees as set forth in the Statement of Additional
Information.
18
<PAGE>
NET ASSET VALUE PURCHASES. The Trust may sell shares of the Series A Portfolio
at net asset value to:
(1) current or retired directors, trustees, partners, officers and
employees of the Trust, the Master Trust, the Distributor, the Investment
Adviser and its general partner, certain family members of the above
persons, and trusts or plans primarily for such persons;
(2) current or retired registered representatives or full-time employees
and their spouses and minor children of dealers having selling group
agreements with the Trust and plans for such persons;
(3) former limited partners and participants of certain investment
partnerships and pooled trusts previously managed by the Investment Adviser;
(4) shareholders and former shareholders of another mutual fund which
has a sales charge and is not a series of the Trust, so long as shares of
the Portfolio are purchased with the proceeds of a redemption, made within
60 days of the purchase, of shares of such other mutual fund (to obtain this
benefit, the redemption check, endorsed to the Trust, or a copy of the
confirmation showing the redemption must be forwarded to the Transfer
Agent);
(5) companies or other entities exchanging securities with the Trust or
Master Trust through a merger, acquisition or exchange offer;
(6) trustees or other fiduciaries purchasing shares for certain
retirement plans of organizations with 50 or more eligible employees;
(7) participants in certain pension, profit-sharing or employee benefit
plans that are sponsored by the Distributor and its affiliates;
(8) investment advisers and financial planners who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services;
(9) clients of investment advisers and financial planners referred to in
item (8) who place trades for their own accounts if the accounts are linked
to the master account of the investment adviser or financial planner on the
books and records of a broker, agent, investment adviser or financial
institution;
(10) employee-sponsored benefit plans in connection with purchases of
shares of the Series A Portfolio made as a result of participant-directed
exchanges between options in such a plan;
(11) "wrap accounts" for the benefit of clients of broker-dealers,
financial institutions or financial planners having sales or service
agreements with the Distributor or another broker-dealer or financial
institution with respect to sales of shares of the Series A Portfolio; and
(12) such other persons as are determined by the Board of Trustees (or
by the Distributor pursuant to guidelines established by the Board) to have
acquired shares under circumstances not involving any sales expense to the
Trust or the Distributor.
Shares are offered at net asset value to these persons and organizations due to
anticipated economies in sales effort and expense. No sales charges are imposed
on Portfolio shares
19
<PAGE>
purchased upon the reinvestment of dividends and distributions, or upon an
exchange of shares from other series of the Trust except as otherwise noted in
"Shareholder Services-Exchange Privilege" below.
AGGREGATION. Sales charge discounts on purchases of shares of the Series A
Portfolio are available for certain aggregated investments. Investments which
may be aggregated include those by you, your spouse and your children under the
age of 21, if all parties are purchasing shares for their own accounts, which
may include purchases through employee benefit plans such as an IRA,
individual-type 403(b) plan or single-participant Keogh-type plan or by a
business solely controlled by these individuals (for example, the individuals
own the entire business) or by a trust (or other fiduciary arrangement) solely
for the benefit of these individuals. Individual purchases by trustees or other
fiduciaries may also be aggregated if the investments are (1) for a single trust
estate or fiduciary account, including an employee benefit plan other than those
described above, or (2) made for two or more employee benefit plans of a single
employer or of affiliated employers as defined in the Investment Company Act,
again excluding employee benefit plans described above, or (3) for a common
trust fund or other pooled account not specifically formed for the purpose of
accumulating Portfolio shares. Purchases made for nominee or street name
accounts (securities held in the name of a dealer or another nominee such as a
bank trust department instead of the customer) may not be aggregated with those
made for other accounts and may not be aggregated with other nominee or street
name accounts unless otherwise qualified as described above.
CONCURRENT PURCHASES. To qualify for a reduced sales charge, you may combine
concurrent purchases of shares of two or more Portfolio A series of the Trust.
For example, if you concurrently invest $25,000 in the Series A Portfolio and
$25,000 in another Portfolio A series of the Trust, the sales charge would be
reduced to reflect a $50,000 purchase.
RIGHT OF ACCUMULATION. The sales charge for your investment may also be reduced
by taking into account your existing holdings in all Portfolio A series of the
Trust. See the account application for further details.
LETTER OF INTENT. You may reduce sales charges on all investments by meeting the
terms of a letter of intent, a non-binding commitment to invest a certain amount
within a 13-month period. Your existing holdings in the Portfolio A series of
the Trust may also be combined with the investment commitment set forth in the
letter of intent to further reduce your sales charge. Up to 5% of the letter
amount will be held in escrow to cover additional sales charges which may be due
if your total investments over the letter period are not sufficient to qualify
for a sales charge reduction. See the account application for further details.
SERIES B PORTFOLIO
You may purchase shares of the Series B Portfolio without an initial sales
charge. However, you will bear your proportionate share of payments pursuant to
the Distribution and Shareholder Service Plans, as described above, which
affects the net asset value of your shares in the Series B Portfolio. In
addition, a contingent deferred sales charge applies to redemptions of shares of
the Series B Portfolio made within six years from date of their purchase. No
such charge is imposed if the shares redeemed have been acquired through the
reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of purchase payments. The contingent deferred sales charge is paid to the
Distributor. The Distributor pays sales commissions of up to 4.00%
20
<PAGE>
of the purchase price to participating broker-dealers and others at the end of
the month during which purchases of shares of the Series B Portfolio are made by
their customers. See "Redeeming Shares--Contingent Deferred Sales Charge or
Redemption of Portfolio B Shares"
Portfolio B shares may be exchanged for Portfolio A shares seven years after
purchase. Exchanges will be effected at relative net asset value without the
imposition of any additional sales charge, and will be treated as a redemption
and purchase for tax purposes. Since annual distribution-related fees are lower
for Portfolio A shares than Portfolio B shares, the per share net asset value of
the Portfolio A shares may be higher than that of the Portfolio B shares at the
time of conversion. Thus, although the aggregate dollar value will be the same,
you may receive fewer Portfolio A shares than Portfolio B shares converted.
For Portfolio B shares previously exchanged for shares of the Trust's Money
Market Portfolio, the time period during which such shares were held in the
Money Market Portfolio will be excluded in calculating the applicable holding
period. For example, Portfolio B shares held in the Trust's Money Market
Portfolio for one year will not be exchangeable for Portfolio A shares until
eight years from purchase. Portfolio B shares acquired through exchange may be
exchanged for Portfolio A shares after expiration of the exchange period
applicable to the original purchase of such shares.
The Trust currently intends to establish, prior to 2002, an additional class of
the Series B Portfolio with the same distribution and shareholder service fees
as the Series A Portfolio, and to provide for the automatic conversion of the
shares of the current class of Series B Portfolio into the new class seven years
after purchase without any sales charge, if in the opinion of counsel such
conversion would not constitute a taxable event for U.S. income tax purposes. No
assurance exists that the Trust will be able to establish such a class of the
Series B Portfolio in a manner that will provide such benefit.
SERIES C PORTFOLIOS
You may purchase shares of any Series C Portfolio without an initial sales
charge. However, you will bear your proportionate share of payments pursuant to
the Distribution and Shareholder Service Plans, as described above, which
affects the net asset value of your shares in the Series C Portfolios. In
addition, a contingent deferred sales charge of 1.00% applies to redemptions of
shares of a Series C Portfolio made within one year from date of their purchase.
Shares of the Series C Portfolios may not be exchanged for shares of the Series
A Portfolios, which may affect their performance for long-term investors. The
Distributor pays sales commissions of up to 1.00% of the purchase price to
participating broker-dealers and others at the end of the month during which
purchases of shares of the Series C Portfolios are made by their customers.
OTHER PORTFOLIOS
Currently, the Trust offers nine Series A Portfolios, nine Series B Portfolios,
nine Series C Portfolios and a Money Market Portfolio. Three global Series A, B
and C Portfolios are offered pursuant to this Prospectus. Five domestic Series
A, B and C Portfolios, three other Global Series A, B and C Portfolios, and the
Money Market Portfolio, are covered by separate prospectuses which can be
obtained by calling (800) 551-8045. The Distributor also offers shares of other
portfolios of the Trust which invest in the same Funds of the Master Trust as
the Series A, B and C Portfolios. These other portfolios have different sales
charges and other
21
<PAGE>
expenses than the Series A, B and C Portfolios, which may affect their
performance. Information about these other portfolios can be obtained from your
dealer or by calling (800) 551-8045.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN. You may make regular monthly or quarterly investments
in each Portfolio through automatic withdrawals of specified amounts from your
bank account once an automatic investment plan is established. See the account
application for further details about this service or call the Transfer Agent at
(800) 551-8043.
AUTOMATIC REINVESTMENT. Dividends and capital gain distributions are reinvested
in additional shares at no sales charge unless you indicate otherwise on the
account application. You may elect to have dividends or capital gain
distributions paid in cash.
CROSS-REINVESTMENT. You may cross-reinvest dividends or dividends and capital
gain distributions paid by one Portfolio into shares of another Portfolio within
the same series (A, B or C), subject to conditions outlined in the Statement of
Additional Information. Generally, to use this service the value of your account
in the Portfolio which paid the dividend or capital gain distribution must equal
at least $5,000.
EXCHANGE PRIVILEGE. You may exchange shares of either Portfolio into shares of
other Portfolios within the same series (A, B or C) by writing to the Transfer
Agent, State Street Bank and Trust Company, Attention: Nicholas-Applegate Mutual
Funds, P.O. Box 8326, Boston, Massachusetts 02266-8326. Please specify the name
of the applicable Portfolio, the number of shares or dollar amount to be
exchanged and your name and account number. You may also exchange shares by
contacting your dealer or - if you have authorized telephone exchanges on the
account application - by telephoning the Transfer Agent at (800) 551-8043 or by
sending the Transfer Agent a facsimile at (617) 774-2651, between the hours of
8:00 A.M. and 4:00 P.M. (Eastern time) on a day when the New York Stock Exchange
is open for normal trading (see "Telephone Privilege" below).
The Trust's exchange privilege is not intended to afford shareholders a way to
speculate on short-term market movements. Accordingly, the Trust reserves the
right to limit the number of exchanges a shareholder may make in any year, to
avoid excessive Portfolio expenses.
Before effecting an exchange, you should obtain the currently effective
prospectus of the series into which the exchange is to be made. Exchange
purchases are subject to the minimum investment requirements of the Portfolio
purchased. No sales charge applies. An exchange will be treated as a redemption
and purchase for tax purposes. If certificates are held by you, the
certificates, signed in the name(s) shown on the face of the certificates, must
be returned in order for the shares to be exchanged.
TELEPHONE PRIVILEGE. You may exchange or redeem shares by telephone if you have
elected the telephone privilege on the account application. You should realize
that by electing the telephone privilege you may be giving up a measure of
security that you may have if you were to request an exchange or redemption of
shares in writing. Furthermore, in periods of severe market or economic
conditions, telephone exchanges or redemptions may be difficult to implement, in
which case you should mail or send by overnight delivery a written exchange or
redemption request to the Transfer Agent. Overnight deliveries should be sent to
the Transfer Agent, Attention: Nicholas-Applegate Mutual Funds, 2 Heritage
Drive, 7th Floor, North
22
<PAGE>
Quincy, Massachusetts 02171. All exchanges will be made on the basis of the
relative net asset values of the two Portfolios next determined after a
completed request is received. Requests for telephone exchanges or redemptions
received before 4:00 P.M. (Eastern time) on a day when the New York Stock
Exchange is open for normal trading will be processed as of the close of trading
on that day. Otherwise processing will occur on the next business day.
The Trust will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures employed by the Trust include requiring personal identification by
account number and social security number, tape recording of telephone
instructions, and providing written confirmation of transactions. The Trust
reserves the right to refuse a telephone exchange or redemption request if it
believes, for example, that the person making the request is neither the record
owner of the shares being exchanged or redeemed nor otherwise authorized by the
shareholder to request the exchange or redemption. Shareholders will be promptly
notified of any refused request for a telephone exchange or redemption. No
Portfolio or its agents will be liable for any loss, liability or cost which
results from acting upon instructions of a person reasonably believed to be a
shareholder with respect to the telephone privilege.
AUTOMATIC EXCHANGES. You may automatically exchange shares (in increments of $50
or more) among any of the Portfolios within the same series (A, B or C) on a
monthly or quarterly basis. You must either meet the minimum initial investment
requirement for the receiving Portfolio or the originating Portfolio's balance
must be at least $5,000 and the receiving Portfolio's minimum must be met within
one year.
AUTOMATIC WITHDRAWALS. You may make automatic withdrawals from a Portfolio of
$50 or more on a monthly or quarterly basis if you have an account of $5,000 or
more in the Portfolio. Withdrawal proceeds will normally be received prior to
the end of the month or quarter. See the account application for further
information.
ACCOUNT STATEMENTS. Your account is opened in accordance with your registration
instructions. Transactions in the account, such as additional investments and
dividend reinvestments, will be reflected on regular confirmation statements
from the Transfer Agent (for qualified retirement plans, such statements will be
provided by the plan sponsor or administrator).
REPORTS TO SHAREHOLDERS. Each Portfolio will send its shareholders annual and
semi-annual reports. The financial statements appearing in annual reports will
be audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Portfolios may provide one annual and semi-annual report
and annual prospectus per household. In addition, quarterly unaudited financial
data are available from the Portfolios upon request.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be addressed to the Trust,
c/o State Street Bank and Trust Company, Attention: Nicholas-Applegate Mutual
Funds, P.O. Box 8326, Boston, Massachusetts 02266-8326. Telephone inquiries can
be made by calling (800) 551-8043 or, from outside the U.S., (617) 774-5000
(collect).
The services referred to above are available only in states where the Portfolio
to be purchased may be legally offered and may be terminated or modified at any
time upon 60 days' written notice to shareholders. Shareholders seeking to add
to, change or cancel their selection of available services should contact the
Transfer Agent at the address and telephone number provided above.
23
<PAGE>
- --------------------------------------------------------------------------------
REDEEMING SHARES
HOW TO REDEEM SHARES. You may redeem shares of any Portfolio by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention:
Nicholas-Applegate Mutual Funds, P.O. Box 8326, Boston, Massachusetts
02266-8326. Please specify the name of the Portfolio, the number of shares or
dollar amount to be sold and your name and account number. You should also
enclose any certificated shares you wish to redeem. Shares may also be redeemed
by contacting your dealer, who may charge you for this service. Shares held in
street name must be redeemed through your dealer.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. If the proceeds of the redemption exceed
$50,000, are to be paid to a person other than the record owner, are to be sent
to an address other than the address on the Transfer Agent's records, or are to
be paid to a corporation, partnership, trust or fiduciary, the signature(s) on
the redemption request and on the certificates, if any, or stock powers may be
required to be guaranteed by an "eligible guarantor", which includes a bank or
savings and loan association that is federally insured or a member firm of a
national securities exchange.
Except as noted in the discussions of contingent deferred sales charges below,
the price you receive for the Portfolio shares redeemed is at the next
determined net asset value for the shares after a completed redemption request
is received by the Transfer Agent.
TELEPHONE REDEMPTIONS. You may establish telephone redemption privileges if you
have checked the appropriate box and supplied the necessary information on the
account application. You may then redeem shares of a Portfolio by telephoning
the Transfer Agent at (800) 551-8043 or, from outside the U.S., (617) 774-5000,
or by sending the Transfer Agent a facsimile at (617) 774-2651, between the
hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day when the New York Stock
Exchange is open for normal trading. Redemptions by telephone must be at least
$1,000. Redemption requests received by the Transfer Agent before 4:00 P.M.
(Eastern time) on a day when the New York Stock Exchange is open for normal
trading will be processed that day. Otherwise processing will occur on the next
business day. See "Shareholder Services-Telephone Privilege" above.
REDEMPTION PAYMENTS. Redemption proceeds are generally paid to you by check.
However, at your request, redemption proceeds of $5,000 or more may be wired by
the Transfer Agent to your bank account. Requests for redemption by wire should
include the name, location and ABA or bank routing number (if known) of your
designated bank and your account number. You will be charged a $10 fee for wire
transmissions of redemption proceeds, which will be deducted from such proceeds.
Payment will be made within three days after receipt by the Transfer Agent of
the written or telephonic redemption request and any share certificates, except
as indicated below. Such payment may be postponed or the right of redemption
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on such Exchange is restricted,
when an emergency exists as a result of which disposal by a Portfolio of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Portfolio fairly to determine the value of its net assets,
or during any other period when the Securities and Exchange Commission, by
order, so permits. Payment for redemption of recently purchased shares will be
delayed until the Transfer Agent has been advised that the purchase check has
been honored, up to 15 calendar days from the time of receipt of the purchase
check by the Transfer Agent. Such delay may be avoided by purchasing shares by
wire or by certified or official bank checks.
24
<PAGE>
CONTINGENT DEFERRED SALES CHARGE ON REDEMPTIONS OF PORTFOLIO A SHARES. A
contingent deferred sales charge of 1.00% applies to certain redemptions of
shares of the Series A Portfolio less than one year after investments of $1
million or more. The charge is 1.00% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. The charge will be deducted from the redemption
proceeds and will reduce the amount paid to you. The charge is waived for:
(1) exchanges for other Portfolio A shares (except if shares acquired by
exchange are then redeemed within 12 months of the initial purchase);
(2) redemptions in connection with mergers, acquisitions and exchange
offers involving the Series A Portfolio;
(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;
(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or from IRAs due to death, disability or attainment of
age 59 1/2;
(5) tax-free returns of excess contributions to IRAs;
(6) any partial or complete redemptions following the death or
disability of a shareholder, provided the redemption is made within one year
of death or initial determination of disability;
(7) redemptions through certain automatic withdrawals; and
(8) redemptions by qualified retirement and employee benefit plans with
50 or more eligible employees.
There is no contingent deferred sales charge on redemptions of shares of the
Money Market Portfolio unless such shares were acquired in an exchange for
shares of the Series A Portfolio and the redemption is made less than one year
after the initial $1 million purchase of such shares.
CONTINGENT DEFERRED SALES CHARGE ON REDEMPTION OF PORTFOLIO B SHARES. A
contingent deferred sales charge ("CDSC") applies to redemptions of shares of
the Series B Portfolio within six years of investment. The charge declines from
5.00% to zero over a six-year period. The CDSC will be deducted from the
redemption proceeds and will reduce the amount paid to you. A CDSC will be
applied to the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Portfolio B shares until the time the
shares are redeemed. Solely for purposes of determining the number of years from
the time of any payment for the purchase of shares, all payments during a month
will be aggregated and deemed to have been made on the last day of the month
preceding the purchase and the time shares were held in the Trust's Money Market
Portfolio will be excluded.
25
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of shares of the Series B Portfolio:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEARS SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ----------------------------------------------------------------------- ----------------------------
<S> <C>
First.................................................................. 5.00%
Second................................................................. 4.00%
Third.................................................................. 3.00%
Fourth................................................................. 3.00%
Fifth.................................................................. 2.00%
Sixth.................................................................. 1.00%
Seventh and thereafter................................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption of shares of the
Series B Portfolio, the calculation will be made in a manner that results in the
lowest possible rate. It will be assumed that the redemption is made first of
amounts representing shares of the Series B Portfolio acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of the Series B Portfolio above the
total amount of payments for the purchase of the shares of the Series during the
preceding six years; then of amounts representing the cost of shares of the
Series B Portfolio held beyond the applicable CDSC period; and finally, of
amounts representing the cost of shares of the Series B Portfolio held for the
longest period of time.
For example, assume you purchased 100 shares of International Core Growth
Portfolio B at $10 per share for a cost of $1,000. Subsequently, you acquired 5
additional shares of International Core Growth Portfolio B through dividend
reinvestment. During the second year after the purchase, you decided to redeem
$500 of your investment. Assuming at the time of the redemption the net asset
value had appreciated to $12 per share, the value of your International Core
Growth Portfolio B shares would be $1,260 (105 shares at $12 per share). The
CDSC would not be applied to the value of the reinvested dividend shares and the
amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged a CDSC at a rate of 4%
(the applicable rate in the second year after purchase) for a total CDSC of
$9.60.
For Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
The CDSC is waived for redemptions of shares of the Series B Portfolio by: (1)
current or retired directors, trustees, partners, officers and employees of the
Trust, the Master Trust, the Distributor, the Investment Adviser and its general
partner, certain family members of the above persons, and trusts or plans
primarily for such persons; (2) former limited partners and participants of
certain investment partnerships and pooled trusts previously managed by the
Investment Adviser; and (3) participants in certain pension, profit-sharing or
employee benefit plans that are sponsored by the Distributor and its affiliates.
The CDSC is also waived for:
(1) exchanges for other Portfolio B shares (however, the shares acquired
by exchange will continue to be subject to a contingent deferred sales
charge on the same basis as the shares exchanged);
(2) redemptions in connection with mergers, acquisitions and exchange
offers involving the Series B Portfolio;
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(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;
(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or IRAs due to death, disability or attainment of age
59 1/2;
(5) tax-free returns of excess contributions to IRAs; and
(6) any partial or complete redemptions following the death or
disability of a shareholder, provided the redemption is made within one year
of death or initial determination of disability.
There is no CDSC on redemptions of shares of the Money Market Portfolio unless
such shares were acquired in an exchange for shares of the Series B Portfolio
and the redemption is made within six years after the initial purchase.
CONTINGENT DEFERRED SALES CHARGE ON REDEMPTION OF PORTFOLIO C SHARES. A
contingent deferred sales charge of 1.00% applies to redemptions of shares of a
Series C Portfolio made less than one year after the date of their purchase. No
such charge is imposed if the shares redeemed have been acquired through the
reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of purchase payments. Such charge is also waived for redemptions of shares
purchased at net asset value by qualified retirement plans through entities
which have entered into alliance agreements with the Distributor. In determining
whether a contingent deferred sales charge is payable, the same procedures are
followed as described above with respect to redemptions of shares of Series B
Portfolios. The contingent deferred sales charge is paid to the Distributor. The
contingent deferred sales charge is waived for redemptions of shares of a Series
C Portfolio, on the same basis as for redemptions of shares of a Series B
Portfolio. See "Contingent Deferred Sales Charge on Redemption of Portfolio B
Shares."
REINSTATEMENT PRIVILEGE. You may reinvest proceeds from a redemption of
Portfolio shares, or proceeds of a dividend or capital gain distribution paid to
you with respect to Portfolio shares, without a sales charge in either of the
Portfolios. Upon such a reinvestment, the Distributor will credit to your
account any contingent deferred sales charge imposed on the redeemed shares.
Send a written request and a check to the Transfer Agent within 90 days after
the date of the redemption, dividend or distribution. Reinvestment will be at
the next calculated net asset value after receipt. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege, but a loss may be nullified if you reinvest in the same series within
30 days.
INVOLUNTARY REDEMPTION. In order to reduce expenses of a Portfolio, the Trust
may redeem all of the shares of any shareholder whose account has a net asset
value of less than $500 due to redemptions other than a shareholder which is an
IRA or other tax-deferred retirement plan. The Trust will give such shareholders
60 days' prior written notice in which to purchase sufficient additional shares
to avoid such redemption. No contingent deferred sales charge is imposed on such
redemptions.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust intends to qualify each Portfolio as a regulated investment company
under the Internal Revenue Code. Accordingly, the Portfolios will not be subject
to federal income taxes on their net investment income and capital gains, if
any, that they distribute to their
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shareholders. All dividends out of net investment income, together with
distributions of short-term capital gains, will be taxable as ordinary income to
the shareholders whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholders, whether
or not reinvested and regardless of the length of time a shareholder has owned
his shares.
The Portfolios declare and pay annual dividends of net investment income. Each
Portfolio makes distributions at least annually of its net capital gains, if
any. In determining amounts of capital gains to be distributed by a Portfolio,
any capital loss carryovers from prior years will be offset against its capital
gains.
Under U.S. Treasury Regulations, the Portfolios are required to withhold and
remit to the U.S. Treasury 31% of the dividends, capital gain income and
redemption proceeds on the accounts of those shareholders who fail to furnish
their correct tax identification numbers on IRS Form W-9 (or IRS Form W-8, in
the case of certain foreign shareholders) with the required certifications
regarding the shareholder's status under the federal income tax law or who are
subject to backup withholding for failure to include payments of interest or
dividends on their returns. Notwithstanding the foregoing, dividends of net
income and short-term capital gains to a foreign shareholder will generally be
subject to U.S. withholding at the rate of 30% (or lower treaty rate).
The Trust may elect to "pass through" to a Portfolio's shareholders the amount
of foreign income taxes paid by the Portfolio. The Trust will make such an
election only if it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of the Portfolio will be required to
include in their gross income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
The Master Trust's Fund is not required to pay federal income taxes on its net
investment income and capital gains, as it is treated as a partnership for tax
purposes. Any interest, dividends and gains or losses of the Fund will be deemed
to have been "passed through" to the Portfolios and other investors in the Fund,
regardless of whether such interest, dividends or gains have been distributed by
the Fund or losses have been realized by the Portfolios and other investors.
You should consult your own tax adviser regarding specific questions as to
federal, state or local taxes. See "Taxes" in the Statement of Additional
Information.
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GENERAL INFORMATION
PERFORMANCE INFORMATION. From time to time the Trust may advertise each
Portfolio's total return and, if applicable, its yield. These figures are based
on historical earnings and are not intended to indicate future performance.
Total return shows how much an investment in the Portfolio would have increased
(or decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Portfolio) assuming that all distributions and dividends
by the Trust to shareholders of the Portfolio were reinvested on the
reinvestment dates during the period. Total return takes into account any
applicable sales charges, but does not take into account any federal or state
income taxes which may be payable by the investor. The Trust also may include
comparative performance information in advertising or marketing Portfolio
shares.
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Such performance information may include data from Lipper Analytical Services,
Inc., Morningstar Inc., other industry publications, business periodicals,
rating services and market indices. See "Performance Information" in the
Statement of Additional Information.
Further information about the performance of the Portfolios will be contained in
the Trust's Annual Reports to Shareholders, which may be obtained without charge
by calling (800) 551-8043.
DESCRIPTION OF SHARES. The Portfolios are series of Nicholas-Applegate Mutual
Funds, a diversified, open-end management investment company. The Trust was
organized in December 1992 as a Delaware business trust. The Trust is authorized
to issue an unlimited number of shares of each Portfolio. Shares of a Portfolio,
when issued, are fully paid, nonassessable, fully transferable and redeemable at
the option of the holder. Shares of a Portfolio are also redeemable at the
option of the Trust under certain circumstances. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of a Portfolio is entitled to its portion of all of the Portfolio's assets after
all debts and expenses of the Portfolio have been paid. Pursuant to the Trust's
Declaration of Trust, the Board of Trustees of the Trust may authorize the
creation of additional series, and classes within series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.
Shareholders of the Portfolios are entitled to one vote for each full share held
and fractional votes for fractional shares held, and will vote by series or
class except as otherwise required by law or when the Board of Trustees of the
Trust determines that a matter to be voted upon affects only the interests of
shareholders of a particular series or class. Shares of the Trust do not have
cumulative voting rights for the election of Trustees. The Trust does not intend
to hold annual meetings of its shareholders unless otherwise required by law.
The Trust will not be required to hold meetings of shareholders unless the
election of Trustees or any other matter is required to be acted on by
shareholders under the Investment Company Act. Shareholders have certain rights,
including the right to call a meeting upon the request of 10% of the outstanding
shares of the Trust, for the purpose of voting on the removal of one or more
Trustees.
MASTER TRUST. The Funds are series of Nicholas-Applegate Investment Trust, an
open-end management investment company organized as a Delaware business trust in
December 1992. The trustees and officers of the Master Trust are described in
the Statement of Additional Information. Whenever a Portfolio is requested to
vote on matters pertaining to the corresponding Fund or the Master Trust in its
capacity as a shareholder of such Fund, the Trust will hold a meeting of its
shareholders and will cast its vote as instructed by such shareholders or, in
the case of a matter pertaining exclusively to the corresponding Fund, as
instructed particularly by shareholders of the Portfolio and other series of the
Trust which invest in the Fund. The Trust will vote shares for which it has
received no voting instructions in the same proportion as the shares for which
it does receive voting instructions.
ADDITIONAL INFORMATION. This Prospectus, including the Statement of Additional
Information which has been incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by the Trust
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Master Trust has also filed a Registration Statement with the
Commission. Copies of the Trust's and Master Trust's Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
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APPENDIX
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INVESTMENT POLICIES, STRATEGIES AND RISKS
The investment policies and strategies of the Portfolios (as implemented through
their investment in the Fund) encompass the following securities, techniques and
risk considerations.
EQUITY SECURITIES. The Fund will invest primarily in equity securities,
including common and preferred stocks, convertible securities and warrants.
Common stocks, the most familiar type of equity securities, represent an equity
(ownership) interest in a corporation. Preferred stock, unlike common stock,
offers a stated dividend rate payable from the issuer's earnings and also
generally has a preference over common stock in the event of liquidation of the
issuer. See "Convertible Securities and Warrants" for a description of
convertible securities and warrants. The Fund may invest in equity securities of
growth companies, cyclical companies, companies with smaller market
capitalizations or companies believed to be undergoing a basic change in
operations or markets which could result in a significant improvement in
earnings. Although equity securities have a history of long-term growth in
value, their prices fluctuate based on changes in the issuer's financial
condition and prospects and on overall market and economic conditions.
SHORT-TERM INVESTMENTS. The Fund may retain cash (U.S. dollars, foreign
currencies or multinational currency units) and make short-term investments to
maintain liquidity for redemptions or during periods when, in the opinion of the
Investment Adviser, attractive investments are temporarily unavailable. Under
normal circumstances, no more than 10% of the Fund's total assets will be
retained in cash and short-term investments. However, the Fund may retain cash
and make short-term investments without restriction for temporary defensive
purposes, such as when the securities markets or economic conditions are
expected to enter a period of decline. Short-term investments in which the Fund
may invest include U.S. Treasury bills or other U.S. Government or Government
agency or instrumentality obligations; certificates of deposit; bankers'
acceptances; time deposits; high quality commercial paper and other short-term
high grade corporate obligations; shares of money market mutual funds; or
repurchase agreements with respect to such securities. These instruments are
described below. The Fund will only invest in short-term investments which, in
the opinion of the Investment Adviser present minimal credit and interest rate
risk.
GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S. Government
or its agencies and instrumentalities in which the Fund may invest include U.S.
Treasury securities, which differ only in their interest rates, maturities and
times of issuance. Treasury bills have initial maturities of one year or less;
Treasury notes have initial maturities of one to ten years; and Treasury bonds
generally have initial maturities of more than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow money from the Treasury; others, such as those
issued by the Federal National Mortgage Association, by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to U.S.
Government-sponsored agencies and instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund will
invest
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in securities issued or guaranteed by U.S. Government agencies and
instrumentalities only when the Investment Adviser is satisfied that the credit
risk with respect to the issuer is minimal.
The Fund may invest in sovereign debt securities of foreign governments and
their agencies and instrumentalities. Investments in such securities involve
special risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to pay principal or
interest when due in accordance with the terms of the debt. Periods of economic
uncertainty may result in the volatility of market prices of sovereign debt, and
in turn the Fund's net asset value, to a greater extent than the volatility
inherent in domestic fixed income securities.
CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANKERS' ACCEPTANCES. The Fund may
invest in certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks, foreign banks, foreign branches of domestic banks, domestic
and foreign branches of foreign banks, and domestic savings and loan
associations, all of which at the date of investment have capital, surplus and
undivided profits as of the date of their most recent published financial
statements in excess of $100 million, or less than $100 million if the principal
amount of such bank obligations is insured by the Federal Deposit Insurance
Corporation. Certificates of deposit are certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer; these instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity.
COMMERCIAL PAPER. The Fund may invest in commercial paper of domestic and
foreign entities which is rated (or guaranteed by a corporation the commercial
paper of which is rated) in the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"), including
"P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P, or, if rated by only one
NRSRO, in such NRSRO's two highest grades, or, if not rated, is issued by an
entity which the Investment Adviser, acting pursuant to guidelines established
by the Master Trust's Board of Trustees, has determined to be of minimal credit
risk and comparable quality. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
VARIABLE RATE DEMAND SECURITIES. The Fund may purchase floating and variable
rate demand notes and bonds, which are obligations ordinarily having stated
maturities in excess of one year, but which permit the holder to demand payment
of principal at any time, or at specified intervals not exceeding one year, in
each case upon not more than 30 days' notice. Variable rate demand notes include
master demand notes, which are obligations that permit the Fund to invest
fluctuating amounts, which may change daily without penalty. The interest rates
on these notes are adjusted at designated intervals or whenever there are
changes in the market rates of interest on which the interest rates are based.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Such obligations frequently are not rated by credit rating agencies and
the Fund may invest in obligations which are not so rated
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only if the Investment Adviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the Fund
may invest. The Investment Adviser will monitor the creditworthiness of the
issuers of such obligations and their earning power and cash flow, and will also
consider situations in which all holders of such notes would redeem at the same
time. Investment by the Fund in floating or variable rate demand obligations as
to which it cannot exercise the demand feature on not more than seven days'
notice will be subject to the Fund's limit on illiquid securities of 15% of net
assets if there is no secondary market available for these obligations.
CORPORATE DEBT SECURITIES. The non-convertible corporate debt securities in
which the Fund may invest include obligations of varying maturities (such as
debentures, bonds and notes) over a cross-section of industries. The value of a
debt security changes as interest rates fluctuate, with longer-term securities
fluctuating more widely in response to changes in interest rates than those of
shorter-term securities. A decline in interest rates usually produces an
increase in the value of debt securities, while an increase in interest rates
generally reduces their value. The corporate debt securities purchased by the
Fund are of investment grade. For short-term purposes, the Fund may also invest
in corporate obligations issued by domestic and foreign issuers which mature in
one year or less and which are rated "Aa" or higher by Moody's, "AA" or higher
by S&P, rated in the two highest rating categories by any other NRSRO, or which
are unrated but determined by the Investment Adviser to be of minimal credit
risk and comparable quality.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in debt and equity
securities which may be exchanged for, converted into, or exercised to acquire a
predetermined number of shares of the issuer's common stock at the option of the
holder during a specified time period (such as convertible preferred stocks,
convertible debentures and warrants). Convertible securities generally pay
interest or dividends and provide for participation in the appreciation of the
underlying common stock but at a lower level of risk because the yield is higher
and the security is senior to common stock. Convertible debt securities
purchased by the Fund, which are acquired in substantial part for their equity
characteristics, are not subject to minimum rating requirements.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value.
Like debt securities, the market value of convertible securities tends to vary
inversely with the level of interest rates. The value of the security declines
as interest rates increase and increases as interest rates decline. Although
under normal market conditions longer term debt securities have greater yields
than do shorter term debt securities of similar quality, they are subject to
greater price fluctuations. Fluctuations in the value of the Fund's investments
will be reflected in its and the Portfolios' net asset values per share. A
convertible security may be subject to redemption at the option of the issuer at
a price established in the instrument governing the
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convertible security. If a convertible security held by the Fund is called for
redemption, the Fund will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
Warrants give the holder the right to purchase at any time during a specified
period a predetermined number of shares of common stock at a fixed price but do
not pay a fixed dividend. Investments in warrants involve certain risks,
including the possible lack of a liquid market for resale, potential price
fluctuations as a result of speculation or other factors, and the failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised, in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein. As a matter of operating policy, the Fund will
not invest more than 5% of its net assets in
warrants.
SYNTHETIC CONVERTIBLE SECURITIES. The Fund may invest in "synthetic" convertible
securities, which are derivative positions composed of two or more different
securities whose investment characteristics, taken together, resemble those of
convertible securities. For example, the Fund may purchase a non-convertible
debt security and a warrant, which enables the Fund to have a convertible-like
position with respect to a company, group of companies or stock index. Synthetic
convertible securities are typically offered by financial institutions and
investment banks in private placement transactions. Upon conversion, the Fund
generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike a
true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market value
of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. The Fund only invests in synthetic convertibles with
respect to companies whose corporate debt securities are rated investment grade
by Moody's or S&P, or an equivalent rating by any other NRSRO, and will not
invest more than 15% of its net assets in such synthetic securities and other
illiquid securities. See "Illiquid Securities" below.
EURODOLLAR CONVERTIBLE SECURITIES. The Fund may invest in Eurodollar convertible
securities, which are fixed income securities of a U.S. issuer or a foreign
issuer that are issued outside the United States and are convertible into or
exchangeable for equity securities of the same or a different issuer. Interest
and dividends on Eurodollar securities are payable in U.S. dollars outside of
the United States. The Fund may invest without limitation in Eurodollar
convertible securities that are convertible into or exchangeable for foreign
equity securities listed, or represented by ADRs listed, on the New York Stock
Exchange or the American Stock Exchange or convertible into or exchangeable for
publicly traded common stock of U.S. companies. The Fund may also invest up to
15% of its total assets invested in convertible securities, taken at market
value, in Eurodollar convertible securities that are convertible into or
exchangeable for foreign equity securities which are not listed, or represented
by ADRs listed, on such exchanges.
COUNTRY FUNDS. Closed-end and open-end country funds in which the Fund may
invest are registered investment companies which hold portfolio securities of
issuers operated or located in a single country or geographical region. The
extent to which the Fund may invest in closed-end and open-end country funds is
limited by the Investment Company Act. Accordingly, as a fundamental policy, the
Fund will not own more than 3% of the outstanding voting stock of any closed-end
or open-end investment company, will not invest more than
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10% of its total assets in securities issued by closed-end and open-end
investment companies nor, together with other investment companies managed by
the Investment Adviser, will own more than 10% of any closed-end or open-end
investment company. Assets of the Fund invested in closed-end and open-end
country funds are subject to advisory and other fees imposed by the closed-end
and open-end country funds, as well as to fees imposed by the Fund.
DEPOSITORY RECEIPTS. The Fund may invest in American Depository Receipts
("ADRs"), which are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs,
in registered form, are designed for use in U.S. securities markets. The Fund
may also invest in European and Global Depository Receipts ("EDRs" and "GDRs"),
which, in bearer form, are designed for use in European and other foreign
securities markets, and in other instruments representing securities of foreign
companies. Such depository receipts may be sponsored by the foreign issuer or
may be unsponsored. Unsponsored depository receipts are organized independently
and without the cooperation of the foreign issuer of the underlying securities;
as a result, available information regarding the issuer may not be as current as
for sponsored depository receipts, and the prices of unsponsored depository
receipts may be more volatile than if they were sponsored by the issuers of the
underlying securities.
FOREIGN INVESTMENT CONSIDERATIONS. There are special risks associated with the
Fund's investments in securities of foreign companies and governments, which add
to the usual risks inherent in domestic investments. Such special risks include
fluctuations in foreign exchange rates, political or economic instability in the
country of issue, and the possible imposition of exchange controls or other laws
or restrictions. In addition, securities prices in foreign markets are generally
subject to different economic, financial, political and social factors than are
the prices of securities in United States markets. With respect to some foreign
countries there may be the possibility of expropriation or confiscatory
taxation, limitations on liquidity of securities or political or economic
developments which could affect the foreign investments of the Fund. Moreover,
securities of foreign issuers generally will not be registered with the
Securities and Exchange Commission and such issuers generally will not be
subject to the Commission's reporting requirements. Accordingly, there is likely
to be less publicly available information concerning certain of the foreign
issuers of securities held by the Fund than is available concerning U.S.
companies. Foreign companies are also generally not subject to uniform
accounting, auditing and financial reporting standards or to practices and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign broker-dealers, financial
institutions and listed companies than exists in the United States. The Fund
will not invest in securities denominated in a foreign currency unless, at the
time of investment, such currency is considered by the Investment Adviser to be
fully exchangeable into United States dollars without significant legal
restriction. See "Investment Objectives, Policies and Risks--Foreign
Investments" in the Statement of Additional Information.
SPECIAL CONSIDERATIONS REGARDING EMERGING MARKETS INVESTMENTS. Investments by
the Fund in securities issued by the governments of emerging or developing
countries, and of companies within those countries, involves greater risks than
other foreign investments. Investments in emerging or developing markets involve
exposure to economic and legal structures that are generally less diverse and
mature (and in some cases the absence of developed legal structures governing
private and foreign investments and private property), and to political systems
which can be expected to have less stability, than those of more developed
countries. The risks of investment in such countries may include matters such as
relatively unstable governments,
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higher degrees of government involvement in the economy, the absence until
recently of capital market structures or market-oriented economies, economies
based on only a few industries, securities markets which trade only a small
number of securities, restrictions on foreign investment in stocks, and
significant foreign currency devaluations and fluctuations.
Emerging markets can be substantially more volatile than both U.S. and more
developed foreign markets. Such volatility may be exacerbated by illiquidity.
The average daily trading volume in all of the emerging markets combined is a
small fraction of the average daily volume of the U.S. market. Small trading
volumes may result in the Fund being forced to purchase securities at
substantially higher prices than the current market, or to sell securities at
much lower prices than the current market.
OVER-THE-COUNTER SECURITIES. Securities owned by the Fund may be traded in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of securities trading on a national
securities exchange. As a result, disposition by the Fund of portfolio
securities to meet redemptions by shareholders or otherwise may require the Fund
to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS. The Fund may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions in which the payment obligation and interest
rate are fixed at the time of the transaction but the settlement is delayed).
Delivery and payment for these securities typically occur 15 to 45 days after
the commitment to purchase. No interest accrues to the purchaser during the
period before delivery. There is a risk in these transactions that the value of
the securities at settlement may be more or less than the agreed upon price, or
that the party with which the Fund enters into such a transaction may not
perform its commitment. The Fund will normally enter into these transactions
with the intention of actually receiving or delivering the securities. The Fund
may sell the securities before the settlement date.
To the extent the Fund engages in any of these transactions it will do so for
the purpose of acquiring securities for its portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage. The Fund will segregate liquid assets such as cash, U.S. Government
securities and other liquid debt or equity securities in an amount sufficient to
meet their payment obligations with respect to these transactions. The Fund may
not purchase when-issued securities or enter into firm commitments if, as a
result, more than 15% of the Fund's net assets would be segregated to cover such
contracts.
SHORT SALES. The Investment Adviser believes that its growth equity management
approach, in addition to identifying equity securities the earnings and prices
of which it expects to grow at a rate above that of the S&P 500, also identifies
securities the prices of which can be expected to decline. Therefore, 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 have the right to acquire. A short sale that
is not made "against the box" is a transaction in which the Fund sells a
security it does not own in anticipation of a decline in market price. When the
Fund makes a short sale, the proceeds it receives are retained by the broker
until the Fund replaces the borrowed security. In order to deliver the security
to the buyer, the Fund must arrange through a broker to borrow the security and,
in so doing, the Fund becomes obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be.
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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 special risk
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share, and that of the Portfolios,
will tend to increase more when the securities it has sold short decrease in
value, and to decrease more when the securities it has sold short increase in
value, than would otherwise be the case if it had not engaged in such short
sales. Short sales theoretically involve unlimited loss potential, as the market
price of securities sold short may continuously increase, although the Fund may
mitigate such losses by replacing the securities sold short before the market
price has increased significantly. Under adverse market conditions the Fund
might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales. The value of securities of
any issuer in which the Fund maintains a short position which is "not against
the box" may not exceed the lesser of 2% of the value of the Fund's net assets
or 2% of the securities of such class of the issuer.
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. 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.
In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the Investment Company Act, unless the sale
is "against the box" and the securities sold are placed in a segregated account
(not with the broker), or unless the Fund's obligation to deliver the securities
sold short is "covered" by placing in a segregated account (not with the broker)
cash, U.S. Government securities or other liquid debt or equity securities in an
amount equal to the difference between the market value of the securities sold
short at the time of the short sale and any such collateral required to be
deposited with a broker in connection with the sale (not including the proceeds
from the short sale), which difference is adjusted daily for changes in the
value of the securities sold short. The total value of the cash, U.S. Government
securities or other liquid debt or equity securities deposited with the broker
and otherwise segregated may not at any time be less than the market value of
the securities sold short at the time of the short sale. The Fund will comply
with these requirements. In addition, as a matter of policy, the Master Trust's
Board of Trustees has determined that the Fund will not make short sales of
securities or maintain a short position if to do so could create liabilities or
require collateral deposits and segregation of assets aggregating more than 25%
of the Fund's total assets, taken at market value.
The Fund's ability to enter into short sales transactions is limited by the
requirements of the Internal Revenue Code with respect to the Portfolios'
qualification as regulated investment companies. See "Dividends, Distributions
and Taxes" in the Statement of Additional Information.
FOREIGN EXCHANGE CONTRACTS. Since the Fund may invest primarily in securities
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect the
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values of its portfolio securities and the unrealized appreciation or
depreciation of its investments. The rate of exchange between the U.S. dollar
and other currencies is determined by forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
The Fund may enter into derivative positions such as foreign exchange forward
contracts or currency futures or options contracts for the purchase or sale of
foreign currency to "lock in" the U.S. dollar price of the securities
denominated in a foreign currency or the U.S. dollar equivalent of interest and
dividends to be paid on such securities, or to hedge against the possibility
that the currency of a foreign country in which the Fund has investments may
suffer a decline against the U.S. dollar. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund may
purchase a particular currency or enter into a forward currency contract to
preserve the U.S. dollar price of securities it intends to or has contracted to
purchase. Alternatively, the Fund might sell a particular currency on either a
spot (cash) basis at the rate then prevailing in the currency exchange market or
on a forward basis by entering into a forward contract to purchase or sell
currency, to hedge against an anticipated decline in the U.S. dollar value of
securities it intends or has contracted to sell. This method of attempting to
hedge the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. The Fund is not obligated to engage in any such currency hedging
operations, and there can be no assurance as to the success of any hedging
operations which the Fund may implement. Although the strategy of engaging in
foreign currency transactions could reduce the risk of loss due to a decline in
the value of the hedged currency, it could also limit the potential gain from an
increase in the value of the currency. The Fund does not intend to maintain a
net exposure to such contracts where the fulfillment of the Fund's obligations
under such contracts would obligate the Fund to deliver an amount of foreign
currency in excess of the value of the Fund's portfolio securities or other
assets denominated in that currency.
OPTIONS. The Fund may purchase listed 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, for hedging purposes, subject to the
following restrictions: the aggregate premiums on call options purchased by the
Fund may not exceed 5% of the market value of net assets of the Fund as of the
date the call options are purchased, and the aggregate premiums on put options
may not exceed 5% of the market value of the net assets of the Fund as of the
date such options are purchased. In addition the Fund will not purchase or sell
options if, immediately thereafter, more than 25% of its net assets would be
hedged. A "put" gives a holder the right, in return for the premium paid, to
require the writer of the put to purchase from the holder a security at a
specified price. A "call" gives a holder the right, in return for the premium
paid, to require the writer of the call to sell a security to the holder at a
specified price. An option on a securities index (such as a stock index) gives
the holder the right, in return for the premium paid, to require the writer to
pay cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiplier.
Put and call options are derivative securities traded on United States and
foreign exchanges, including the American Stock Exchange, Chicago Board Options
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock
Exchange. Additionally, the Fund may purchase options not traded on a securities
exchange, which may bear a greater risk of
37
<PAGE>
nonperformance than options traded on a securities exchange. Options not traded
on an exchange are considered dealer options and generally lack the liquidity of
an exchange traded option. Accordingly, dealer options may be subject to the
Fund's restriction on investment in illiquid securities, as described below.
Dealer options may also involve the risk that the securities dealers
participating in such transactions will fail to meet their obligations under the
terms of the option.
The Fund may also write listed covered options on up to 25% of the value of its
net assets. Call options written by the Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise price; put options
written by the Fund give the holder the right to sell the underlying security to
the Fund. A call option is covered if the Fund owns the security underlying the
call or has an absolute and immediate right to acquire that security without
additional cash consideration upon conversion or exchange of securities
currently held by the Fund. A put option is covered if the Fund maintains liquid
assets such as cash, U.S. Government Securities, or other liquid high quality
debt or equity securities equal to the exercise price in a segregated amount
with its Custodian. If an option written by the Fund expires unexercised, the
Fund realizes a gain equal to the premium received at the time the option was
written. If an option purchased by the Fund expires unexercised, the Fund
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option written by the Fund
may be closed out by an offsetting purchase or sale of an option of the same
series. The Fund will realize a gain from a closing purchase transaction if the
cost of the closing transaction is less than the premium received from writing
the option; if it is more, the Fund will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium paid to
purchase the option, the Fund will realize a gain; if it is less, the Fund will
realize a loss.
FUTURES CONTRACTS. The Fund may purchase and sell stock index futures contracts
as a hedge against changes in market conditions. A stock index futures contract
is a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made.
The Fund may also purchase and sell financial futures contracts as a hedge
against changes in interest rates. Additionally, the Fund may purchase and sell
currency futures contracts to hedge against foreign currency fluctuations, and
the Fund may purchase and sell related options on futures contracts. A financial
or currency futures contract obligates the seller of the contract to deliver and
the purchaser of the contract to take delivery of the type of financial
instrument or currency called for in the contract at a specified future time
(the settlement date) for a specified price. Although the terms of a contract
call for actual delivery or acceptance of the financial instrument or currency,
the contracts will be closed out before the delivery date without delivery or
acceptance taking place. Futures options possess many of the same
characteristics as options on securities and indices. A futures option gives the
holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at any
time during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true. A
futures option may be closed out before exercise or expiration by an offsetting
purchase or sale of a futures option of the same series.
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<PAGE>
Financial, currency and stock index futures contracts are derivative instruments
traded on United States commodities and futures exchanges, including the Chicago
Mercantile Exchange, the New York Futures Exchange, the Kansas City Board of
Trade, the Chicago Board of Trade and the International Monetary Market, as well
as commodity and securities exchanges located outside the United States,
including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
The Fund will not engage in transactions in futures contracts for speculation,
but only as a hedge against the risk of unexpected changes in the values of
securities held or intended to be held by the Fund. As a general rule, the Fund
will not purchase or sell futures if, immediately thereafter, more than 25% of
its net assets would be hedged. In addition, the Fund may not purchase or sell
futures or related options if, immediately thereafter, the sum of the amount of
margin deposits on the Fund's existing futures positions and premiums paid for
such options would exceed 5% of the market value of the Fund's net assets. See
"Investment Objectives, Policies and Risks--Futures Contracts and Related
Options" in the Statement of Additional Information.
SPECIAL HEDGING CONSIDERATIONS. Special risks are associated with the use of
options and futures contracts as hedging techniques. There can be no guaranty of
a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. A lack of correlation could result in a loss
on both the hedged securities in the Fund and the hedging vehicle, so that the
Fund's return might have been better had hedging not been attempted. In
addition, a decision as to whether, when and how to use options or futures
involves the exercise of skill and judgment which are different from those
needed to select portfolio securities, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior, currency fluctuations
or interest rate trends. If the Investment Adviser is incorrect in its forecasts
regarding market values, currency fluctuations, interest rate trends or other
relevant factors, the Fund may be in a worse position than if the Fund had not
engaged in options or futures transactions. The potential loss incurred by the
Fund in writing options on futures and engaging in futures transactions is
unlimited. The Investment Adviser is experienced in the use of options and
futures contracts as an investment technique.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out an option position or futures contract. Most futures
exchanges and boards of trade limit the amount of fluctuation in futures
contract prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Fund from liquidating an unfavorable position and the
Fund would remain obligated to meet margin requirements until the position is
closed. See "Investment Objectives, Policies and Risks-- Options on Securities
and Securities Indices" and "--Futures Contracts and Related Options" in the
Statement of Additional Information.
The Fund's ability to enter into options and futures contracts is limited by the
requirements of the Internal Revenue Code with respect to the corresponding
Portfolios' qualification as regulated investment companies. See "Taxes" in the
Statement of Additional Information.
REPURCHASE AGREEMENTS. The Fund may on occasion enter into repurchase
agreements, in which the Fund purchases securities and the seller agrees to
repurchase them from the Fund at a mutually agreed-upon time and price. The
period of maturity is usually overnight or a few
39
<PAGE>
days, although it may extend over a number of months. The resale price is in
excess of the purchase price, reflecting an agreed-upon rate of return effective
for the period of time the Fund's money is invested in the security. The Fund's
repurchase agreements will at all times be fully collateralized in an amount at
least equal to 102% of the purchase price, including accrued interest earned on
the underlying securities. The instruments held as collateral are valued daily
and, if the value of the instruments declines, the Fund will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Fund may incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by the Fund may be delayed or limited. The Fund will only enter into
repurchase agreements involving securities in which it could otherwise invest
and with selected financial institutions and brokers and dealers which meet
certain creditworthiness and other criteria.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933
("restricted securities"), securities which are otherwise not readily marketable
such as over-the-counter, or dealer traded, options, and repurchase agreements
having a maturity of more than seven days. Mutual funds do not typically hold a
significant amount of restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and the Fund might not be able to dispose of restricted or other securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, the Investment Adviser may
determine, pursuant to guidelines established by the Master Trust's Board of
Trustees, that such securities are not illiquid securities notwithstanding their
legal or contractual restrictions on resale, based on factors such as the
frequency of trades and quotes for the securities, the number of dealers and
others wishing to purchase and sell the securities, and the nature of the
security and the marketplace trades. In all other cases, however, securities
subject to restrictions on resale will be deemed illiquid. Investing in
restricted securities eligible for resale under Rule 144A could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become uninterested in purchasing such securities.
SECURITIES LENDING. To increase its income, the Fund may lend its portfolio
securities to financial institutions such as banks and brokers if the loan is
collateralized in accordance with applicable regulatory requirements. The Master
Trust's Board of Trustees has adopted an operating policy that limits the amount
of loans made by the Fund to not more than 30% of the value of the total assets
of the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund an amount equivalent to any dividends or interest paid on such
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securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured a letter of credit.
The amounts received by the Fund will be reduced by any fees and administrative
expenses associated with such loans. In addition, such loans involve risks of
delay in receiving additional collateral or in recovering the securities loaned
or even loss of rights in the collateral should the borrower of the securities
fail financially. However, such securities lending will be made only when, in
the Investment Adviser's judgment, the income to be earned from the loans
justifies the attendant risks. Loans are subject to termination at the option of
the Fund or the borrower.
BORROWING. The Fund may borrow money from banks in amounts up to 20% of its
total assets (calculated when the loan is made) only for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
Purchases of portfolio securities while borrowings are outstanding create
leverage and involve special risk considerations. Interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales. All borrowings by the Fund will be
made only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all borrowings.
If such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law. Short sales "not
against the box" and roll transactions are considered borrowings for purposes of
the percentage limitations applicable to borrowings.
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NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
SERIES A, B AND C INTERNATIONAL CORE GROWTH PORTFOLIOS
600 West Broadway
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
____________, 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 three of those Portfolios:
Nicholas-Applegate International Core Growth Portfolio A, International Core
Growth Portfolio B, and International Core Growth Portfolio C (the
"International Core Growth Portfolios").
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
International Core Growth Portfolios' 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-23
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . B-27
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . B-31
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-33
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-34
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . B-37
Purchase and Redemption of Portfolio Shares. . . . . . . . . . . . . . B-38
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . B-40
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-42
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-44
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . B-50
Custodian, Transfer and Dividend Disbursing
Agent, Independent Accountants and Legal Counsel . . . . . . . . . . B-51
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-51
Appendix A - Description of Securities Ratings . . . . . . . . . . . . A-1
B-1
<PAGE>
GENERAL INFORMATION
The Trust and the Master Trust were organized in December 1992 as
business trusts under the laws of Delaware. The Trust offers shares of numerous
Portfolios with differing sales load, shareholder service plan and distribution
plan arrangements, including Series A Portfolios, Series B Portfolios, Series C
Portfolios, Institutional Portfolios and Qualified Portfolios. This Statement
of Additional Information contains information regarding two Portfolios,
International Core Growth Portfolio A and International Core Growth Portfolio B.
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 International Core Growth Fund (the
"International Core Growth Fund"), in which the International Core Growth
Portfolios invest.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of the
International Core Growth Portfolios' investment objective and policies as set
forth in the Portfolios' Prospectus. As each International Core Growth
Portfolio seeks to achieve its investment objective by investing all of its
assets in the International Core Growth Fund, which has the same investment
objective as the Portfolio, the following discussion describes the various
investment policies and techniques employed by the International Core Growth
Fund. There can be no assurance that the investment objective of the
International Core Growth Fund or the International Core Growth Portfolios can
be achieved.
PREFERRED STOCK
Preferred stock, unlike common stock, offers a stated dividend rate
payable from a corporation's earnings. Such preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest rates
rise, the fixed dividend on preferred stocks may be less attractive, causing the
price of preferred stocks to decline. Preferred stock may have mandatory
sinking fund provisions, as well as call/redemption provisions prior to
maturity, a negative feature when interest rates decline. Dividends on some
preferred stock may be "cumulative," requiring all or a portion of prior unpaid
dividends to be paid. Preferred stock also generally has a preference over
common stock on the distribution of a corporation's assets in the event of
liquidation of the corporation, and may be "participating," which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of preferred stocks on the distribution of a corporation's assets in
the event of a liquidation are generally subordinate to the rights associated
with a corporation's debt securities.
B-2
<PAGE>
CONVERTIBLE SECURITIES AND WARRANTS
The International Core Growth 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.
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 International Core Growth 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. The Fund will not retain debt securities downgraded below
investment grade in excess of 5% of its net assets.
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. In addition, the International Core Growth Fund's return
on the debt securities in which it invests depends on the continuing ability of
the issuers of such debt securities to meet their obligations for the payment of
interest and principal when due.
B-3
<PAGE>
SHORT-TERM INVESTMENTS
The International Core Growth Fund may invest in any of the following
securities and instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.
The Fund's holdings of instruments of foreign banks or financial
institutions may be subject to additional investment risks that are different in
some respects from those incurred by a fund which invests only in debt
obligations of U.S. domestic issuers. See "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.
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SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations 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.
In addition to the advisory and other fees paid by the Fund, 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,
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such as those of the FNMA, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
The Fund may invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay principal and
interest in a timely manner may be affected by a number of factors, including
its cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitments on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debt in a timely
manner.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Fund may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however, unrated
variable and floating rate instruments purchased by the Fund will be determined
by the Investment Adviser under guidelines established by the Master Trust's
Board of Trustees to be of comparable quality at the time of the purchase and
rated instruments eligible for purchase by the Fund. In making such
determinations, the Investment Adviser will consider the earning power, cash
flow and other liquidity ratios of the issuers of such instruments (such issuers
include financial, merchandising, bank holding and other companies) and will
monitor their financial condition. An active secondary market may not exist
with respect to particular variable or floating rate instruments purchased by
the Fund. The absence of such an active secondary market could make it
difficult for the Fund to dispose of the variable or floating rate instrument
involved in the event of the issuer of the instrument defaulted on its payment
obligation or during periods in which the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss to
the extent of the default. Variable and floating rate instruments may be
secured by bank letters of credit.
FOREIGN INVESTMENTS
The International Core Growth 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
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Trustees of the Trust would consider alternative arrangements, including
reevaluation of the International Core Growth Portfolios' 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 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
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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.
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 International Core Growth Fund
is authorized to purchase "put" and "call" options with respect to securities
which are otherwise eligible for purchase by the Fund and with respect to
various stock indices subject to certain restrictions. 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
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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, 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 International Core Growth 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
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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.
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
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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 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 International Core Growth 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
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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 illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The International Core Growth Fund may buy or sell put and call
options on foreign currencies. A put or call option on a foreign currency gives
the purchaser of the option the right to sell or purchase a foreign currency at
the exercise price until the option expires. The Fund will use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
a call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an at-the-
money strike price or an in-the-money strike price. Foreign currency options
are derivative securities. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of the Fund to
reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option
on foreign currency will constitute only a partial hedge, up to the amount of
the premium received. The Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movement adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
The International Core Growth Fund may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, the Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to
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purchase. Alternatively, it might sell a particular currency on either a spot
or forward basis to hedge against an anticipated decline in the dollar value of
securities it intends to or has contracted to sell. Although this strategy
could minimize the risk of loss due to a decline in the value of the hedged
currency, it could also limit any potential gain from an increase in the value
of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
The International Core Growth 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 cash, U.S.
Governmental securities, or other high quality liquid debt or equity securities
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, U.S. Government securities, or other high quality liquid debt or equity
securities 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 International Core Growth 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
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Exchange Composite Index on the New York Futures Exchange, and the Value Line
Stock Index on the Kansas City Board of Trade. Foreign financial and stock
index futures are traded on foreign exchanges including the London International
Financial Futures Exchange, the Singapore International Monetary Exchange, the
Sydney Futures Exchange Limited, and the Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific price. The specific securities delivered or
taken, respectively, at settlement date, would not be determined until at or
near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchased for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund's entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. The Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
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FOREIGN CURRENCY FUTURES CONTRACTS. The International Core Growth
Fund may use foreign currency future contracts for hedging purposes. A foreign
currency futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a foreign currency at a specified
price and time. A public market exists in futures contracts covering several
foreign currencies, including the Australian dollar, the Canadian dollar, the
British pound, the German mark, the Japanese yen, the Swiss franc, and certain
multinational currencies such as the European Currency Unit ("EUC"). Other
foreign currency futures contracts are likely to be developed and traded in the
future. The Fund will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or foreign exchange, board of trade,
or similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
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
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to margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions, which could distort the normal relationship between the
index or cash market and futures markets. In addition, the deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions. As a result of price
distortions in the futures market and the imperfect correlation between
movements in the cash market and the price of securities and movements in the
price of futures, a correct forecast of general trends by the Investment Adviser
may still not result in a successful hedging transaction over a very short time
frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
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
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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 International
Core Growth Fund may purchase options on the futures contracts they can purchase
or sell, as described above. A futures option gives the holder, in return for
the premium paid, the right to buy (call) from or sell (put) to the writer of
the option a futures contract at a specified price at any time during the period
of the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder or writer of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. There is no guarantee that such closing transactions can be
effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund 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.
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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 International Core Growth Portfolio as a regulated
investment company. See "Taxes."
REPURCHASE AGREEMENTS
The International Core Growth Fund may enter into repurchase
agreements with respect to its portfolio securities. Pursuant to such
agreements, the Fund acquires securities from financial institutions such as
banks and broker-dealers as are deemed to be creditworthy by the Investment
Adviser, subject to the seller's agreement to repurchase and the Fund's
agreement to resell such securities at a mutually agreed upon date and price.
The repurchase price generally equals the price paid by the Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the underlying portfolio security). Securities subject to
repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund
holding the repurchase agreement will suffer a loss to the extent that the
proceeds from a sale of the underlying securities is less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting seller
may cause the Fund's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans under the Investment
Company Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The International Core Growth 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
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to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
BORROWING
The International Core Growth 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 or reduce the
lenders' commitment thereunder in increments of $2,500,000.
While outstanding, the Revolving Credit Loans will bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or (ii)
the prime rate of interest of Chemical Bank. If, as a result of changes in
applicable laws, regulations or 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
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payable in thirty days, and may be prepaid at any time in increments of $100,000
without premium or penalty. No Portfolio is liable for repayment of a Revolving
Credit Loan to any other Portfolio.
The Credit Agreement contains, among other things, covenants that
require each Portfolio to maintain certain minimum ratios of debt to net worth;
limit the ability of the Trust to incur other indebtedness and create liens on
its assets or guarantee obligations of others; merge or consolidate with, or
sell its assets to, others; make material changes in its method of conducting
business; make distributions to shareholders in excess of the requirements of
Subchapter M of the Internal Revenue Code in the event of a default under the
Credit Agreement; or make changes in fundamental investment policies. The
Credit Agreement also contains other terms and conditions customary in such
agreements, including various events of default.
LENDING PORTFOLIO SECURITIES
The International Core Growth 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
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negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund is also required to
deposit with the broker additional cash or securities so that the total deposit
with the broker is maintained daily at 150% of the current market value of the
securities sold short (100% of the current market value if a security is held in
the account that is convertible or exchangeable into the security sold short
within 90 days without restriction other than the payment of money).
Short sales by 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 International Core Growth Portfolio as a regulated investment company. See
"Taxes."
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ILLIQUID SECURITIES
The International Core Growth 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.
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 has determined that such securities are not illiquid
securities notwithstanding their legal or contractual restrictions on resale.
In all other cases, however, securities subject to restrictions on resale will
be deemed illiquid.
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.
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The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "bottom-up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is guided
by three critical questions: Is there positive change? Is it sustainable? Is
it timely? The Investment Adviser uses these three factors because it focuses
on discovering positive developments when they first show up in an issuer's
earnings, but before they are fully reflected in the price of the issuer's
securities. The Investment Adviser is always looking for companies that are
driving change and surpassing analysts' expectations. It seeks to identify
companies poised for rapid growth. The Investment Adviser focuses on
recognizing successful companies, regardless of their capitalizations or whether
they are domestic or foreign.
As indicated in the International Core Growth Portfolios' 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 International Core Growth Portfolios' 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 each International Core Growth Portfolio, and
the Master Trust, on behalf of the International Core Growth 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 an
International Core Growth 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, any International Core Growth
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 International Core Growth Portfolio's assets in another investment
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company with the same investment objective, policies and restrictions as the
Portfolio or hiring an investment adviser to manage the Portfolio's assets in
accordance with the investment objectives, policies and restrictions of the
Portfolio described in the Portfolio's Prospectus and in this Statement of
Additional Information.
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
Neither the International Core Growth Fund nor any International Core
Growth 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 a Portfolio's or the Fund's total assets may be
invested without regard to this restriction and a Portfolio will be permitted to
invest all or a portion of its assets in 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 a 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 a
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 a
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 a Portfolio or the
Fund in securities of the U.S. Government or its agencies and instrumentalities.
4. May purchase or sell real estate. However, a 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 a Portfolio or the Fund may
purchase publicly distributed debt instruments and certificates of deposit and
enter into repurchase agreements. Each 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
B-24
<PAGE>
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 a Portfolio or the
Fund from engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid.
10. May purchase securities on margin, except for initial and
variation margin on options and futures contracts, and except that a 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 a 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 a Portfolio or the Fund.
12. May issue senior securities, except that a Portfolio or the Fund
may borrow money as permitted by restrictions 6 and 7 above. This restriction
shall not prohibit a Portfolio or the 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 a
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.
B-25
<PAGE>
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust and the Master Trust, neither International Core Growth
Portfolio nor the International Core Growth Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships, although
a Portfolio or 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 a Portfolio or the Fund
would then have more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors) having a record of
less than three years of continuous operation, except (a) that a 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 a Portfolio or the Fund.
3. May purchase securities of any issuer if any officer or trustee
of a Portfolio or the Fund, or any officer or director of ICAC, the Distributor,
or the Investment Adviser, owning more than 1/2 of 1% of the outstanding
securities of such issuer, own in the aggregate more than 5% of the outstanding
securities of such issuer.
4. May lend any securities from its portfolio unless the value of
the collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market daily.
5. May invest in warrants, valued at the lower of cost or market, in
excess of 5% of the market value of a Portfolio's or the Fund's net assets, or
in excess of 2% of the market value of a Portfolio's or the Fund's net assets if
such warrants are not listed on the New York Stock Exchange or the American
Stock Exchange, as of the date of investment.
BLUE SKY RESTRICTIONS
In order to permit the sale of shares of the Portfolios 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 the
Portfolios 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 any Portfolio or the Fund is restricted from selling without
B-26
<PAGE>
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 Portfolios to invest in securities of the Fund or other
diversified, open-end management investment companies with the same investment
objectives, policies and restrictions as the Portfolios), and (iii) the Master
Trust will provide adequate notice to the Trust of changes in such restrictions
to enable the Trust to provide at least 30 days advance notice of such changes
to its shareholders.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of 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).
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), MasTec Inc., construction (since 1994), and Coinmach Laundry
Corporation (since 1996); 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 or its affiliates received $100,000 in 1995 and
$100,000 in 1996 from the Investment Adviser as compensation for consulting
services provided from time to time to the Investment Adviser.
B-27
<PAGE>
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-28
<PAGE>
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual from Trust and
Compensation as Part of Trust Benefits Upon Trust Complex
Name from 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.*/
Managing Partner and Chief Investment Officer, Nicholas-Applegate Capital
Management (since 1984), and Chairman / President Nicholas-Applegate Securities.
Director and Chairman of the Board of Directors of Nicholas-Applegate Fund,
Inc., a registered open-end investment company, since 1987.
DANN V. ANGELOFF, TRUSTEE. 727 West Seventh Street, Los Angeles,
California. President, The Angeloff Company, corporate financial advisers
(since 1976); 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), 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 Advisors, L.P., an investment manager (since 1994); and Banyan Realty Fund
(since 1987), Banyan Strategic Land Fund (since 1987), Banyan Strategic Land
Fund II (since 1988), and Banyan Mortgage Fund (since 1988), real estate
investment trusts. Formerly Chairman and Chief Executive Officer, Chicago Board
Options Exchange (1979 to 1986) and Senior Executive Vice President, Director
and Member of the Executive Committee, PaineWebber, Inc. (until 1979). Mr. Auch
is considered to be an "interested person" of the Master Trust under the 1940
Act because he is a director of a company which has a broker-dealer subsidiary.
B-29
<PAGE>
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991) and research associate, Harvard Graduate School of Education (since 1996);
Director, Nicholas-Applegate Fund, Inc. (since 1987), Emerging Germany Fund
(since 1991), Moovies, Inc. (since 1995). Formerly Managing Director of Global
Equity Transactions Group and member of Board of Directors, Prudential
Securities (from 1986 to June 1991).
DARLENE DEREMER, TRUSTEE.*/ 155 South Street, Wrentham,
Massachusetts. President and Founder, DeRemer Associates, a marketing
consultant for the financial services industry (since 1987); Vice President,
PBHG Funds, Inc. (since 1995); formerly Vice President and Director, Asset
Management Division, State Street Bank and Trust Company (from 1982 to 1987),
and Vice President, T. Rowe Price & Associates (1979 to 1982); Director,
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).
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
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
Master Trust for the fiscal year ended March 31, 1996, to the Trustees who are
not affiliated with the Investment Adviser and the aggregate compensation paid
to such Trustees for service
B-30
<PAGE>
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):
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Master
Compensation Benefits Accrued Estimated Annual Trust and Master
from Master as Part of Master Benefits Upon Trust Complex
Name Trust Trust Expenses Retirement Paid to Trustee
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dann V. Angeloff $15,500 None N/A $32,500 (13*)
Walter E. Auch $15,000 None N/A $15,000 (12*)
Theodore J. Coburn $15,000 None N/A $29,000 (13*)
Darlene Deremer $15,000 None N/A $15,000 (12*)
George F. Keane $15,000 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 350 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.
B-31
<PAGE>
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Master Trust and
the Investment Adviser with respect to the International Core Growth Fund, the
Master Trust retains the Investment Adviser to manage the International Core
Growth Fund's investment portfolio, subject to the direction of the Master
Trust's Board of Trustees. The Investment Adviser is authorized to determine
which securities are to be bought or sold by the Fund and in what amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by the
International Core Growth 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 Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act of 1940).
The Investment Advisory Agreement may be terminated with respect to the
International Core Growth 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 International Core Growth 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 International Core Growth 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 each International
Core Growth 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
the following percentage of the average net assets of such Portfolio through
March 31, 1998: International Core Growth Portfolio A - 1.95%; International
Core Growth Portfolio B - 2.60%; International Core Growth Portfolio C - 2.60%.
B-32
<PAGE>
ADMINISTRATORS
The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, ICAC 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. ICAC has no supervisory responsibility over the
investment operations of the Portfolios. The management or administrative
services of ICAC for the Trust are not exclusive under the terms of the
Administration Agreement and ICAC is free to, and does, render management and
administrative services to others. ICAC also serves as the Administrator for the
Master Trust.
For its services, ICAC 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, ICAC
currently receives aggregate compensation at the rate of $250,000 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, ICAC 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. ICAC 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, ICAC 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 ICAC or the
Investment Adviser, (c) out-of-pocket travel expenses for the officers and
Trustees of the Trust and other expenses of Board of Trustees' meetings, (d) the
fees and certain expenses of the Custodian, (e) the fees and expenses of the
Transfer and Dividend Disbursing Agent that relate to the maintenance of each
shareholder account, (f) the charges and expenses of the Trust's legal counsel
and independent accountants, (g) brokerage commissions and any issue or transfer
taxes chargeable to Trustees and officers of the Trust in connection with
securities transactions, (h) all taxes and corporate fees payable by the Trust
to federal, state and other governmental agencies, (i) the fees of any trade
association of which the Trust may be members, (j) the cost of maintaining the
Trust's existence, taxes and interest, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining the
registration of the Trust and of its shares with the Commission and registering
the Trust as a broker or dealer and qualifying their shares under state
securities laws, including the preparation and printing of
B-33
<PAGE>
the Trust's registration statement, prospectuses and statements of additional
information, (m) allocable communication expenses with respect to investor
services and all expenses of shareholders' and Board of Trustees' meetings and
of preparing, printing and mailing prospectuses and reports to shareholders, (n)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the business of the Trust, and (o) expenses
assumed by the Trust pursuant to any plan of distribution adopted in conformity
with Rule 12b-1 under the Investment Company Act.
The Administration Agreement provides that ICAC 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 ICAC'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 ICAC 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.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer agents,
accounting agents, independent accountants and legal counsel. These services
are comprised principally of assistance in coordinating with the Trust's various
service providers, providing certain officers of the Trust, responding to
inquiries from shareholders which are directed to the Trust rather than other
service providers, calculating performance data, providing various reports to
the Board of Trustees, and assistance in preparing reports, prospectuses, proxy
statements and other shareholder communications. The Agreement contains
provisions regarding liability and termination similar to those of the
Administration Agreement.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the Portfolios. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.
DISTRIBUTION AGREEMENT
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Portfolios,
but is not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. Pursuant to the
Distribution Agreement, the Trust has agreed to indemnify the Distributor to the
extent permitted by applicable law against certain liabilities under the
Securities Act.
Sales charges on sales of Series A Portfolio shares are payable only
with respect to purchase of less than $1,000,000. However, the Distributor pays
an initial commission to broker-dealers and others on purchases of the Series A
Portfolio of $1 million or more, and on purchases made at net asset value by
certain retirement plans. See "Purchase and Redemption of Portfolio Shares --
Dealer Commissions."
DISTRIBUTION PLAN
Under a plan of distribution for the Trust with respect to the Series
A Portfolio, Series B Portfolio and Series C Portfolio (the "Distribution Plan")
adopted pursuant to Rule 12b-1 under the Investment Company Act and distribution
agreement (the "Distribution Agreement"), the Distributor incurs the expense of
distributing shares of the Portfolios. The Distribution Plan provides for
compensation to the Distributor for the services it provides, and the costs and
expenses it incurs, related to marketing shares of the Portfolios. The
Distributor is paid for: (a) expenses incurred in connection with advertising
and marketing shares of the Portfolios including but not limited to any
advertising by radio, television, newspapers, magazines, brochures, sales
literature, telemarketing or direct mail solicitations; (b) periodic payments of
fees or commissions for distribution assistance made to one or more securities
brokers, dealers or other industry professionals such as investment advisers,
accountants, estate planning firms and the Distributor itself in respect of the
average daily value of shares owned by clients of such service organizations,
and (c) expenses incurred in preparing, printing and distributing the
Portfolios' prospectus and statement of additional information.
The Distribution Plan continues in effect from year to year, provided
that each such continuance is approved at least annually by a vote of the Board
of Trustees of the Trust, including a majority vote of the Trustees who are not
"interested persons" of the Trust (as defined in the Investment Company Act) and
have no direct or indirect interest in the operation of the Plan or in any
agreements related to the Plan (the "Rule 12b-1 Trustees"), cast in person at a
meeting called for the purpose of voting on such continuance. The Distribution
Plan may be terminated with respect to any Portfolio at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote of
the holders of a majority of the outstanding shares of the Portfolio. The
Distribution Plan my not be amended to increase materially the amounts to be
paid by a Portfolio for the services described therein without approval by the
shareholders of the Portfolio, and all material amendments are required to be
approved by the Board of Trustees in the manner described above. The
Distribution Plan will automatically terminate in the event of its assignment.
A Portfolio will not be contractually obligated to pay expenses incurred under
the Distribution Plan if the Plan is terminated or not continued with respect to
the Portfolio.
Under the Distribution Plan, the Distributor is compensated for
distribution-related expenses with respect to the Portfolios at the following
annual rates, payable monthly, based on the average daily net assets of each
Portfolio: for the Series A Portfolio, 0.25%; for the Series B and C Portfolios,
0.75%. The Distributor recovers the distribution expenses it incurs through the
receipt of compensation payments from the Trust under the Distribution Plan and
the receipt of that portion of initial sales charges on purchases of shares of
the Portfolios remaining after the Distributor's reallowance to selected
dealers.
If the Distributor incurs expenses greater than the maximum
distribution fees payable under the Distribution Plan, as described above, with
respect to a Portfolio, the Portfolio will not reimburse the Distributor for the
excess in the subsequent fiscal year. However, because the Distribution Plan is
a "compensation-type" plan, the distribution fees are payable even if the
Distributor's actual distribution related expenses are less than the percentages
described above.
The Distributor pays broker-dealers and others out of its distribution
feesquarterly trail commissions of up to the following annual percentages of the
average daily net assets attributable to shares of respective Portfolios held in
the accounts of their customers: 0.25% for the Series A and B Portfolios.
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SHAREHOLDER SERVICE PLAN
The Trust has also adopted a Shareholder Service Plan with respect to
the Portfolios. Under the Shareholder Service Plan, the Distributor is
compensated at the annual rate of 0.10% of the Series A Portfolio's average
daily net assets and 0.25% of each Series B and C Portfolio's average daily net
assets, for certain shareholder service expenses provided by the Distributor and
fees paid to broker-dealers and others for the provision of support services to
their clients who are beneficial owners of shares of the Portfolios.
Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in
Portfolio shares; processing dividend and distribution payments from the
Portfolios on behalf of clients; preparing tax reports; arranging for bank
wires; responding to client inquiries concerning their investments in Portfolio
shares; providing the information to the Portfolios necessary for accounting and
subaccounting; preparing tax reports, forms and related documents; forwarding
shareholder communications from the Trust (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to clients; assisting in processing exchange and redemption request
from clients; assisting clients in changing dividend options, account
designations and addresses; and providing other similar services.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Trustees of the Trust, including a majority of the Trustees who
have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder Service
Plan (the "Independent Trustees"), cast in person or at a meeting called for the
purpose of voting on such continuance. The Shareholder Service Plan may be
amended at any time by the Board, provided that any material amendments of the
terms of the Plan will become effective only upon the approval by a majority of
the Board and a majority of the Independent Trustees pursuant to a vote cast in
person at a meeting called for the purpose of voting on the Plan. The
Shareholder Service Plan may be terminated with respect to any Portfolio at any
time, without penalty, by the Board.
Under the Shareholder Service Plan, the Distributor pays broker-
dealers and others an account servicing fee of up to 0.25% annually of the
average daily net assets of the Series C Portfolio attributable to shares in the
accounts of their customers, as compensation for providing certain shareholder-
related services.
MISCELLANEOUS
Pursuant to the Distribution Plan and Shareholder Service Plan, the
Board of Trustees will review at least quarterly a written report of the
distribution and service expenses incurred on behalf of shares of the Portfolios
by the Distributor. The report will include an itemization of the distribution
and service expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Trustees who
are not interested persons of the Trust will be committed to the Trustees who
are not interested persons of the Trust.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Master Trust's Board of
Trustees, the Investment Adviser is primarily responsible for the execution of
the International Core Growth Fund's portfolio transactions and the allocation
of the brokerage business. In executing such transactions, the Investment
Adviser will seek to obtain the best price and execution for the Fund, taking
into account such factors as price, size of order, difficulty and risk of
execution and operational facilities of the firm involved. Securities in which
the Fund invest may be traded in the over-the-counter markets, and the Fund
deals directly with the dealers who make markets in such securities except in
those circumstances where better prices and execution are available elsewhere.
Commission rates are established pursuant to negotiation with brokers or dealers
based on the quality or quantity of services provided in light of generally
prevailing rates, and while the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commissions available. The allocation of orders among brokers and the
commission rates paid are reviewed periodically by the Board of Trustees of the
Master Trust.
The International Core Growth 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 International Core Growth 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
B-36
<PAGE>
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.
PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the Portfolios may be purchased and redeemed at their net
asset value without initial or deferred sales charge by former partners of
Whitehall Partners and Coventry Partners, California limited partnerships, who
received shares of the Core Growth Institutional Portfolio and Income & Growth
Institutional Portfolio, respectively, in the reorganization and conversion of
such partnerships into such Portfolios. Similarly, shares of the Portfolios may
be purchased and redeemed at their net asset value without any initial or
deferred sales charge by former partners and participants of Stratford Partners
and Nicholas-Applegate Emerging Growth Pooled Trust who received shares of the
Emerging Growth Institutional Portfolio in the reorganization and conversion of
such partnerships and pooled trust into such Portfolio. Payment for shares
redeemed will not be made more than seven days after receipt of a written or
telephonic request in appropriate form, except as permitted by the 1940 Act and
the rules thereunder.
The price paid for purchase and redemption of shares of the Portfolios
is based on the net asset value per share, which is calculated once daily at the
close of trading (currently 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Washington's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas
Day. The offering price is effective for orders received by the Transfer Agent
prior to the time of determination of net asset value. Dealers are responsible
for promptly transmitting purchase orders to the Transfer Agent. The Trust
reserves the right in its sole discretion to suspend the continued offering of
the Portfolios' shares and to reject purchase orders in whole or in part when
such rejection is in the best interests of the Trust and the affected
Portfolios.
REDUCED SALES CHARGES
Sales charges on purchases of Series A Portfolio shares are subject to
a reduction in certain circumstances, as indicated in the Prospectus for the
Series A Portfolio.
RIGHTS OF ACCUMULATION. The Series A Portfolio makes available to its
shareholders the ability to aggregate the value (at the current maximum offering
price on the date of the purchase) of their existing holdings of all Series A
Portfolio shares to determine the reduced sales charge, provided the shares are
held in a single account. The value of existing holdings for the purposes of
determining the reduced sales charge is calculated using the maximum offering
price (net asset value plus sales charge) as of the previous business day. The
Transfer Agent must be notified at the time of purchase that the shareholder is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings.
CONCURRENT PURCHASES. Purchasers may combine concurrent purchases of
shares of two or more Series A Portfolios to qualify for a reduced sales charge.
If the shares of the Portfolios purchased concurrently are subject to different
sales charges, the concurrent purchases are aggregated to determine the reduced
sales charge applicable to each Portfolio purchased, and each separate reduced
sales charge is imposed on the amount of shares purchased for that Portfolio.
To illustrate, suppose an investor concurrently purchases $40,000 of
the Series A International Core Growth Portfolio and $20,000 of the Series A
Government Income Portfolio, for an aggregate concurrent purchase of $60,000.
Because the sales charges are reduced for purchases of $50,000 or more and
because concurrent purchases can be combined, the applicable sales charge
imposed on the $40,000 purchase of shares of the International Core Growth
Portfolio would be reduced to 4.50% (from 5.25%), and the sales charge imposed
on the concurrent $20,000 purchase of shares of the Government Income Portfolio
would be reduced to 4.00% (from 4.75%).
LETTER OF INTENT. Reduced sales charges are available to purchasers
of Series A Portfolio shares who enter into a written Letter of Intent providing
for the purchase, within a 13-month period, of shares of the Series A
Portfolios, provided the shares are held in a single account. All shares of the
Series A Portfolios which were previously purchased and are still owned are also
included in determining the applicable reduction. The Letter of Intent
privilege may be withdrawn by the Distributor or the Transfer Agent for future
purchases upon receipt of information that any shares subject to the Letter of
Intent have been transferred or redeemed during the 13-month period.
A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments of a 13-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Investors should refer to their Letter of Intent when placing
orders for shares of a Series A Portfolio. During the 13-month period, an
investor may increase his or her Letter of Intent goal and all subsequent
purchases will be treated as a new Letter of Intent except as to the 13-month
period, which does not change. The sales charge paid on purchases made before
the increase to the Letter of Intent goal will be retroactively reduced at the
end of the period.
Shares of the Series A Portfolio totaling 5% of the dollar amount of
the Letter of Intent will be held in escrow by the Transfer Agent in the name of
the purchaser. Any dividends and capital gains distributions on the escrowed
shares will be paid to the investor or as otherwise directed by the investor.
The effective date of a Letter of Intent may be back-dated up to 90 days, in
order that any investment made during this 90-day period, valued at the
purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal. Upon completion of the Letter of Intent goal within the 13-month period,
the escrowed shares will be promptly delivered to the investor or as otherwise
directed by the investor.
The Letter of Intent does not obligate the investor to purchase, or
the Series A Portfolio to sell, the indicated amount. In the event the Letter
of Intent goal is not achieved within the 13-month period, the investor is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Transfer Agent or, if not paid within 20
days after written request, the Transfer Agent will liquidate sufficient
escrowed shares to obtain such difference. If the redemption or liquidation
proceeds are inadequate to cover the differences, investors will be liable for
the extent of the inadequacy. By executing the Letter of Intent, investors
irrevocably appoint the Transfer Agent as attorney in fact with full power of
substitution to surrender for redemption any or all escrowed shares. If the
goal Letter of Intent is exceeded in an amount which qualified for a lower sales
charge, a price adjustment is made by refunding to the purchaser the amount of
excess sales charge, if any, paid during the 13-month period.
DEALER COMMISSIONS
The following commissions will be paid by the Distributor to dealers
who initiate and are responsible for purchases of Portfolio shares of $1 million
or more and for purchases made at net asset value by certain retirement plans of
organizations with 50 or more eligible employees. Such commissions are paid
twice monthly at the following annual rates:
Current Market Value
of Accounts at
Commission Rate Time of Purchase
--------------- ------------------
1.00% $1,000,000 up to $2,000,000
.80% over $2,000,000 up to $5,000,000
.50% over $5,000,000 up to $25,000,000
.25% over $25,000,000
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the International Core Growth
Portfolio, a Shareholder Investment Account is established for each investor
under which the shares are held for the investor by the Transfer Agent. If a
share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares and may be
redeposited in the Account at any time. There is no charge to the investor for
issuance of a certificate. Whenever a transaction takes place in the
Shareholder Investment Account, the shareholder will be mailed a statement
showing the transaction and the status of the Account.
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 each International
Core Growth Portfolio at net asset value. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such distribution at net
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.
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<PAGE>
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of an International Core Growth
Portfolio on a monthly or quarterly basis on any day of the month or quarter by
authorizing his or her bank account to be debited to invest specified dollar
amounts in shares of the Portfolio. The investor's bank must be a member of the
Automatic Clearing House System. Participation in the Plan will begin within 30
days after receipt of the account application. If the investor's bank account
cannot be charged due to insufficient funds, a stop-payment order or closing of
the account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer Agent. Further information
about this program and an application form can be obtained from the Transfer
Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in an International Core Growth 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) the aggregate value of the
shareholder's account(s) in the paying Portfolio(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving Portfolio
equals or exceeds that Portfolio's minimum initial investment requirement), (ii)
as long as the value of the account in 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, (iii) there is no cross-reinvestment, and
(iv) 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 International
Core Growth 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 an International
Core Growth 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
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<PAGE>
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.
NET ASSET VALUE
The net asset value of a share of an International Core Growth
Portfolio is calculated by dividing (i) the value of the securities held by the
Portfolio (I.E., the value of its investments in the International Core Growth
Fund), plus any cash or other assets, minus all liabilities (including accrued
estimated expenses on an annual basis), by (ii) the total number of shares of
the Portfolio outstanding. The net asset value of an interest in the
International Core Growth 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 an International Core Growth
Portfolio or the International Core Growth 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 quoted bid price for such
securities, or if such prices are not available, at prices for securities of
comparable maturity, quality and type; however, when the Investment Adviser
deems it appropriate, prices obtained for the day of valuation from a bond
pricing service will be used, as discussed below. Debt securities with
maturities of 60 days or less are valued at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from the
sixty-first day prior to maturity, their value on the sixty-first day prior to
maturity if their term to maturity from date of purchase by an International
Core Growth Portfolio or the International Core Growth 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 last available bid price, except that securities with a
demand feature exercisable within one to seven days are valued at par. Such
valuations are based on
B-39
<PAGE>
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.
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.
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<PAGE>
TAXES
MASTER TRUST'S TAX STATUS
The International Core Growth Fund will be treated as a partnership
rather than as a regulated investment company or a corporation under the
Internal Revenue Code (the "Code"). As a partnership under the Code, any
interest, dividends and gains or losses of the Master Trust attributable to the
Fund will be deemed to have been "passed through" to the Trust and other
investors in such Fund, regardless of whether the interest, dividends or gains
have been distributed by the Fund or such losses have been realized and
recognized by the Trust and other investors. Therefore, to the extent the Fund
were to accrue but not distribute any interest, dividends or gains, the Trust
and other investors in the Fund would be deemed to have realized and recognized
their proportionate shares of interest, dividends, gains or losses realized and
recognized by the Fund without receipt of any corresponding distribution.
However, the Master Trust will seek to minimize recognition by investors in the
Fund of interest, dividends, gains or losses allocable to the Fund without a
corresponding distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify each International Core Growth
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, an International Core Growth
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 International Core Growth Portfolio generally will be subject to a
nondeductible excise tax of 4% to the extent that it does not meet certain
minimum
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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.
Dividends paid by an International Core Growth 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 a
Portfolio will be eligible for the dividends received deduction only if the
Portfolio and International Core Growth 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 an International Core Growth 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 an
International Core Growth 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.
B-42
<PAGE>
A shareholder who acquires shares of an International Core Growth
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
an International Core Growth Portfolio is considered tax exempt in their
particular states.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the International Core Growth 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
International Core Growth 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 an International Core Growth 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 International Core Growth 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.
B-43
<PAGE>
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 an International Core
Growth Portfolio's and the International Core Growth 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
International Core Growth Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, gains or losses on disposition
of debt securities denominated in a foreign currency and on disposition of
certain futures attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of an International Core Growth Portfolio's
investment company taxable income to be distributed to the shareholders.
FOREIGN TAX. Income received by the International Core Growth 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 International Core Growth Portfolios' 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 an International Core Growth
Portfolio's taxable year whether the foreign taxes paid by the International
Core Growth 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 International Core Growth 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
B-44
<PAGE>
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 International Core Growth Fund may be treated as debt securities
that are issued originally at a discount. Generally, the amount of the original
issue discount ("OID") is treated as interest income and is included in income
over the term of the debt security, even though payment of that amount is not
received until a later time, usually when the debt security matures. A portion
of the OID includible in income with respect to certain high-yield corporation
debt securities may be treated as a dividend for Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the International
Core Growth 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 International Core
Growth 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.
Each International Core Growth 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 International Core Growth 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 an
International Core Growth
B-45
<PAGE>
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
International Core Growth 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
An International Core Growth Portfolio may be required to withhold for
U.S. federal income taxes 31% of all taxable distributions payable to
shareholders who fail to provide the Portfolio with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal tax liability.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of an
International Core Growth 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 each
International Core Growth Portfolio. Any performance information should be
considered in light of the Portfolio's and the International Core Growth 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
B-46
<PAGE>
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 each International Core Growth 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.
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.
B-47
<PAGE>
The Charles Schwab Trust Company, 101 Montgomery Street, San
Francisco, California 94104, serves as 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; 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 LLP, 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 52 series of shares -- nine A
Portfolios, nine B Portfolios, nine C Portfolios, fifteen institutional
Portfolios, one Money Market Portfolio and nine 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 an International Core Growth Portfolio's fundamental investment
policies would be voted upon only by shareholders of that Portfolio, as would
the approval of any advisory or distribution contract for the Portfolio.
However, all shares of the Trust may vote together in the election or selection
of Trustees, principal underwriters and accountants for the Trust.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of the series of
the Trust affected by the matter. Under Rule 18f-2, a series is presumed to be
affected by a matter, unless the interests of each series in the matter are
identical or the matter does not affect any interest of such series. Under Rule
18f-2 the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to a
Portfolio only if approved by a majority of its outstanding shares. However,
the rule also provides that the ratification of independent public accountants,
the approval of principal underwriting contracts and the election of trustees
may be effectively acted upon by the shareholders of the Trust voting without
regard to Portfolio.
As used in the International Core Growth Portfolios' Prospectus and in
this Statement of Additional Information, the term "majority," when referring to
approvals to be obtained from shareholders of a Portfolio, means the vote of the
lesser of (i) 67% of the shares of the Portfolio represented at a meeting if the
holders of more than 50% of the
B-48
<PAGE>
outstanding shares of the Portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the Portfolio. The term "majority,"
when referring to the approvals to be obtained from shareholders of the Trust's
shares represented at a meeting if the holders of more than 50% of the Trust's
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding shares. Shareholders are entitled to one vote for each
full share held and fractional votes for fractional shares held. Unless
otherwise provided by law (for example, by rule 18f-2 discussed above) or by the
Trust's Declaration of Trust or Bylaws, the Trust may take or authorize any
action upon the favorable vote of the holders of more than 50% of the
outstanding shares of the Trust.
Whenever a Portfolio or the Trust is requested to vote on a matter
with respect to the Master Trust, the Trust will hold a meeting of its
shareholders and will cast its votes as instructed by such shareholders and, in
the case of a matter affecting only a specific Fund, as instructed by the
shareholders of the corresponding Portfolio(s).
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Investment Company Act.
Each share of a Portfolio represents an equal proportional interest in
the Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Portfolio
as are declared in the discretion of the Trustees. In the event of the
liquidation or dissolution of the Trust, shareholders of a Portfolio are
entitled to receive the assets attributable to such Portfolio that are available
for distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Trustees in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
DECLARATIONS OF TRUST
In accordance with Delaware law and in connection with the tax
treatment sought by the Master Trust, the Master Trust's Declaration of Trust
provides that its investors will be personally and jointly and severally
responsible (with rights of contribution INTER SE in proportion to their
respective ownership interests in the Master Trust) for the Master Trust's
liabilities and obligations in the event that the Master Trust fails to satisfy
such liabilities and obligations. However, to the extent assets are available
from the Master Trust, the Master Trust will indemnify each investor from any
claim or liability to which the investor may become subject solely by reason of
his or her having been an investor to the extent such claim or liability imposes
on the investor an obligation or liability which is greater than his or her
proportionate ownership interest in the Master Trust, and will reimburse the
investor for all legal and other expenses reasonably incurred by him or her in
connection with any such claim or liability.
B-49
<PAGE>
The Declarations of Trust of both the Trust and Master Trust provide
that obligations of the Trust and the Master Trust are not binding upon their
respective Trustees, officers, employees and agents individually and that the
Trustees, officers, employees and agents will not be liable to the trusts or
their respective investors for any action or failure to act, but nothing in the
Declarations of Trust protect a Trustee, officer, employee or agent against any
liability to the trusts or their respective investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declarations of Trust also provide that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Portfolio or Fund shall be enforceable against the assets and
property of such Portfolio or Fund only (and, in the case of the Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of the Portfolio, the investors therein).
REGISTRATION STATEMENT
The Registration Statements of the Trust and the Master Trust,
including the International Core Growth Portfolios' Prospectus, the Statement of
Additional Information and the exhibits filed therewith, may be examined at the
office of the Commission in Washington, D.C. Statements contained in the
Portfolio's Prospectus or the Statement of Additional Information as to the
contents of any contract or other document referred to herein or in the
Prospectus are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
B-50
<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
- -------------------------------------------------
INTERNATIONAL CORE GROWTH
- --------------------------------------------------------------------------------
QUALIFIED PORTFOLIO
PROSPECTUS
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment
portfolios, including the International Core Growth Qualified Portfolio (the
"Portfolio") offered hereby. The Portfolio is offered to certain qualified
retirement plans, tax-exempt and other institutional investors, and financial
institutions. The Portfolio seeks to maximize long-term capital appreciation. It
invests in the International Core Growth Fund, which in turn invests primarily
in equity securities of international companies. The Fund emphasizes investment
in foreign issuers with larger market capitalizations (above $1 billion) which
its Investment Adviser believes have above-average growth potential.
- --------------------------------------------------------------------------------
The Portfolio, unlike many other investment companies which directly acquire
and manage their own portfolios of securities, seeks to achieve its investment
objective by investing all of its assets in a corresponding series ("Fund") of
Nicholas-Applegate Investment Trust, which has the same objective as the
Portfolio. The Fund in turn invests its assets, including those of the
Portfolio, in portfolio securities. Accordingly, the investment experience of
the Portfolio will correspond directly with the investment experience of the
Fund. Investors should carefully consider this investment approach. See
"Investment Objective, Policies and Risk Considerations--Special Considerations
Regarding Master/Feeder Structure," page 6, for additional information regarding
this unique structure. There can be no assurance that the Portfolio or the Fund
will achieve its investment objective.
- --------------------------------------------------------------------------------
Shares of the Portfolio are not bank deposits and are not federally insured
by, guaranteed by, obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. Investment in the Portfolio involves investment risk,
including possible loss of the principal amount invested.
This Prospectus presents information you should know before investing in the
Portfolio. It should be retained for future reference. A Statement of Additional
Information for Nicholas-Applegate Mutual Funds dated , 1997 has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. The Statement may be obtained, without charge,
by writing to the Trust, P.O. Box 82169, San Diego, California 92138-2169, or by
calling (800) 551-8643. Inquiries regarding the Portfolio can also be made by
calling (800) 551-8643.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1997
<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
- -------------------------------------------------
INTERNATIONAL CORE GROWTH
- --------------------------------------------------------------------------------
QUALIFIED PORTFOLIO
Table of Contents
Summary of Expenses........................3
Prospectus Summary.........................4
Investment Objective, Policies and Risk
Considerations.............................7
Organization and Management...............11
Purchasing Shares.........................13
Investor Services.........................15
Redeeming Shares..........................17
Dividends, Distributions and Taxes........19
General Information.......................19
Appendix:
Investment Policies, Strategies and
Risks.....................................21
- --------------------------------------------
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Portfolio or the Distributor. This Prospectus
does not constitute an offer by the Portfolio or the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in the
Portfolio. These are expected expenses of the Portfolio for its first year of
operations, and because the Portfolio invests all of its assets in the Fund, the
Portfolio's expenses include its proportionate share of the operating expenses
of the Fund. Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
INTERNATIONAL
CORE GROWTH
QUALIFIED
PORTFOLIO
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases (as a percentage of offering price) None
Sales charge on reinvested dividends None
Deferred sales charge (as a percentage of original purchase price or redemption proceeds,
whichever is lower) None
Redemption fee None
Exchange fee None
- -----------------------------------------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS (AFTER EXPENSE
REDUCTION):(1)
Management fees 1.00 %
12b-1 expenses None
Shareholder service expenses 0.25 %
All other expenses (after expense deferral)(1) 0.40 %
Total operating expenses (after expense deferral)(1) 1.65 %
</TABLE>
The Board of Trustees of the Trust believes that the aggregate per share
expenses of the Portfolio are no greater than the expenses that the Portfolio
would incur if it retained the services of an investment adviser and the assets
of the Portfolio were invested directly in the types of securities held by the
Fund. For a detailed description of the expenses of the Portfolio and the Fund,
see "Organization and Management."
- ---------------------------
(1)
The Investment Adviser of Nicholas-Applegate Investment Trust has agreed to
defer its fees, and to absorb other operating expenses, to ensure that the
expenses for the Portfolio (other than interest, taxes, brokerage commissions
and other portfolio transaction expenses, capital expenditures and
extraordinary expenses) will not exceed 1.65% of the Portfolio's average net
assets on an annual basis through March 31, 1998. In subsequent years, overall
operating expenses for the Portfolio will not fall below 1.65% of average net
assets until the Investment Adviser has fully recouped fees deferred or
expenses paid by the Investment Adviser under this agreement, as the Portfolio
will reimburse the Investment Adviser when operating expenses (before
recoupment) for the Portfolio are less than 1.65% of average net assets.
Accordingly, until all such deferred fees or expenses have been recouped by the
Investment Adviser, the Portfolio's expenses will be higher, and its yields
will be lower, than would otherwise be the case. See "Organization and
Management-Expense Limitation." Actual operating expenses for the Portfolio for
the fiscal year ended March 31, 1998 are estimated to be % of the
Portfolio's average net assets (annualized). The various operating expenses of
the Portfolio are further described under "Organization and Management."
Example of Portfolio Expenses. The following table illustrates the expenses that
an investor would pay on a hypothetical $1,000 investment in the Portfolio over
various time periods, assuming (1) a 5% annual return and (2) redemption at the
end of each time period. The Portfolio does not charge a redemption fee.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
International Core Growth Qualified
Portfolio $ 47 $ 52
</TABLE>
This Example assumes that all dividends and other distributions are reinvested
and that the percentage amounts listed under the heading "Annual Portfolio
Operating Expenses" in the fee table above remain the same in the years shown.
The Example should not be considered a representation of past or future
expenses, and the Portfolio's actual expenses may be more or less than those
shown. The hypothetical 5% annual return is used for illustrative purposes only
and should not be interpreted as an estimate of the Portfolio's annual return,
as there can be no guarantee of the Portfolio's future performance.
3
<PAGE>
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PROSPECTUS SUMMARY
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment portfolios,
including the International Core Growth Qualified Portfolio ("Portfolio")
offered hereby. The Portfolio is offered to certain qualified retirement plans
and tax-exempt investors.
Investment Objective. The investment objective of the Portfolio is long-term
capital appreciation. While there is no assurance the Portfolio will achieve its
objective, it endeavors to do so by following the investment policies and
limitations contained in the Prospectus and Statement of Additional Information.
See "Investment Objectives, Policies and Risk Considerations" and "Appendix:
Investment Policies, Strategies and Risks."
Master/Feeder Structure. The Portfolio seeks to achieve its investment objective
by investing all of its assets in the International Core Growth Fund ("Fund") of
Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified,
open-end management investment company. The Fund has the same investment
objective as the Portfolio. The Fund, in turn, holds investment securities.
Although the "master/feeder" structure employed by the Portfolio to achieve its
investment objectives could provide certain efficiencies and economies of scale,
it could also have potential adverse effects such as those resulting from
large-scale redemptions by other investors of their interests in the Fund, or
from the failure by investors of the Portfolio to approve a change in investment
objectives and policies that has been approved by the investors of the Fund.
There may also be other investment companies through which you can invest in the
Fund which may have higher or lower fees and expenses than those of the
Portfolio. See "Investment Objective, Policies and Risk Considerations-Special
Considerations Regarding Master/Feeder Structure."
The Portfolio may cease investing in the Fund only if the Trust's Board of
Trustees determines that this is in the best interests of the Portfolio and its
investors, and only with the approval of the Portfolio's investors. In such
event the Board of Trustees would consider alternative arrangements such as
investing all of the Portfolio's assets in another investment company with the
same investment objective as the Portfolio or hiring an investment adviser to
manage the Portfolio's assets in accordance with the Portfolio's investment
policies. No assurance exists that satisfactory alternative arrangements would
be available.
Investment Risks and Considerations. Investment risks and other considerations
relevant to the securities in which the Portfolio invests through the Fund are
described under "Investment Objective, Policies and Risk Considerations" and in
"Appendix: Investment Policies, Strategies and Risks." They include the
following:
The value of the Portfolio's shares will fluctuate with the market value of the
Fund's investments, so that the value of your shares when sold may be less than
your original purchase price.
Investments by the Fund in securities of foreign companies involve special risks
in addition to the usual risks inherent in domestic investments, including
fluctuations in foreign exchange rates, political or economic instability in the
country of issue, and the possible imposition of exchange controls or other laws
or restrictions. Settlement of transactions in foreign markets may be delayed or
less frequent than in the U.S., and foreign governments may withhold taxes from
dividends and interest paid on securities held by the Fund. There is also likely
to be less publicly available information about certain foreign issuers than is
available about U.S. companies, and foreign companies are not generally subject
to uniform financial reporting standards comparable to those applicable to U.S.
companies.
4
<PAGE>
The Fund may invest without limitation in emerging market countries. These
investments involve greater risks than other foreign investments, including
less-developed economic and legal structures; less stable political systems;
illiquid securities markets; possible expropriation, nationalization or
confiscatory taxation; and possible foreign currency devaluations and
fluctuations.
The investment approach of Nicholas-Applegate Capital Management (the
"Investment Adviser") results in above-average portfolio turnover for the Fund.
A high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses, and may also result in the realization and distribution to
shareholders of net capital gains which are taxable to them as ordinary income
for federal tax purposes.
For hedging purposes, the Fund may purchase or write put and call options on
securities and securities indices, effect transactions in futures contracts and
related options on stock indices, and enter into foreign exchange forward
contracts, currency futures or related options. These are derivative
instruments, whose value derives from the value of an underlying security, index
or currency. Risks associated with the use of such instruments include the
possibility that the Investment Adviser's forecasts of market values, currency
rates of exchange and other factors are not correct; imperfect correlation
between the Fund's hedging technique and the asset or liability being hedged;
default by the other party to the transaction; and inability to close out a
position because of the lack of a liquid market. Investment in such derivative
instruments may not be successful, and may reduce the returns and increase the
volatility of the Fund. See "Appendix: Investment Policies, Strategies and
Risks" in this Prospectus and "Investment Objectives, Policies and Risks" in the
Statement of Additional Information.
The Fund may engage in short sales, which theoretically involve unlimited loss
potential and may be considered a speculative technique. See the description of
the risks of short sales under "Short Sales" in "Appendix: Investment Policies,
Strategies and Risks."
The Fund may invest up to 15% of its net assets in illiquid securities. The Fund
may enter into repurchase agreements and lend its portfolio securities, which
involve the risk of loss upon the default of the seller or borrower. The Fund
may also borrow money from banks for temporary purposes which, among other
things, may require the Fund to sell portfolio securities to meet interest and
principal payments at an unfavorable time. See "Illiquid Securities,"
"Repurchase Agreements," "Securities Lending," and "Borrowing" in "Appendix:
Investment Policies, Strategies and Risks."
Investment Adviser. The Trust has not retained the services of an investment
adviser for the Portfolio, as the Portfolio seeks to achieve its investment
objectives by investing all of its assets in the Fund. Nicholas-Applegate
Capital Management serves as investment adviser to the Fund. The Investment
Adviser has been in the investment advisory business since 1984 and currently
manages approximately $31 billion of discretionary assets for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations and other institutional investors,
and individuals. The Investment Adviser is compensated for its services to the
Fund in the form of monthly fees at the annual rate of 1.00% of the first $500
million of the Fund's net assets, 0.90% of the next $500 million and 0.85% of
net assets in excess of $1 billion. See "Organization and Management."
Distributor. Nicholas-Applegate Securities (the "Distributor"), an affiliate of
the Investment Adviser, serves as distributor of shares of the Portfolio. The
Portfolio does not pay distribution or other fees to the Distributor in
connection with services it provides. Under a Shareholder
5
<PAGE>
Service Plan, the Distributor is reimbursed for shareholder services it provides
and for payments made to plan administrators and others for related support and
recordkeeping services at an annual rate of up to 0.25% of the Portfolio's net
assets. See "Organization and Management."
Administrators, Transfer Agent and Custodian. The Investment Adviser and
Investment Company Administration Corporation ("ICAC") are the administrators
for the Trust, with responsibility for managing the daily business operations of
the Portfolio, subject to the supervision of the Trust's Board of Trustees. ICAC
also acts as administrator for the Master Trust. PNC Bank (the "Custodian") is
the custodian for the Trust and the Master Trust, and State Street Bank and
Trust Company (the "Transfer Agent") is the transfer and dividend disbursing
agent for the Trust.
Purchase of Shares. Shares of the Portfolio are offered to (i) qualified
retirement plans (including employer, association and other group retirement
plans), employee benefit trusts, foundations and endowments, (ii) certain
financial institutions having sales or service agreements with the Distributor
or another broker-dealer or financial institution with respect to sales of
shares of the Portfolio, and (iii) "wrap accounts" for the benefit of clients of
broker-dealers, financial institutions or financial planners having sales or
service agreements with the Distributor or another broker-dealer or financial
institution with respect to sales of shares of the Portfolio. Investments by
individual participants of qualified retirement plans are made through their
plan sponsor or administrator. Purchases may only be made by check or by wiring
federal funds to the Transfer Agent. Shares are purchased at the next offering
price without any sales charge, after an order is received in proper form by the
Transfer Agent or a sub-transfer agent. The minimum initial investment is
$250,000 and the minimum subsequent investment is $10,000. The minimum initial
and subsequent investments are waived for individual participants of qualified
retirement plans and for certain others, and may be waived from time to time by
the Distributor for other investors. Shares of the Portfolio may also be
purchased with securities which are otherwise appropriate for investment by the
Portfolio. See "Purchasing Shares."
Investor Services. The following services are provided to investors of the
Portfolio for their convenience and flexibility: an automatic investment plan;
automatic reinvestment and cross-reinvestment of dividends and capital gains
distributions; an exchange privilege; and automatic withdrawals. See "Investor
Services." Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
Redeeming Shares. Shares of the Portfolio may be redeemed by writing to the
Transfer Agent or by telephone if telephone redemption privileges have been
established. Redemption proceeds will be wired to your bank. Participants of
qualified retirement plans must make redemption requests to the plan sponsor or
administrator. The price received for Portfolio shares redeemed is at the next
determined net asset value after the request is received by the Transfer Agent
or a sub-transfer agent, which may be more or less than the purchase price. No
contingent deferred sales charge or other fee is imposed on redemptions. See
"Redeeming Shares."
Dividends, Distributions and Taxes. The Portfolio declares and pays annual
dividends of net investment income and makes distributions at least annually of
any net capital gains. All dividends and distributions will be paid in the form
of additional shares at net asset value unless cash payment is requested.
6
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The investment objective and policies of the Portfolio are discussed below and
in "Appendix: Investment Policies, Strategies and Risks."
Special Considerations Regarding Master/Feeder Structure. The Portfolio seeks to
achieve its investment objective by investing all of its assets in the Fund,
which has the same objective as the Portfolio. The Fund, in turn, holds
investment securities. Accordingly, the investment experience of the Portfolio
will correspond directly with the investment experience of the Fund. For a
description of the Fund's objective, policies, restrictions, management and
expenses, see "Organization and Management" below and "Appendix: Investment
Objective, Policies and Risk Considerations." There can be no assurance that the
Portfolio or Fund will achieve its investment objective. The Portfolio's and the
Fund's investment objective is a fundamental policy which may not be changed
without the approval of the holders of a majority of the outstanding shares of
the Portfolio or Fund, respectively, as defined in the Investment Company Act of
1940 (the "Investment Company Act"). Upon any such approval, the Portfolio will
provide at least 30 days' written notice to its investors before any change is
made to its or the Fund's investment objective.
There are certain risks to the Portfolio related to the use of the
"master/feeder" structure. Such risks include, but are not limited to, the
following: Large-scale redemptions by other investment companies of their
interests in the Fund, could have adverse effects, such as lack of portfolio
diversity and decreased economies of scale, and could result in the shareholders
of the Portfolio, as the remaining investor in the Fund, bearing all the
operating costs of the Fund and thus experiencing higher pro rata operating
expenses and lower returns than would otherwise be the case. In addition, the
total withdrawal by another investment company as an investor in the Fund will
cause the Fund to terminate automatically in 120 days, unless the Portfolio and
any other investors in the Fund unanimously agree to continue the business of
the Fund. As the Portfolio is required to submit such matters to a vote of its
shareholders, it will be required to incur the expenses of shareholder meetings
in connection with such withdrawals. If unanimous agreement is not reached to
continue the Fund, the Board of Trustees of the Trust would need to consider
alternative arrangements for the Portfolio, including investing all of the
Portfolio's assets in another investment company with the same investment
objective as the Portfolio or hiring an investment adviser to manage the
Portfolio's assets in accordance with the investment policies described below
and in "Appendix: Investment Policies, Strategies and Risks." The absence of
substantial experience with the master/feeder structure could result in
accounting or other difficulties. Failure by investors of the Portfolio to
approve a change in the investment objective and policies of the Portfolio
parallel to a change that has been approved by the investors of the Fund would
require the Portfolio to redeem its shares of the Fund; this could result in a
distribution in kind to the Portfolio of the portfolio securities of the Fund
(rather than a cash distribution), causing the Portfolio to incur brokerage fees
or other transaction costs in converting such securities to cash, reducing the
diversification of the Portfolio's investments and adversely affecting its
liquidity. Other shareholders in the Fund may have a greater ownership interest
in the Fund than the Portfolio's interest, and could thus have effective voting
control over the operation of the Fund.
The Trust's Board of Trustees believes that the Portfolio will achieve certain
efficiencies and economies of scale through the "master/feeder" structure, and
that the aggregate expenses of the Portfolio will be less than if the Portfolio
invested directly in the securities held by the Fund. However, other investment
companies that offer their shares to the public also may
7
<PAGE>
invest all or substantially all of their assets in the Fund. Accordingly, there
may be other investment companies through which investors can invest indirectly
in the Fund. The fees charged by such other investment companies may be higher
or lower than those charged by the Portfolio, which may reflect, among other
things, differences in the nature and level of the services and features offered
by such companies to their investors. Information about the availability of
other investment companies that invest in the Fund can be obtained by calling
(800) 551-8643.
The Portfolio may cease investing in the Fund only if the Board of Trustees of
the Trust determines that such action is in the best interests of the Portfolio
and its investors, and only with the approval of the Portfolio's investors. In
that event, the Board of Trustees would consider alternative arrangements,
including investing all of the Portfolio's assets in another investment company
with the same investment objective as the Portfolio or hiring an investment
adviser to manage the Portfolio's assets in accordance with the investment
policies described below and in "Appendix: Investment Policies, Strategies and
Risks."
International Core Growth Fund. The Fund seeks long-term capital appreciation.
Assets of the Fund are invested primarily in a diversified portfolio of equity
securities of international companies with larger market capitalizations (above
$1 billion, which currently includes the top 75th percentile worldwide of
publicly traded companies). Equity securities include common stocks, preferred
stocks, debt securities that are convertible into common stocks, and warrants.
The portion of the Fund's total assets invested in common stock, preferred
stock, and convertible securities will vary according to the Investment
Adviser's assessment of market and economic conditions and outlook.
The Fund may invest in securities issued by companies based or operating in any
country, including the United States. Under normal market conditions, as a
fundamental policy which cannot be changed without shareholder approval, at
least 65% of the Fund's total assets will be invested in securities of issuers
located in at least three countries other than the United States. Under normal
market conditions, the Fund may invest up to 35% of its total assets in
securities of U.S. issuers. With these exceptions, the Fund is not driven by
allocation considerations with respect to any particular countries, geographic
regions or economic sectors. Countries in which investment opportunities will be
sought include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and
the United States. However, the Fund may also invest in securities issued by
companies based in other countries such as the countries of Eastern Europe and
South America, Indonesia, Korea, Mexico, the Philippines, Portugal and Thailand.
See "Appendix: Investment Policies, Strategies and Risks" for a discussion of
the risks associated with investment in foreign securities.
Under normal market conditions, at least 75% of the Fund's total assets will be
invested in equity securities (common and preferred stocks, warrants and
securities convertible into equity securities). The remainder of the Fund's
assets will be invested in debt securities of U.S. and foreign companies and
U.S. and foreign governments and their agencies and instrumentalities which the
Investment Adviser believes present attractive opportunities for capital growth,
as well as in various other securities and instruments described in the
"Appendix: Investment Policies, Strategies and Risks." The debt securities in
which the Fund may invest will be rated at the time of purchase "Baa" or higher
by Moody's Investors Service, Inc. ("Moody's"), "BBB" or higher by Standard &
Poor's Corporation ("S&P") or equivalent ratings by other recognized rating
agencies, or will be unrated if determined by the Investment Adviser to be of
8
<PAGE>
comparable quality. These securities are of investment grade, which means that
their issuers are believed to have adequate capacity to pay interest and repay
principal, although certain of such securities in the lower grades have
speculative characteristics, and changes in economic conditions or other
circumstances may be more likely to lead to a weakened capacity to pay interest
and principal than would be the case with higher rated securities. The
Investment Adviser will evaluate securities downgraded below investment grade on
a case by case basis to determine whether the security continues to be an
acceptable investment. If not, the Fund will sell the security as promptly as
practicable. The Fund will not apply ratings limitations to convertible debt
securities. The Fund may also make short sales, which is considered a
speculative technique. See "Appendix: Investment Policies, Strategies and Risks"
for a discussion of the risks associated with short sale transactions.
Investment Techniques and Processes. The focus of the Investment Adviser's
investment program is growth over time-Registered Trademark-. In making
decisions with respect to equity securities for the Fund, the Investment Adviser
uses a proprietary investment methodology which is designed to capture positive
change at an early stage. It adheres rigorously to this methodology, and applies
it to various segments of the capital markets, domestically and internationally.
This methodology consists of investment techniques and processes designed to
identify companies with attractive earnings and dividend growth potential and to
evaluate their investment prospects. These techniques and processes include
relationships with an extensive network of brokerage and research firms located
throughout the world; computer-assisted fundamental analysis of thousands of
domestic and foreign companies; established criteria for the purchase and sale
of individual securities; portfolio structuring and rebalancing guidelines;
securities trading techniques; and continual monitoring and reevaluation of all
holdings with a view to maintaining the most attractive mix of investments. The
Investment Adviser collects data on approximately 26,000 companies in 35
countries (adjusted for reporting and accounting differences). There can be no
assurance that use of the proprietary investment methodology will be successful.
The decision to invest assets of the Fund in any particular debt security will
be based on such factors as the Investment Adviser's analysis of the effect of
the yield to maturity of the security on the average yield to maturity of the
total debt security portfolio of the Fund, the Investment Adviser's assessment
of the credit quality of the issuer and other factors the Investment Adviser
deems relevant. In managing the Fund's debt security investments, the Investment
Adviser seeks to capture major moves in interest rates and utilizes a
proprietary model to identify interest rate trends in the bond market. There can
be no assurance that use of these techniques will be successful.
Investment Policies, Strategies and Risks. The primary risk of investing in the
Portfolio is market risk, which means that the market value of the equity
securities held by the Fund may decline over short or even extended periods of
time. You should also expect periods when market prices generally rise and
periods when market prices generally decline. The Fund is also subject to the
risks associated with foreign investing. Among these are country risk (the
chance that a country's economy will be hurt by political or financial problems
or natural disasters) and currency risk (the chance that Americans investing
abroad could lose money because of a rise in the value of the U.S. dollar versus
foreign currencies). These risks are generally intensified for investments in
emerging markets.
The Appendix and the Statement of Additional Information describe certain
investment securities and techniques of the Fund, and the associated risks.
These include short-term investments in cash and cash equivalents; investment in
sovereign debt securities of the U.S.
9
<PAGE>
and foreign governments and their agencies and instrumentalities; floating and
variable rate demand notes and bonds; commercial paper; non-convertible
corporate debt securities; convertible securities, synthetic convertible
securities, and warrants; depository receipts; over-the-counter securities;
when-issued securities and firm commitment agreements; foreign exchange
contracts; put and call options on securities and securities indices; stock
index futures contracts; futures and options contracts; repurchase agreements;
illiquid securities; securities lending; and borrowing.
Investment Restrictions. The Portfolio and Fund are subject to certain
investment restrictions which constitute fundamental policies. Fundamental
policies may not be changed without the approval of the holders of a majority of
the outstanding shares of the Portfolio or Fund, respectively, as defined in the
Investment Company Act. An investment policy or restriction which is not
described as fundamental in this Prospectus or the Statement of Additional
Information may be changed or modified by the Board of Trustees of the Trust or
Master Trust, as the case may be, without shareholder approval.
Certain of the investment restrictions which are fundamental policies are set
forth below. Additional investment restrictions are discussed in the Appendix
and Statement of Additional Information.
1. Neither the Portfolio nor the Fund may invest more than 5% of its total
assets in the securities of any one issuer. However, up to 25% of the
Portfolio's or Fund's total assets may be invested without regard to this
limitation, and this limitation does not apply to investments in
securities of the U.S. Government or its agencies and instrumentalities.
2. Neither the Portfolio nor the Fund may purchase more than 10% of the
outstanding voting securities of any one issuer, or purchase the
securities of any issuer for the purpose of exercising control.
3. Neither the Portfolio nor the Fund may invest 25% or more of its total
assets in any one particular industry; however, this restriction does not
apply to the securities of the U.S. Government, its agencies and
instrumentalities.
4. Neither the Portfolio nor the Fund may make loans of its portfolio
securities in an aggregate amount exceeding 30% of the value of its total
assets, or borrow money (except from banks for temporary, extraordinary or
emergency purposes or for the clearance of transactions and in an
aggregate amount not exceeding 20% of the value of its total assets).
5. Neither the Portfolio nor the Fund may invest more than 15% of its net
assets in illiquid securities.
The investment restrictions described above do not apply to an investment by the
Portfolio of all of its assets in the Fund.
Portfolio Turnover. The Investment Adviser's investment approach results in
above-average portfolio turnover, as the Investment Adviser sells portfolio
securities when it believes the reasons for their initial purchase are no longer
valid or when it believes that the sale of a security owned by the Fund and the
purchase of another security of better value can enhance principal or increase
income. A security may also be sold to avoid a prospective decline in market
value or purchased in anticipation of a market rise. Although it is not possible
to predict future portfolio turnover rates accurately, and such rates may vary
greatly from year to year, the Investment Adviser anticipates that the Fund's
annual portfolio turnover rate may be
10
<PAGE>
up to 200%, which is substantially greater than that of many other investment
companies. A high rate of portfolio turnover (100% or more) will result in the
Fund paying greater brokerage commissions on equity securities (other than those
effected with dealers on a principal basis) than would otherwise be the case,
which will be borne directly by the Fund and ultimately by the investors of the
Portfolio. High portfolio turnover should not result in the Fund paying greater
brokerage commissions on debt securities, as most transactions in debt
securities are effected with dealers on a principal basis. However, debt
securities, as well as equity securities traded on a principal basis, are
subject to mark-ups by the dealers. High portfolio turnover may also result in
the realization of substantial net capital gains, and any distributions derived
from such gains may be ordinary income for federal tax purposes.
- --------------------------------------------------------------------------------
ORGANIZATION AND MANAGEMENT
Organization. The Portfolio is a series of Nicholas-Applegate Mutual Funds, a
Delaware business trust. The Board of Trustees of the Trust, in addition to
reviewing the actions of the Trust's administrators and Distributor, as set
forth below, decides upon matters of general policy with respect to the
Portfolio. See "General Information." The trustees and officers of the Trust and
of the Master Trust are described in "Trustees and Principal Officers" in the
Statement of Additional Information. None of the disinterested trustees of the
Trust are the same individuals as the disinterested trustees of the Master
Trust.
Investment Adviser. The Trust has not retained the services of an investment
adviser for the Portfolio, as the Portfolio seeks to achieve its investment
objective by investing all of its assets in the Fund. Nicholas-Applegate Capital
Management, 600 West Broadway, 30th Floor, San Diego, California 92101, serves
as the Investment Adviser to the Fund. The Investment Adviser currently manages
a total of approximately $31 billion of discretionary assets for numerous
clients, including employee benefit plans of corporations, public retirement
systems and unions, university endowments, foundations and other institutional
investors and individuals. The Investment Adviser was organized in 1984 as a
California limited partnership. Its general partner is Nicholas-Applegate
Capital Management Holdings, L.P., a California limited partnership controlled
by Arthur E. Nicholas. He and thirteen other partners manage a staff of
approximately 350 employees.
As compensation for the services it provides, the Investment Adviser receives a
monthly fee at the annual rate of 1.00% on the first $500 million of the Fund's
net assets, 0.90% on the next $500 million of net assets, and 0.85% on net
assets in excess of $1 billion.
The Fund is managed under the general supervision of Mr. Nicholas, who has been
the chief executive officer of the Investment Adviser since its organization. In
addition, John D. Wylie, as Chief Investment Officer-Investor Services Group, is
also responsible for general oversight of the Fund's portfolio. The global
management team headed by Lawrence S. Speidell and Catherine Somhegyi is
primarily responsible for the Investment Adviser's day-to-day management of the
Fund's portfolio. Mr. Speidell has been a portfolio manager with the Investment
Adviser since March 1994; from 1983 until he joined the Investment Adviser, he
was an institutional portfolio manager with Batterymarch Financial Management.
Ms. Somhegyi has managed institutional investments for the Investment Adviser
for more than the last five years.
Administrators. Investment Company Administration Corporation is the
administrator of the Portfolio and of the Master Trust. Pursuant to an
Administration Agreement with both the
11
<PAGE>
Master Trust and the Trust, and subject to the supervision of the Board of
Trustees, ICAC Administrator provides administrative personnel and services
(including certain legal and financial reporting services) necessary to operate
both the Portfolio and the Fund. ICAC is entitled to receive an annual fee of
between $5,000 and $35,000 for each of the groups of portfolios of the Trust
investing in the various series of the Master Trust; the fee is allocated among
various series of the Trust, including the Portfolio, in accordance with
relative net asset values. ICAC is compensated separately for the services
rendered to the Fund at an annual rate of approximately .02% of the average
daily net assets of the Fund.
The Investment Adviser also provides administrative personnel and services to
the Trust pursuant to an Administrative Services Agreement with the Trust, and
is reimbursed for the cost of such services at the annual rate of up to 0.10% of
the average daily assets of the various series of the Trust, including the
portfolio.
Expense Limitation. To limit the expenses of the Portfolio, the Investment
Adviser has agreed to defer its fees, and to absorb the other operating expenses
of the Portfolio, to ensure that the expenses of the Portfolio (excluding
interest, taxes, brokerage commissions and other portfolio transaction expenses,
capital expenditures and extraordinary expenses, but including the Portfolio's
proportionate share of the Fund's similar operating expenses) do not exceed
1.65% of the Portfolio's average net assets on an annual basis through March 31,
1998. The Portfolio will reimburse the Investment Adviser for fees deferred or
other expenses paid by the Investment Adviser pursuant to this agreement in
later years in which operating expenses for the Portfolio are less than the
applicable percentage limitation set forth above for any such year. No interest,
carrying or finance charge will be paid by the Portfolio with respect to any
amounts representing fees deferred or other expenses paid by the Investment
Adviser. In addition, neither the Portfolio nor the Fund will be required to
repay any unreimbursed amounts to the Investment Adviser upon termination or
non-renewal of its Investment Advisory Agreement with the Master Trust.
Distributor. Nicholas-Applegate Securities, 600 West Broadway, 30th Floor, San
Diego, California 92101, a California limited partnership, serves as the
Distributor of shares of each Portfolio. The general partner of the Distributor
is Nicholas-Applegate Capital Management Holdings, L.P. and its limited partner
is the Investment Adviser.
The Trust has adopted a Shareholder Service Plan under which the Portfolio
reimburses the Distributor for shareholder expenses actually incurred with
respect to shares of the Portfolio. Under the Shareholder Service Plan, which is
a "reimbursement" plan, the Portfolio pays the Distributor an annual fee of up
to 0.25% of the Portfolio's average daily net assets as reimbursement for
certain expenses actually incurred in connection with shareholder services
provided by the Distributor and payments to plan administrators and others for
the provision of such services. Support services with respect to the beneficial
owners of the Portfolio's shares include establishing and maintaining accounts
and records relating to clients of plan administrators and others who invest in
the Portfolio's shares, preparing tax reports, assisting clients in processing
exchange and redemption requests and account designations, and responding to
client inquiries concerning their investments. If in any month the Distributor
is due more monies for shareholder services than are immediately payable because
of the expense limitations under the Shareholder Service Plan, the unpaid amount
is carried forward from month to month while the Shareholder Service Plan is in
effect until such time when it may be paid. However, no carried forward amount
will be payable beyond the fiscal year during which the amounts were incurred,
and no interest, carrying or other finance charge is borne by the Portfolio with
respect to any amount carried forward.
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The Distributor, at its expense, may from time to time pay additional cash
bonuses or other incentives to selected participating brokers or financial
institutions in connection with the sale, administration and servicing of the
Portfolio. In some cases, these bonuses or incentives may be offered only to
certain brokers or financial institutions which have sold or may sell
significant amounts of shares of the Portfolio or other series of the Trust. The
Distributor currently expects that any such additional bonuses or incentives
will not exceed 0.50%. Dealers may obtain further information by calling (800)
551-8045.
Custodian and Transfer and Dividend Disbursing Agent. PNC Bank, Airport Business
Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania, 19113,
serves as Custodian for the Portfolio and the Fund. PFPC Inc., an affiliate of
the Custodian, provides accounting services to the Portfolio and the Fund. State
Street Bank and Trust Company, Mutual Funds Division, Nicholas-Applegate, 2
Heritage Drive, 5th Floor, North Quincy, Massachusetts 02171, is the Transfer
Agent and the Dividend Disbursing Agent for the Portfolio.
Portfolio Transactions and Brokerage. The Investment Adviser is responsible for
the Fund's portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser seeks to obtain the best
price and execution for the Fund. Subject to obtaining the best price and
execution, the Investment Adviser may effect transactions through brokers who
sell shares of the Portfolio or provide research services to the Investment
Adviser, which may result in the payment of higher commissions than those
charged by other brokers. However, the selection of such brokers will be made in
accordance with Section 28(e) of the Securities Exchange Act of 1934. Section
28(e) requires the Investment Adviser to make a good faith determination that
the commissions paid are reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities with
respect to the accounts as to which it exercises investment discretion.
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PURCHASING SHARES
How to Purchase Shares. Shares of the Portfolio are offered to (i) qualified
retirement plans (including employer, association and other group retirement
plans), employee benefit trusts, foundations and endowments, (ii) certain
financial institutions having sales or service agreements with the Distributor
or another broker-dealer or financial institution with respect to sales of
shares of the Portfolio, (iii) "wrap accounts" for the benefit of clients of
broker-dealers, financial institutions or financial planners having sales or
service agreements with the Distributor or another broker-dealer or financial
institution with respect to sales of shares of the Portfolio, and (iv) certain
other persons determined from time to time by the Distributor.
Investments by individual participants of qualified retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
all orders for the purchase, redemption and exchange of Portfolio shares. The
availability of an investment by a plan participant in the Portfolio, and the
procedures for investing, depend upon the provisions of the qualified retirement
plan and whether the plan sponsor or administrator has contracted with the Trust
or the Transfer Agent for special processing services, including subaccounting.
Other institutional investors and eligible purchasers must arrange for services
through the Transfer Agent or Distributor by calling (800) 551-8042.
Shares of the Portfolio may be purchased at net asset value without a sales
charge. The minimum initial investment is $250,000 and the minimum subsequent
investment is $10,000.
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The minimum initial and subsequent investments are waived for individual
participants of qualified retirement plans, and may be waived from time to time
by the Distributor for other investors (but not below $12,000). Shares of the
Portfolio may also be purchased with securities which are otherwise appropriate
for investment by the Portfolio. Shares will be purchased for a participant of a
qualified retirement plan only upon receipt by the plan's recordkeeper of the
participant's funds accompanied by the information necessary to determine the
proper share allocation for the participant.
An account may be opened by completing and signing an account application and
sending it to the address indicated on the application. Account applications can
be obtained from the Distributor or Transfer Agent. Individual participants of
qualified retirement plans can obtain an account application from their plan
sponsor or administrator. Plan sponsors and administrators will be responsible
for forwarding to the Transfer Agent all relevant information and account
applications for plan participants.
The Distributor also offers shares of the Trust's Institutional Portfolio series
to qualified retirement programs with total plan assets in excess of $50 million
and certain other taxable and tax-exempt investors. The Institutional Portfolios
have no shareholder service plan, and investors must make separate arrangements
with administrators or others for services provided pursuant to such plans.
Information about the Trust's Institutional Portfolio series can be obtained by
calling (800) 551-8643.
Purchases of shares of the Portfolio can be made by check or by wiring federal
funds to the Transfer Agent. Checks should be in U.S. dollars and made payable
to Nicholas-Applegate Mutual Funds or, in the case of a retirement account, the
custodian or trustee. Third party checks will normally not be accepted. Checks
should be sent to the Transfer Agent, State Street Bank and Trust Company, P.O.
Box 8326, Boston, Massachusetts 02266-8326, Attention: Mutual Funds Division,
Nicholas-Applegate. Please specify the name of the Portfolio, the account number
assigned by the Transfer Agent, and your name. See "Purchase by Wire" below for
wiring instructions.
Purchase by Wire. Purchase of shares of the Portfolio can be made by wiring
federal funds to the Transfer Agent. Before wiring federal funds, you must first
telephone the Transfer Agent at (800) 551-8043 (toll-free) between the hours of
8:00 A.M. and 4:00 P.M. (Eastern Time) on a day when the New York Stock Exchange
is open for normal trading to receive an account number. The following
information will be requested: your name, address, tax identification number,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to the
Portfolio's Transfer Agent, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, ABA No. 011000028, DDA No. 9904-645-0
Attention: Mutual Funds Division, Nicholas-Applegate, specifying on the wire the
name of the Portfolio, the account number assigned by the Transfer Agent and
your name. If you arrange for receipt by the Transfer Agent of federal funds
prior to close of trading (currently 4:00 P.M., Eastern time) of the New York
Stock Exchange on a day when the Exchange is open for normal trading, you may
purchase shares of the Portfolio as of that day. Your bank is likely to charge
you a fee for wire transfers.
Subsequent purchases by wire may be made at any time by calling the Transfer
Agent and wiring federal funds as outlined above.
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Individual participants of qualified retirement plans should purchase Portfolio
shares through their plan sponsor or administrator who is responsible for
forwarding payment to the Transfer Agent.
Share Price. Shares are purchased at the next offering price after the order is
received in proper form by the Transfer Agent or a sub-transfer agent. An order
in proper form must include all correct and complete information, documents and
signatures required to process your purchase, as well as a check or bank wire
payment properly drawn and collectable. For purchases by a qualified retirement
plan, an order in proper form is defined as receipt of funds and the information
necessary to determine the proper share allocation for each participant. The
price per share is its net asset value, which is determined as of the close of
trading of the New York Stock Exchange on each day the Exchange is open for
normal trading. Orders received before 4:00 P.M. (Eastern time) on a day when
the Exchange is open for normal trading will be processed as of the close of
trading on that day. Otherwise, processing will occur on the next business day.
To determine the Portfolio's net asset value per share, the current value of the
Portfolio's total assets, less all liabilities, is divided by the total number
of shares outstanding, and the result is rounded to the nearer cent.
Investors may be charged a fee if they affect transactions through a broker or
agent.
Retirement Plans. You may invest in the Portfolio through various retirement
plans including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans (including 401(k) plans). For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please consult your tax adviser.
Other Portfolios. Currently, the Trust has nine Qualified Portfolios. Eight
domestic and global Qualified Portfolios are offered pursuant to separate
prospectuses which can be obtained by calling (800) 973-8473. The Distributor
also offers shares of other portfolios of the Trust which invest in the same
Funds of the Master Trust as the Qualified Portfolios. These other portfolios
have different sales charges and other expenses than the Qualified Portfolios,
which may affect their performance. Information about these other portfolios can
be obtained from your dealer or by calling (800) 551-8643.
Other Purchase Information. Purchases of Portfolio shares will be made in full
and fractional shares. In the interest of economy and convenience, certificates
for shares will generally not be issued. The Portfolio reserves the right to
reject any purchase order or to suspend or modify the continuous offering of its
shares.
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INVESTOR SERVICES
Automatic Investment Plan. Investors may make regular monthly or quarterly
investments in the Portfolio through automatic withdrawals of specified amounts
from their bank account once an automatic investment plan is established.
Individual participants of qualified retirement plans may make regular
investments in the Portfolio through payroll deductions in accordance with
procedures adopted by the plan sponsor or administrator. Further details about
this service and an application form are available from the Distributor or from
your plan sponsor or administrator.
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Automatic Reinvestment. Dividends and capital gain distributions are reinvested
in additional shares at no sales charge unless you indicate otherwise on the
account application. You may elect to have dividends and capital gain
distributions paid in cash.
Cross-Reinvestment. You may cross-reinvest dividends or dividends and capital
gain distributions paid by the Portfolio into shares of any other Qualified
Portfolio series of the Trust, subject to conditions outlined in the Statement
of Additional Information and the applicable provisions of the qualified
retirement plan.
Exchange Privilege. Shares of the Portfolio may be exchanged into shares of any
other available Qualified Portfolio or Series A Portfolio of the Trust by
writing to the Transfer Agent, State Street Bank and Trust Company, Attention:
Mutual Funds Division, Nicholas-Applegate, P.O. Box 8326, Boston, Massachusetts
02266-8326. Please specify the name of the applicable series, the number of
shares or dollar amount to be exchanged and your name and account number. Shares
may also be exchanged by telephoning the Transfer Agent at (800) 551-8043 or by
sending the Transfer Agent a facsimile at (617) 774-2651, between the hours of
8:00 A.M. and 4:00 P.M. (Eastern time) on a day when the New York Stock Exchange
is open for normal trading (see "Telephone Privilege" below).
The Trust's exchange privilege is not intended to afford shareholders a way to
speculate on short-term market movements. Accordingly, the Trust reserves the
right to limit the number of exchanges an investor or participant may make in
any year, to avoid excessive Portfolio expenses.
Individual participants of qualified retirement plans may exchange shares
(depending upon the provisions of the plan) by written or telephone request
through the plan sponsor or administrator. Such participants may exchange shares
only for shares of other Institutional Portfolios that are included in their
plans. In addition, the exchange privilege may not be available to investors who
are eligible to purchase shares of the Portfolio as a result of agreements
between the Distributor and certain broker-dealers, financial planners and
similar institutions.
Before effecting an exchange, investors should obtain the currently effective
prospectus of the series into which the exchange is to be made. All exchanges
will be made on the basis of the relative net asset values of the two series
next determined after a completed request is received. Exchange purchases are
subject to the minimum investment requirements of the series being purchased. An
exchange will be treated as a redemption and purchase for tax purposes.
Telephone Privilege. Investors may exchange or redeem shares by telephone if
they have elected the telephone privilege on their account application.
Participants in qualified retirement plans may make telephone requests only
through their plan sponsor or administrator and only if such service is offered
under the plan. Investors should realize that by electing the telephone
privilege, they may be giving up a measure of security that they may have if
they were to exchange or redeem their shares in writing. Furthermore, in periods
of severe market or economic conditions, telephone exchanges or redemptions may
be difficult to implement, in which case investors should mail or send by
overnight delivery a written exchange or redemption request to the Transfer
Agent. Overnight deliveries should be sent to the Transfer Agent, Attention:
Mutual Funds Division, Nicholas-Applegate, 2 Heritage Drive, 7th Floor, North
Quincy, Massachusetts 02171. Requests for telephone exchanges or redemptions
received before 4:00 P.M. (Eastern time) on a day when the New York Stock
Exchange is open for normal trading will be processed as of the close of trading
on that day. Otherwise, processing will occur on the next business day.
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The Trust will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures employed by the Trust include requiring personal identification by
account number and social security number, tape recording of telephone
instructions, and providing written confirmation of transactions. The Trust
reserves the right to refuse a telephone exchange or redemption request if it
believes, for example, that the person making the request is neither the record
owner of the shares being exchanged or redeemed nor otherwise authorized by the
investor to request the exchange or redemption. Investors will be promptly
notified of any refused request for a telephone exchange. Neither the Portfolio
nor its agents will be liable for any loss, liability or cost which results from
acting upon instructions of a person reasonably believed to be an investor with
respect to the telephone exchange privilege.
Automatic Withdrawal Plan. An automatic withdrawal plan may be established by an
investor or by a qualified retirement plan sponsor or administrator for its
participants subject to the requirements of the plan and applicable federal law.
Individual participants of qualified retirement plans must establish automatic
withdrawal plans with the plan sponsor or administrator rather than the Trust.
Automatic withdrawals of $250 or more may be made on a monthly, quarterly,
semi-annual or annual basis if you have an account of at least $15,000 when the
automatic withdrawal plan begins. Withdrawal proceeds will normally be received
prior to the end of the period designated. All income dividends and capital gain
distributions on shares under the Automatic Withdrawal Plan must be reinvested
in additional shares of the Portfolio. For the protection of investors and the
Trust, wiring instructions must be on file prior to executing any request for
the wire transfer of automatic withdrawal proceeds.
Account Statements. An account is opened in accordance with applicable
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from the Transfer Agent (for qualified retirement plans,
such statements will be provided by the plan sponsor or administrator).
Reports to Investors. The Portfolio will send its investors annual and
semi-annual reports. The financial statements appearing in annual reports will
be audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Portfolios may provide one annual and semi-annual report
and annual prospectus per household. In addition, quarterly unaudited financial
data are available from the Portfolio upon request.
Investor Inquiries. Investor inquiries should be addressed to the Trust, P.O.
Box 82169, San Diego, California 92138-2169, or by telephone, at (800) 551-8643
(toll free). Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
The services referred to above are available only in states where the Portfolio
to be purchased may be legally offered and may be terminated or modified at any
time upon 60 days' written notice. Investors seeking to add to, change or cancel
their selection of available services should contact the Transfer Agent of the
address and telephone number provided above.
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REDEEMING SHARES
How to Redeem Shares. Shares of the Portfolio may be redeemed by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention: Mutual Funds
Division, Nicholas-
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Applegate, P.O. Box 8326, Boston, Massachusetts 02266-8326. Redemptions by
participants in qualified retirement plans must be made in writing to the plan
sponsor or administrator rather than the Trust. Please specify the name of the
Portfolio, the number of shares or dollar amount to be sold and your name and
account number. The price received for the shares redeemed is at the next
determined net asset value for the Portfolio shares after the redemption request
is received by the Transfer Agent or a sub-transfer agent. No charge will be
imposed by the Trust or the Transfer Agent for redemptions.
The signature(s) on a redemption request must be exactly as name(s) appear on
the Portfolio's account records, and the request must be signed by the minimum
number of persons designated on the account application that are required to
effect a redemption. Requests by participants of qualified retirement plans must
include all other signatures required by the plan and applicable Federal law.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. If the proceeds of the redemption exceed
$50,000, are to be paid to a person other than the record owner, are to be sent
to an address other than the address on the Transfer Agent's records, or are to
be paid to a corporation, partnership, trust or fiduciary, the signature(s) on
the redemption request may be required to be guaranteed by an "eligible
guarantor," which includes a bank or savings and loan association that is
federally insured or a member firm of a national securities exchange.
Redemptions by Telephone. If an election is made on the account application (or
subsequently in writing), redemptions of shares may be requested by contacting
the Transfer Agent by telephone at (800) 551-8043 or by facsimile at (617)
774-2651 between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading. Investors should
state the name of the Portfolio, the number of shares or dollar amount to be
sold and their name and account number. Participants of qualified retirement
plans may make telephonic or facsimile redemption requests through their plan
sponsor or administrator, provided that such service is offered under the plan
and satisfactory arrangements have been made with the Transfer Agent. Redemption
requests received by the Transfer Agent before 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading and be processed
that day. Otherwise, processing will occur on the next business day. See
"Investor Services-Telephone Privilege" above.
Redemption Payments. Payment for shares presented for redemption will ordinarily
be wired to your bank one business day after redemption is requested, but may
take up to three business days after receipt by the Transfer Agent of a written
or telephonic redemption request except as indicated below. Such payment may be
postponed or the right of redemption suspended at times when the New York Stock
Exchange is closed for other than customary weekends and holidays, when trading
on such Exchange is restricted, when an emergency exists as a result of which
disposal by the Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio fairly to
determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits. Payment for redemption
of recently purchased shares will be delayed until the Transfer Agent has been
advised that the purchase check has been honored, up to 15 calendar days from
the time of receipt of the purchase check by the Transfer Agent. Such delay may
be avoided by purchasing shares by wire or by certified or official bank check.
Involuntary Redemption. In order to reduce expenses of the Portfolio, the Trust
may redeem all of the shares of any investor whose account has a net asset value
of less than $10,000 due to
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redemptions other than a shareholder who is a participant in a qualified
retirement plan. The Trust will give such investors 60 days' prior written
notice in which to purchase sufficient additional shares to avoid such
redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust intends to qualify the Portfolio as a regulated investment company
under the Internal Revenue Code. Accordingly, the Portfolio will not be subject
to federal income taxes on its net investment income and capital gains, if any,
that it distributes to its investors. All dividends out of net investment
income, together with distributions of short-term capital gains, will be taxable
as ordinary income to the investors whether or not reinvested. Any net long-term
capital gains distributed to investors will be taxable as such to the investors,
whether or not reinvested and regardless of the length of time an investor has
owned his shares.
The Portfolio declares and pays annual dividends of net investment income and
makes distributions at least annually of its net capital gains, if any. In
determining amounts of capital gains to be distributed by the Portfolio, any
capital loss carryovers from prior years will be offset against its capital
gains. Under U.S. Treasury Regulations, the Portfolio is required to withhold
and remit to the U.S. Treasury 31% of the dividends, capital gains and
redemption proceeds on the accounts of those investors who fail to furnish their
correct tax identification numbers on IRS Form W-9 (or IRS Form W-8, in the case
of certain foreign investors) with the required certifications regarding the
investor's status under the federal income tax law or who are subject to backup
withholding for failure to include payments of interest or dividends on their
returns. Notwithstanding the foregoing, dividends of net income and short-term
capital gains to a foreign investor will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
The Trust may elect to "pass through" to the Portfolio's shareholders the amount
of foreign income taxes paid by the Portfolio. The Trust will make such an
election only if it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of the Portfolio will be required to
include in their gross income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
The Fund is not required to pay federal income taxes on its net investment
income and capital gains, as it is treated as a partnership for tax purposes.
Any interest, dividends and gains or losses of the Fund will be deemed to have
been "passed through" to the Portfolio and other investors in the Fund,
regardless of whether such interest, dividends or gains have been distributed by
the Fund or losses have been realized by the Portfolio and such other investors.
Investors should consult their own tax advisers regarding specific questions as
to federal, state or local taxes. See "Taxes" in the Statement of Additional
Information.
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GENERAL INFORMATION
Performance Information. From time to time the Trust may advertise the
Portfolio's total return. These figures are based on historical earnings and are
not intended to indicate future performance. Total return shows how much an
investment in the Portfolio would have increased (or decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the
Portfolio) assuming that all distributions and dividends by the Trust to
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investors of the Portfolio were reinvested on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes which may be payable by the investor. The Trust also may include
comparative performance information in advertising or marketing Portfolio
shares. Such performance information may include data from Lipper Analytical
Services, Inc., other industry publications, business periodicals, rating
services and market indices. See "Performance Information" in the Statement of
Additional Information.
Description of Shares. The Portfolio is a series of Nicholas-Applegate Mutual
Funds, a diversified, open-end management investment company. The Trust was
organized in December 1992 as a Delaware business trust. The Trust is authorized
to issue an unlimited number of shares of the Portfolio. Shares of the
Portfolio, when issued, are fully paid, nonassessable, fully transferable and
redeemable at the option of the holder. Shares of the Portfolio are also
redeemable at the option of the Trust under certain circumstances. There are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of the Portfolio is entitled to its portion of all of
the Portfolio's assets after all debts and expenses of the Portfolio have been
paid. Pursuant to the Trust's Declaration of Trust, the Board of Trustees of the
Trust may authorize the creation of additional series, and classes within
series, with such preferences, privileges, limitations and voting and dividend
rights as the Board may determine.
Investors of the Portfolio are entitled to one vote for each full share held and
fractional votes for fractional shares held, and will vote by series except as
otherwise required by law or when the Board of Trustees of the Trust determines
that a matter to be voted upon affects only the interests of investors of a
particular series. Shares of the Trust do not have cumulative voting rights for
the election of Trustees. The Trust does not intend to hold annual meetings of
its investors unless otherwise required by law. The Trust will not be required
to hold meetings of investors unless the election of Trustees or any other
matter is required to be acted on by investors under the Investment Company Act.
Investors have certain rights, including the right to call a meeting upon the
request of 10% of the outstanding shares of the Trust, for the purpose of voting
on the removal of one or more Trustees.
Master Trust. The Fund is a series of Nicholas-Applegate Investment Trust, a
diversified, open-end management investment company organized as a Delaware
business trust in December 1992. The trustees and officers of the Master Trust
are described in the Statement of Additional Information. Whenever the Portfolio
is requested to vote on matters pertaining to the Fund or the Master Trust in
its capacity as a shareholder of the Fund, the Trust will hold a meeting of its
investors and will cast its vote as instructed by such investors or, in the case
of a matter pertaining exclusively to the Fund, as instructed particularly by
investors of the Portfolio and other series of the Trust which invest in the
Fund. The Trust will vote shares for which it has received no voting
instructions in the same proportion as the shares for which it does receive
voting instructions.
Additional Information. This Prospectus, including the Statement of Additional
Information which has been incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by the Trust
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Master Trust has also filed a Registration Statement with the
Commission. Copies of the Trust's and Master Trust's Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
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APPENDIX
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INVESTMENT POLICIES, STRATEGIES AND RISKS
The investment policies and strategies of the Portfolio (as implemented through
its investment in the Fund) encompass the following securities, techniques and
risk considerations.
Equity Securities. The Fund will invest primarily in equity securities,
including common and preferred stocks, convertible securities and warrants.
Common stocks, the most familiar type of equity securities, represent an equity
(ownership) interest in a corporation. Preferred stock, unlike common stock,
offers a stated dividend rate payable from the issuer's earnings and also
generally has a preference over common stock in the event of liquidation of the
issuer. See "Convertible Securities and Warrants" for a description of
convertible securities and warrants. The Fund may invest in equity securities of
growth companies, cyclical companies, companies with small market
capitalizations or companies believed to be undergoing a basic change in
operations or markets which could result in a significant improvement in
earnings. Although equity securities have a history of long term growth in
value, their prices fluctuate based on changes in the issuer's financial
condition and prospects and on overall market and economic conditions.
Short-Term Investments. The Fund may retain cash (U.S. dollars, foreign
currencies, or multinational currency units) and make short-term investments to
maintain liquidity for redemptions or during periods when, in the opinion of the
Investment Adviser, attractive investments are temporarily unavailable. Under
normal circumstances, no more than 10% of the Fund's total assets will be
retained in cash and short-term investments. However, the Fund may retain cash
and make short-term investments without restriction for temporary defensive
purposes, such as when the securities markets or economic conditions are
expected to enter a period of decline. Short-term investments in which the Fund
may invest include U.S. Treasury bills or other U.S. Government or Government
agency or instrumentality obligations; certificates of deposit; bankers'
acceptances; time deposits; high quality commercial paper and other short-term
high grade corporate obligations; shares of money market mutual funds; or
repurchase agreements with respect to such securities. These instruments are
described below. The Fund will only invest in short-term investments which, in
the opinion of the Investment Adviser, present minimal credit and interest rate
risk.
Government Obligations. Securities issued or guaranteed by the U.S. Government
or its agencies and instrumentalities in which the Fund may invest include U.S.
Treasury securities, which differ only in their interest rates, maturities and
times of issuance. Treasury bills have initial maturities of one year or less;
Treasury notes have initial maturities of one to ten years; and Treasury bonds
generally have initial maturities of more than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow money from the Treasury; others, such as those
issued by the Federal National Mortgage Association, by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to U.S.
Government-sponsored agencies and instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund will
invest
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in securities issued or guaranteed by U.S. Government agencies and
instrumentalities only when the Investment Adviser is satisfied that the credit
risk with respect to the issuer is minimal.
The Fund may invest in sovereign debt securities of foreign governments and
their agencies and instrumentalities. Investments in such securities involve
special risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to pay principal or
interest when due in accordance with the terms of the debt. Periods of economic
uncertainty may result in the volatility of market prices of sovereign debt, and
in turn the Fund's net asset value, to a greater extent than the volatility
inherent in domestic fixed income securities.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. The Fund may
invest in certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks, foreign banks, foreign branches of domestic banks, domestic
and foreign branches of foreign banks, and domestic savings and loan
associations, all of which at the date of investment have capital, surplus and
undivided profits as of the date of their most recent published financial
statements in excess of $100 million, or less than $100 million if the principal
amount of such bank obligations is insured by the Federal Deposit Insurance
Corporation. Certificates of deposit are certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer; these instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity.
Commercial Paper. The Fund may invest in commercial paper of domestic and
foreign entities which is rated (or guaranteed by a corporation the commercial
paper of which is rated) in the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"), including
"P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P, or, if rated by only one
NRSRO, in such NRSRO's two highest grades, or, if not rated, is issued by an
entity which the Investment Adviser, acting pursuant to guidelines established
by the Master Trust's Board of Trustees, has determined to be of minimal credit
risk and comparable quality. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
Variable Rate Demand Notes. The Fund may purchase floating and variable rate
demand notes and bonds, which are obligations ordinarily having stated
maturities in excess of one year, but which permit the holder to demand payment
of principal at any time, or at specified intervals not exceeding one year, in
each case upon not more than 30 days' notice. Variable rate demand notes include
master demand notes, which are obligations that permit the Fund to invest
fluctuating amounts, which may change daily without penalty. The interest rates
on these notes are adjusted at designated intervals or whenever there are
changes in the market rates of interest on which the interest rates are based.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Such obligations frequently are not rated by credit rating agencies and
the Fund may invest in obligations which are not so rated only if the Investment
Adviser
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determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Investment
Adviser will monitor the creditworthiness of the issuers of such obligations and
their earning power and cash flow, and will also consider situations in which
all holders of such notes would redeem at the same time. Investment by the Fund
in floating or variable rate demand obligations as to which it cannot exercise
the demand feature on not more than seven days' notice will be subject to the
Fund's limit on illiquid securities of 15% of net assets if there is no
secondary market available for these obligations.
Corporate Debt Securities. The non-convertible corporate debt securities in
which the Fund may invest include obligations of varying maturities (such as
debentures, bonds and notes) over a cross-section of industries. The value of a
debt security changes as interest rates fluctuate, with longer-term securities
fluctuating more widely in response to changes in interest rates than those of
shorter-term securities. A decline in interest rates usually produces an
increase in the value of debt securities, while an increase in interest rates
generally reduces their value. The corporate debt securities purchased by the
Fund are of investment grade. For short-term purposes, the Fund may also invest
in corporate obligations issued by domestic and foreign issuers which mature in
one year or less and which are rated "Aa" or higher by Moody's, "AA" or higher
by S&P, rated in the two highest rating categories by any other NRSRO, or which
are unrated but determined by the Investment Adviser to be of minimal credit
risk and comparable quality.
Convertible Securities and Warrants. The Fund may invest in securities which may
be exchanged for, converted into, or exercised to acquire a predetermined number
of shares of the issuer's common stock at the option of the holder during a
specified time period (such as convertible preferred stocks, convertible
debentures and warrants). Convertible securities generally pay interest or
dividends and provide for participation in the appreciation of the underlying
common stock but at a lower level of risk because the yield is higher and the
security is senior to common stock. Convertible debt securities purchased by the
Fund, which are acquired in whole or substantial part for their equity
characteristics, are not subject to rating requirements.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value.
Like debt securities, the market value of convertible securities tends to vary
inversely with the level of interest rates. The value of the security declines
as interest rates increase and increases as interest rates decline. Although
under normal market conditions longer term securities have greater yields than
do shorter term securities of similar quality, they are subject to greater price
fluctuations. Fluctuations in the value of the Fund's investments will be
reflected in its and the Portfolio's net asset value per share. A convertible
security may be subject to redemption at the option of the issuer at a price
established in the instrument governing the convertible security.
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If a convertible security held by the Fund is called for redemption, the Fund
will be required to permit the issuer to redeem the security, convert it into
the underlying common stock or sell it to a third party.
Warrants give the holder the right to purchase at any time during a specified
period a predetermined number of shares of common stock at a fixed price but do
not pay a fixed dividend. Investments in warrants involve certain risks,
including the possible lack of a liquid market for resale, potential price
fluctuations as a result of speculation or other factors, and the failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised, in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein. As a matter of operating policy, the Fund will
not invest more than 5% of its net assets in warrants.
Synthetic Convertible Securities. The Fund may invest in "synthetic" convertible
securities, which are derivative positions composed of two or more different
securities whose investment characteristics, taken together, resemble those of
convertible securities. For example, the Fund may purchase a non-convertible
debt security and a warrant, which enables the Fund to have a convertible-like
position with respect to a company group of companies or stock index. Synthetic
convertible securities are typically offered by financial institutions and
investment banks in private placement transactions. Upon conversion, the Fund
generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike a
true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market value
of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. The Fund only invests in synthetic convertibles with
respect to companies whose corporate debt securities are rated investment grade
by Moody's or S&P, or an equivalent rating by any other NRSRO, and will not
invest more than 15% of its net assets in such synthetic securities and other
illiquid securities. See "Illiquid Securities" below.
Eurodollar Convertible Securities. The Fund may invest in Eurodollar convertible
securities, which are fixed income securities of a U.S. issuer or a foreign
issuer that are issued outside the United States and are convertible into or
exchangeable for equity securities of the same or a different issuer. Interest
and dividends on Eurodollar securities are payable in U.S. dollars outside of
the United States. The Fund may invest without limitation in Eurodollar
convertible securities that are convertible into or exchangeable for foreign
equity securities listed, or represented by ADRs listed, on the New York Stock
Exchange or the American Stock Exchange or convertible into or exchangeable for
publicly traded common stock of U.S. companies. The Fund may also invest up to
15% of its total assets invested in convertible securities, taken at market
value, in Eurodollar convertible securities that are convertible into or
exchangeable for foreign equity securities which are not listed, or represented
by ADRs listed, on such exchanges.
Country Funds. Closed-end and open-end country funds in which the Fund may
invest are registered closed-end and open-end investment companies which hold
portfolio securities of issuers operated or located in a single country or
geographical region. The extent to which the Fund may invest in closed-end and
open-end country funds is limited by the Investment Company Act. Accordingly, as
a fundamental policy, the Fund will not own more than 3% of the outstanding
voting stock of any closed-end or open-end investment company, will not invest
more than 10% of its total assets in securities issued by closed-end and
open-end investment companies nor, together with other investment companies
managed by the
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<PAGE>
Investment Adviser, will own more than 10% of any closed-end or open-end
investment company. Assets of the Fund invested in closed-end and open-end
country funds are subject to advisory and other fees imposed by the closed-end
and open-end country funds, as well as to fees imposed by the Fund.
Depository Receipts. The Fund may invest in American Depository Receipts
("ADRs"), which are receipts issued by an American bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. ADRs,
in registered form, are designed for use in U.S. securities markets. Such
depository receipts may be sponsored by the foreign issuer or may be
unsponsored. The Fund may also invest in European and Global Depository Receipts
("EDRs" and "GDRs"), which, in bearer form, are designed for use in European
securities markets, and in other instruments representing securities of foreign
companies. Such depository receipts may be sponsored by the foreign issuer or
may be unsponsored. Unsponsored depository receipts are organized independently
and without the cooperation of the foreign issuer of the underlying securities;
as a result, available information regarding the issuer may not be as current as
for sponsored depository receipts, and the prices of unsponsored depository
receipts may be more volatile than if they were sponsored by the issuers of the
underlying securities.
Foreign Investment Considerations. There are special risks associated with
investments in securities of foreign companies and governments, which add to the
usual risks inherent in domestic investments. Such special risks include
fluctuations in foreign exchange rates, political or economic instability in the
country of issue, and the possible imposition of exchange controls or other laws
or restrictions. In addition, securities prices in foreign markets are generally
subject to different economic, financial, political and social factors than are
the prices of securities in United States markets. With respect to some foreign
countries there may be the possibility of expropriation or confiscatory
taxation, limitations on liquidity of securities or political or economic
developments which could affect the foreign investments of the Fund. Moreover,
securities of foreign issuers generally will not be registered with the
Securities and Exchange Commission and such issuers generally will not be
subject to the Commission's reporting requirements. Accordingly, there is likely
to be less publicly available information concerning certain of the foreign
issuers of securities held by the Fund than is available concerning U.S.
companies. Foreign companies are also generally not subject to uniform
accounting, auditing and financial reporting standards or to practices and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign broker-dealers, financial
institutions and listed companies than exists in the United States. The Fund
will not invest in securities denominated in a foreign currency unless, at the
time of investment, such currency is considered by the Investment Adviser to be
fully exchangeable into United States dollars without significant legal
restriction. See "Investment Objectives, Policies and Risks--Foreign
Investments" in the Statement of Additional Information.
Special Considerations Regarding Emerging Markets Investments. Investments by
the Fund in securities issued by the governments of emerging or developing
countries, and of companies within these countries, involves greater risks than
other foreign investments. Investments in emerging or developing markets involve
exposure to economic and legal structures that are generally less diverse and
mature (and in some cases the absence of developed legal structures governing
private and foreign investments and private property), and to political systems
which can be expected to have less stability, than those of more developed
countries. The risks of investment in such countries may include matters such as
relatively unstable governments, higher degrees of government involvement in the
economy, the absence until recently of
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<PAGE>
capital market structures or market-oriented economies, economies based on only
a few industries, securities markets which trade only a small number of
securities, restrictions on foreign investment in stocks, and significant
foreign currency devaluations and fluctuations.
Emerging markets can be substantially more volatile than both U.S. and more
developed foreign markets. Such volatility may be exacerbated by illiquidity.
The average daily trading volume in all of the emerging markets combined is a
small fraction of the average daily volume of the U.S. market. Small trading
volumes may result in the Fund being forced to purchase securities at
substantially higher prices than the current market, or to sell securities at
much lower prices than the current market.
Over-the-Counter Securities. Securities owned by the Fund may be traded in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of securities trading on a national
securities exchange. As a result, disposition by the Fund of portfolio
securities to meet redemptions by investors or otherwise may require the Fund to
sell these securities at a discount from market prices, to sell during periods
when such disposition is not desirable, or to make many small sales over a
lengthy period of time.
When-Issued Securities and Firm Commitment Agreements. The Fund may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions in which the payment obligation and interest
rate are fixed at the time of the transaction but the settlement is delayed).
Delivery and payment for these securities typically occur 15 to 45 days after
the commitment to purchase. No interest accrues to the purchaser during the
period before delivery. There is a risk in these transactions that the value of
the securities at settlement may be more or less than the agreed upon price, or
that the party with which the Fund enters into such a transaction may not
perform its commitment. The Fund will normally enter into these transactions
with the intention of actually receiving or delivering the securities. The Fund
may sell the securities before the settlement date.
To the extent the Fund engages in any of these transactions it will do so for
the purpose of acquiring securities for its portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage. The Fund will segregate liquid assets such as cash, U.S. Government
securities and other liquid high quality debt or equity securities in an amount
sufficient to meet their payment obligations with respect to these transactions.
The Fund may not purchase when-issued securities or enter into firm commitments
if, as a result, more than 15% of the Fund's net assets would be segregated to
cover such contracts.
Short Sales. The Investment Adviser believes that its growth equity management
approach, in addition to identifying equity securities the earnings and prices
of which it expects to grow at an above average rate, 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 have the right to acquire. A short sale that
is not made "against the box" is a transaction in which the Fund sells a
security it does not own in anticipation of a decline in market price. When the
Fund makes a short sale, the proceeds it receives are retained by the broker
until the Fund replaces the borrowed security. In order to deliver the security
to the buyer, the Fund must arrange through a broker to borrow the security and,
in so doing, the Fund becomes obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be.
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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 special risks
considerations and may be considered a speculative technique. Since the Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share, and that of the Portfolio,
will tend to increase more when the securities it has sold short increase in
value, than would otherwise be the case if it had not engaged in such short
sales. Short sales theoretically involve unlimited loss potential, as the market
price of securities sold short may continuously increase, although the Fund may
mitigate such losses by replacing the securities sold short before the market
price has increased significantly. Under adverse market conditions the Fund
might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales. The value of securities of
any issuer in which a Fund maintains a short position which is "not against the
box" may not exceed the lesser of 2% of the value of the Fund's net assets or 2%
of the securities of such class of the issuer.
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. 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.
In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the Investment Company Act, unless the sale
is "against the box" and the securities sold are placed in a segregated account
(not with the broker), or unless the Fund's obligation to deliver the securities
sold short is "covered" by placing in a segregated account (not with the broker)
cash, U.S. Government securities or other liquid debt or equity securities in an
amount equal to the difference between the market value of the securities sold
short at the time of the short sale and any such collateral required to be
deposited with a broker in connection with the sale (not including the proceeds
from the short sale), which difference is adjusted daily for changes in the
value of the securities sold short. The total value of the cash, U.S. Government
securities or other liquid debt or equity securities deposited with the broker
and otherwise segregated may not at any time be less than the market value of
the securities sold short at the time of the short sale. The Fund will comply
with these requirements. In addition, as a matter of policy, the Master Trust's
Board of Trustees has determined that the Fund will not make short sales of
securities or maintain a short position if to do so could create liabilities or
require collateral deposits and segregation of assets aggregating more than 25%
of the Fund's total assets, taken at market value.
The Fund's ability to enter into short sales transactions is limited by the
requirements of the Internal Revenue Code with respect to the Portfolio's
qualification as a regulated investment company. See "Dividends, Distributions
and Taxes" in the Statement of Additional Information.
Foreign Exchange Contracts. Since the Fund will invest primarily in securities
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect the values of its portfolio securities and
the unrealized appreciation or depreciation of its
27
<PAGE>
investments. The rate of exchange between the U.S. dollar and other currencies
is determined by forces of supply and demand in the foreign exchange markets.
These forces are affected by the international balance of payments and other
economic and financial conditions, government intervention, speculation and
other factors.
The Fund may enter into derivative positions such as foreign exchange forward
contracts or currency futures or options contracts for the purchase or sale of
foreign currency to "lock in" the U.S. dollar price of the securities
denominated in a foreign currency or the U.S. dollar equivalent of interest and
dividends to be paid on such securities, or to hedge against the possibility
that the currency of a foreign country in which the Fund has investments may
suffer a decline against the U.S. dollar. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund may
purchase a particular currency or enter into a forward currency contract to
preserve the U.S. dollar price of securities it intends to or has contracted to
purchase. Alternatively, the Fund might sell a particular currency on either a
spot (cash) basis at the rate then prevailing in the currency exchange market or
on a forward basis by entering into a forward contract to purchase or sell
currency, to hedge against an anticipated decline in the U.S. dollar value of
securities it intends or has contracted to sell. This method of attempting to
hedge the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. The Fund is not obligated to engage in any such currency hedging
operations, and there can be no assurance as to the success of any hedging
operations which the Fund may implement. Although the strategy of engaging in
foreign currency transactions could reduce the risk of loss due to a decline in
the value of the hedged currency, it could also limit the potential gain from an
increase in the value of the currency. The Fund does not intend to maintain a
net exposure to such contracts where the fulfillment of the Fund's obligations
under such contracts would obligate the Fund to deliver an amount of foreign
currency in excess of the value of the Fund's portfolio securities or other
assets denominated in that currency.
Options. The Fund may purchase listed 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, for hedging purposes, subject to the
following restrictions: the aggregate premiums on call options purchased by the
Fund may not exceed 5% of the market value of net assets of the Fund as of the
date the call options are purchased, and the aggregate premiums on put options
may not exceed 5% of the market value of the net assets of the Fund as of the
date such options are purchased. In addition the Fund will not purchase or sell
options if, immediately thereafter, more than 25% of its net assets would be
hedged. A "put" gives a holder the right, in return for the premium paid, to
require the writer of the put to purchase from the holder a security at a
specified price. A "call" gives a holder the right, in return for the premium
paid, to require the writer of the call to sell a security to the holder at a
specified price. An option on a securities index (such as a stock index) gives
the holder the right, in return for the premium paid, to require the writer to
pay cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiplier.
Put and call options are derivative securities traded on United States and
foreign exchanges, including the American Stock Exchange, Chicago Board Options
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock
Exchange. Additionally, the Fund may purchase options not traded on a securities
exchange, which may bear a greater risk of nonperformance than options traded on
a securities exchange. Options not traded on an
28
<PAGE>
exchange are considered dealer options and generally lack the liquidity of an
exchange traded option. Accordingly, dealer options may be subject to the Fund's
restriction on investment in illiquid securities, as described below. Dealer
options may also involve the risk that the securities dealers participating in
such transactions will fail to meet their obligations under the terms of the
option.
The Fund may also write listed covered options on up to 25% of the value of its
respective net assets. Call options written by the Fund give the holder the
right to buy the underlying securities from the Fund at a stated exercise price;
put options written by the Fund give the holder the right to sell the underlying
security to the Fund. A call option is covered if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration upon conversion or exchange of
securities currently held by the Fund. A put option is covered if the Fund
maintains liquid assets such as cash, U.S. Government securities, or other
liquid high quality debt or equity securities equal to the exercise price in a
segregated amount with its Custodian. If an option written by a Fund expires
unexercised, the Fund realizes a gain equal to the premium received at the time
the option was written. If an option purchased by the Fund expires unexercised,
the Fund realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option written by the Fund
may be closed out by an offsetting purchase or sale of an option of the same
series. The Fund will realize a gain from a closing purchase transaction if the
cost of the closing transaction is less than the premium received from writing
the option; if it is more, the Fund will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium paid to
purchase the option, the Fund will realize a gain; if it is less, the Fund will
realize a loss.
Futures Contracts. The Fund may purchase and sell stock index futures contracts
as a hedge against changes in market conditions. A stock index futures contract
is a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made.
The Fund may also purchase and sell financial and currency futures contracts as
a hedge against changes in interest rates and foreign currency fluctuations, and
may purchase and sell related options on futures contracts. A financial or
currency futures contract obligates the seller of the contract to deliver and
the purchaser of the contract to take delivery of the type of financial
instrument or currency called for in the contract at a specified future time
(the settlement date) for a specified price. Although the terms of a contract
call for actual delivery or acceptance of the financial instrument or currency,
the contracts will be closed out before the delivery date without delivery or
acceptance taking place. Futures options possess many of the same
characteristics as options on securities and indices. A futures option gives the
holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at any
time during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true. A
futures option may be closed out before exercise or expiration by an offsetting
purchase or sale of a futures option of the same series.
Financial, currency and stock index futures contracts are derivatives
instruments traded on United States commodities and futures exchanges, including
the Chicago Mercantile Exchange, the New York Futures Exchange, the Kansas City
Board of Trade, the Chicago Board of Trade
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<PAGE>
and the International Monetary Market, as well as commodity and securities
exchanges located outside the United States, including the London International
Financial Futures Exchange, the Singapore International Monetary Exchange, the
Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
The Fund will not engage in transactions in futures contracts for speculation,
but only as a hedge against the risk of unexpected changes in the values of
securities held or intended to be held by the Fund. As a general rule, the Fund
will not purchase or sell futures if, immediately thereafter, more than 25% of
its net assets would be hedged. In addition, the Fund may not purchase or sell
futures or related options if, immediately thereafter, the sum of the amount of
margin deposits on the Fund's existing futures positions and premiums paid for
such options would exceed 5% of the market value of the Fund's net assets. See
"Investment Objectives, Policies and Risks--Futures Contracts and Related
Options" in the Statement of Additional Information.
Special Hedging Considerations. Special risks are associated with the use of
options and futures contracts as hedging techniques. There can be no guaranty of
a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. A lack of correlation could result in a loss
on both the hedged securities in the Fund and the hedging vehicle, so that the
Fund's return might have been better had hedging not been attempted. In
addition, a decision as to whether, when and how to use futures involves the
exercise of skill and judgment which are different from those needed to select
portfolio securities, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior, currency fluctuations or interest
rate trends. If the Investment Adviser is incorrect in its forecasts regarding
market values, currency fluctuations, interest rate trends or other relevant
factors, the Fund may be in a worse position than if the Fund had not engaged in
options or futures transactions. The potential loss incurred by the Fund in
writing options and engaging in futures transactions is unlimited. The
Investment Adviser is experienced in the use of options and futures contracts as
an investment technique.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out an option position or futures contract. Most futures
exchanges and boards of trade limit the amount of fluctuation in futures
contract prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Fund from liquidating an unfavorable position and the
Fund would remain obligated to meet margin requirements until the position is
closed. See "Investment Objectives, Policies and Risks-- Options and Securities
and Securities Indices" and "--Futures Contracts and Related Options" in the
Statement of Additional Information.
The Fund's ability to enter into options and futures contracts is limited by the
requirements of the Internal Revenue Code with respect to the Portfolio's
qualification as a regulated investment company. See "Taxes" in the Statement of
Additional Information.
Repurchase Agreements. The Fund may on occasion enter into repurchase
agreements, in which the Fund purchases securities and the seller agrees to
repurchase them from the Fund at a mutually agreed-upon time and price. The
period of maturity is usually overnight or a few days, although it may extend
over a number of months. The resale price is in excess of the purchase price,
reflecting an agreed-upon rate of return effective for the period of time the
Fund's money is invested in the security. The Fund's repurchase agreements will
at all times
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be fully collateralized in an amount at least equal to 102% of the purchase
price, including accrued interest earned on the underlying securities. The
instruments held as collateral are valued daily and, if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. If bankruptcy proceedings are commenced
with respect to the seller, realization upon the collateral by the Fund may be
delayed or limited. The Fund will only enter into repurchase agreements
involving securities in which it could otherwise invest and with selected
financial institutions and brokers and dealers which meet certain
creditworthiness and other criteria.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933
("restricted securities"), securities which are otherwise not readily marketable
such as over-the-counter, or dealer traded, options, and repurchase agreements
having a maturity of more than seven days. Mutual funds do not typically hold a
significant amount of restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and the Fund might not be able to dispose of restricted or other securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, the Investment Adviser may
determine, pursuant to guidelines established by the Board of Trustees of the
Master Trust, that such securities are not illiquid securities notwithstanding
their legal or contractual restrictions on resale, based on factors such as the
frequency of trades and quotes for the securities, the number of dealers and
others wishing to purchase and sell the securities, and the nature of the
security and the marketplace trades. In all other cases, however, securities
subject to restrictions on resale will be deemed illiquid. Investing in
securities with legal or contractual restrictions under Rule 144A could have the
effect of increasing the level of illiquidity in the Fund to the extent that the
qualified institutional buyers become uninterested in purchasing such
securities.
Securities Lending. To increase its income, the Fund may lend its portfolio
securities to financial institutions such as banks and brokers if the loan is
collateralized in accordance with applicable regulatory requirements. The Master
Trust's Board of Trustees has adopted an operating policy that limits the amount
of loans made by the Fund to not more than 30% of the value of the total assets
of the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured
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a letter of credit. The amounts received by the Fund will be reduced by any fees
and administrative expenses associated with such loans. In addition, such loans
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or even loss of rights in the collateral should the borrower
of the securities fail financially. However, such securities lending will be
made only when, in the Investment Adviser's judgment, the income to be earned
from the loans justifies the attendant risks. Loans are subject to termination
at the option of the Fund or the borrower.
Borrowing. The Fund may borrow money from banks in amounts up to 20% of its
total assets (calculated when the loan is made) only for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
Purchases of portfolio securities while borrowings are outstanding create
leverage and involve special risk considerations. Interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales. All borrowings by the Fund will be
made only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all borrowings.
If such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law. Short sales "not
against the box" are considered borrowings for purposes of the percentage
limitations applicable to borrowings.
32
<PAGE>
NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO
600 West Broadway
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
, 1997
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 International Core Growth Qualified Portfolio (the
"International Core Growth Portfolio").
The various Qualified Portfolios of the Trust may from time to time be
collectively referred to as the "Nicholas-Applegate Advisory Portfolios."
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
International Core Growth 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-23
Trustees and Principal Officers. . . . . . . . . . . . . . B-27
Investment Adviser . . . . . . . . . . . . . . . . . . . . B-31
Administrator. . . . . . . . . . . . . . . . . . . . . . . B-33
Distributor. . . . . . . . . . . . . . . . . . . . . . . . B-34
Portfolio Transactions and Brokerage . . . . . . . . . . . B-34
Purchase and Redemption of Portfolio Shares. . . . . . . . B-36
Shareholder Services . . . . . . . . . . . . . . . . . . . B-36
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . B-38
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . B-40
Performance Information. . . . . . . . . . . . . . . . . . B-45
Custodian, Transfer and Dividend Disbursing
Agent, Independent Accountants and Legal Counsel . . . . B-46
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . B-47
Appendix A - Description of Securities Ratings . . . . . . A-1
B-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 International Core Growth Qualified 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
International Core Growth Fund (the "International Core Growth Fund"), in
which the International Core Growth Portfolio invests.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of the
International Core Growth Portfolio's investment objective and policies as
set forth in the Portfolio's Prospectus. As the International Core Growth
Portfolio seeks to achieve its investment objective by investing all of its
assets in the International Core Growth Fund, which has the same investment
objective as the Portfolio, the following discussion describes the various
investment policies and techniques employed by the International Core Growth
Fund. There can be no assurance that the investment objective of the
International Core Growth Fund or the International Core Growth Portfolio can
be achieved.
PREFERRED STOCK
Preferred stock, unlike common stock, offers a stated dividend rate
payable from a corporation's earnings. Such preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest
rates rise, the fixed dividend on preferred stocks may be less attractive,
causing the price of preferred stocks to decline. Preferred stock may have
mandatory sinking fund provisions, as well as call/redemption provisions
prior to maturity, a negative feature when interest rates decline. Dividends
on some preferred stock may be "cumulative," requiring all or a portion of
prior unpaid dividends to be paid. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating,"
which means that it may be entitled to a dividend exceeding the stated
dividend in certain cases. The rights of preferred stocks on the distribution
of a corporation's assets in the event of a liquidation are generally
subordinate to the rights associated with a corporation's debt securities.
CONVERTIBLE SECURITIES AND WARRANTS
The International Core Growth 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
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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.
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 International Core Growth 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. The Fund will not retain debt securities
downgraded below investment grade in excess of 5% of its net assets.
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. In addition, the
International Core Growth Fund's return on the debt securities in which it
invests depends on the continuing ability of the issuers of such debt
securities to meet their obligations for the payment of interest and
principal when due.
SHORT-TERM INVESTMENTS
The International Core Growth 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.
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Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and
undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less
than $100 million if the principal amount of such bank obligations are fully
insured by the U.S. Government.
The Fund's holdings of instruments of foreign banks or financial
institutions may be subject to additional investment risks that are different
in some respects from those incurred by a fund which invests only in debt
obligations of U.S. domestic issuers. See "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.
B-4
<PAGE>
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by
Moody's, or similarly rated by another nationally recognized statistical
rating organization or, if unrated, will be determined by the Investment
Adviser to be of comparable quality. These rating symbols are described in
Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper.
While such obligations generally have maturities of ten years or more, the
Fund may purchase corporate obligations 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.
In addition to the advisory and other fees paid by the Fund, 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.
The Fund may invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay principal and
interest in a timely manner
B-5
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may be affected by a number of factors, including its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may
be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitments on
the part of these governments, agencies and others to make such disbursements
may be conditioned on a sovereign debtor's implementation of economic reforms
and/or economic performance and the timely service of such debtor's
obligations. Failure to meet such conditions could result in the cancellation
of such third parties' commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debt in a timely manner.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Fund may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however,
unrated variable and floating rate instruments purchased by the Fund will be
determined by the Investment Adviser under guidelines established by the
Master Trust's Board of Trustees to be of comparable quality at the time of
the purchase and rated instruments eligible for purchase by the Fund. In
making such determinations, the Investment Adviser will consider the earning
power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active
secondary market may not exist with respect to particular variable or
floating rate instruments purchased by the Fund. The absence of such an
active secondary market could make it difficult for the Fund to dispose of
the variable or floating rate instrument involved in the event of the issuer
of the instrument defaulted on its payment obligation or during periods in
which the Fund is not entitled to exercise its demand rights, and the Fund
could, for these or other reasons, suffer a loss to the extent of the
default. Variable and floating rate instruments may be secured by bank
letters of credit.
FOREIGN INVESTMENTS
The International Core Growth 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
International Core Growth 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.
B-6
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DEPOSITORY RECEIPTS. American Depository Receipts ("ADRs") may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in the United States dollars; the
underlying security may be denominated in a foreign currency, although the
underlying security may be subject to foreign government taxes which would
reduce the yield on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, diversification
and balance of payments position. The internal politics of certain foreign
countries may not be as stable as those of the United States. Governments in
certain foreign countries also continue to participate to a significant
degree, through ownership interest or regulation, in their respective
economies. Action by these governments could include restrictions on foreign
investment, nationalization, expropriation of goods or imposition of taxes,
and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment by
these trading partners of protectionist trade legislation could have a
significant adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. 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
B-7
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ability to act upon economic events occurring in foreign markets during
non-business hours in the United States.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and
less financial information available to issuers, than is available in the
United States.
TAXES. The interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the
Portfolio's shareholders. A shareholder otherwise subject to United States
federal income taxes may, subject to certain limitations, be entitled to
claim a credit or deduction of U.S. federal income tax purposes for his
proportionate share of such foreign taxes paid by the Fund.
COSTS. The expense ratio of the Fund is likely to be higher than
those of investment companies investing in domestic securities, since the
cost of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics
of the particular company, differences between economic trends and the
performance of securities markets within the U.S. and those within other
countries, and also factors relating to the general economic, governmental
and social conditions of the country or countries where the company is
located. The extent to which the Fund will be invested in 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 International Core Growth Fund
is authorized to purchase "put" and "call" options with respect to securities
which are otherwise eligible for purchase by the Fund and with respect to
various stock indices subject to certain restrictions. 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
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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, 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 International Core Growth 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
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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.
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
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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 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 International Core Growth 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.
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<PAGE>
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 illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Fund may buy or sell put and call options on foreign currencies. A
put or call option on a foreign currency gives the purchaser of the option the
right to sell or purchase a foreign currency at the exercise price until the
option expires. The Fund will use foreign currency options separately or in
combination to control currency volatility. Among the strategies employed to
control currency volatility is an option collar. An option collar involves the
purchase of a put option and the simultaneous sale of a call option on the same
currency with the same expiration date but with different exercise (or "strike")
prices. Generally, the put option will have an out-of-the-money strike price,
while the call option will have either an at-the-money strike price or an in-
the-money strike price. Foreign currency options are derivative securities.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Fund to reduce foreign currency risk
using such options.
As with other kinds of option transactions, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received. The Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movement adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund
might purchase a particular currency or enter into a forward currency contract
to preserve the U.S. dollar price of securities it intends to or has contracted
to purchase. Alternatively, it might sell a particular currency on either a
spot or forward basis to hedge against an anticipated decline in the dollar
value of securities it intends to or has contracted to sell. Although this
strategy could minimize the risk of loss due to a decline in the value of the
hedged currency, it could also limit any potential gain from an increase in the
value of the currency.
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FUTURES CONTRACTS AND RELATED OPTIONS
The International Core Growth 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 cash, U.S.
Government securities, or other high quality liquid debt or equity securities 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, U.S. Government securities, other high quality liquid debt or equity
securities 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 International Core Growth 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.
B-13
<PAGE>
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific price. The specific securities delivered or
taken, respectively, at settlement date, would not be determined until at or
near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchased for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund's entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. The Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The Fund may use foreign currency
future contracts for hedging purposes. A foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("EUC"). Other foreign currency
futures
B-14
<PAGE>
contracts are likely to be developed and traded in the future. The Fund
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because
of the imperfect correlation between movements in the price of the futures
contract and movements in the price of the securities which are the subject
of the hedge. The price of the future may move more or less than the price of
the securities being hedged. If the price of the future moves less than the
price of the securities which are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position
than if it had not hedged at all. If the price of the securities being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the future. If the price of the future moves more than
the price of the hedged securities, the Fund will experience either a loss or
a gain on the future which will not be completely offset by movements in the
price of the securities which are subject to the hedge.
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
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price distortions in the futures market and the imperfect correlation between
movements in the cash market and the price of securities and movements in the
price of futures, a correct forecast of general trends by the Investment
Adviser may still not result in a successful hedging transaction over a very
short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
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 International
Core Growth 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
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<PAGE>
to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option.
Upon exercise, the writer of the option is obligated to pay the difference
between the cash value of the futures contract and the exercise price. Like
the buyer or seller of a futures contract, the holder or writer of an option
has the right to terminate its position prior to the scheduled expiration of
the option by selling, or purchasing an option of the same series, at which
time the person entering into the closing transaction will realize a gain or
loss. There is no guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option. Depending on the pricing of the
option compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or may not be
less risky than ownership of the futures contract or such securities. In
general, the market prices of options can be expected to be more volatile
than the market prices on the underlying futures contracts. Compared to the
purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to
the Fund 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 International Core Growth Portfolio as a regulated
investment company. See "Taxes."
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<PAGE>
REPURCHASE AGREEMENTS
The International Core Growth Fund may enter into repurchase
agreements with respect to its portfolio securities. Pursuant to such
agreements, the Fund acquires securities from financial institutions such as
banks and broker-dealers as are deemed to be creditworthy by the Investment
Adviser, subject to the seller's agreement to repurchase and the Fund's
agreement to resell such securities at a mutually agreed upon date and price.
The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be
more or less than the rate on the underlying portfolio security). Securities
subject to repurchase agreements will be held by the Custodian or in the
Federal Reserve/Treasury Book-Entry System or an equivalent foreign system.
The seller under a repurchase agreement will be required to maintain the
value of the underlying securities at not less than 102% of the repurchase
price under the agreement. If the seller defaults on its repurchase
obligation, the Fund holding the repurchase agreement will suffer a loss to
the extent that the proceeds from a sale of the underlying securities is less
than the repurchase price under the agreement. Bankruptcy or insolvency of
such a defaulting seller may cause the Fund's rights with respect to such
securities to be delayed or limited. Repurchase agreements are considered to
be loans under the Investment Company Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The International Core Growth 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.
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<PAGE>
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees
to purchase the securities. The Fund does not earn interest on the
securities it has committed to purchase until they are paid for and delivered
on the settlement date.
BORROWING
The International Core Growth 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 or reduce the lenders' commitment thereunder in increments of
$2,500,000.
While outstanding, the Revolving Credit Loans will bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or
(ii) the prime rate of interest of Chemical Bank. If, as a result of changes
in applicable laws, regulations or 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
B-19
<PAGE>
increments of $100,000 without premium or penalty. No Portfolio is liable
for repayment of a Revolving Credit Loan to any other Portfolio.
The Credit Agreement contains, among other things, covenants that
require each Portfolio to maintain certain minimum ratios of debt to net
worth; limit the ability of the Trust to incur other indebtedness and create
liens on its assets or guarantee obligations of others; merge or consolidate
with, or sell its assets to, others; make material changes in its method of
conducting business; make distributions to shareholders in excess of the
requirements of Subchapter M of the Internal Revenue Code in the event of a
default under the Credit Agreement; or make changes in fundamental investment
policies. The Credit Agreement also contains other terms and conditions
customary in such agreements, including various events of default.
LENDING PORTFOLIO SECURITIES
The International Core Growth 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.
B-20
<PAGE>
To meet current margin requirements, the Fund is also required to deposit
with the broker additional cash or securities so that the total deposit with
the broker is maintained daily at 150% of the current market value of the
securities sold short (100% of the current market value if a security is held
in the account that is convertible or exchangeable into the security sold
short within 90 days without restriction other than the payment of money).
Short sales by 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 International Core Growth Portfolio as a regulated investment company.
See "Taxes."
B-21
<PAGE>
ILLIQUID SECURITIES
The International Core Growth 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.
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 has
determined that such securities are not illiquid securities notwithstanding
their legal or contractual restrictions on resale. In all other cases,
however, securities subject to restrictions on resale will be deemed illiquid.
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.
B-22
<PAGE>
The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "bottom-up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is
guided by three critical questions: Is there positive change? Is it
sustainable? Is it timely? The Investment Adviser uses these three factors
because it focuses on discovering positive developments when they first show
up in an issuer's earnings, but before they are fully reflected in the price
of the issuer's securities. The Investment Adviser is always looking for
companies that are driving change and surpassing analysts' expectations. It
seeks to identify companies poised for rapid growth. The Investment Adviser
focuses on recognizing successful companies, regardless of their
capitalizations or whether they are domestic or foreign.
As indicated in the International Core Growth 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 International Core Growth 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 International Core Growth Portfolio, and
the Master Trust, on behalf of the International Core Growth 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
International Core Growth 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 International Core
Growth 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 International Core Growth Portfolio's assets
in another investment
B-23
<PAGE>
company with the same investment objective, policies and restrictions as the
Portfolio or hiring an investment adviser to manage the Portfolio's assets in
accordance with the investment objectives, policies and restrictions of the
Portfolio described in the Portfolio's Prospectus and in this Statement of
Additional Information.
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
Neither the International Core Growth Fund nor the International Core
Growth 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
B-24
<PAGE>
banks and will be made only to the extent that the value of the Fund's total
assets, less its liabilities other than borrowings, is equal to at least 300%
of all borrowings (including the proposed borrowing). If such asset coverage
of 300% is not maintained, the Portfolio or Fund will take prompt action to
reduce its borrowings as required by applicable law.
7. May pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Portfolio or
Fund from engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid.
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.
B-25
<PAGE>
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 International Core
Growth Portfolio nor the International Core Growth 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 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 any officer or director of ICAC, the Distributor, or
the Investment Adviser owning more than 1/2 of 1% of the outstanding securities
of such issuer, own in the aggregate more than 5% of the outstanding securities
of such issuer.
4. May lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.
5. May invest in warrants, valued at the lower of cost or market, in
excess of 5% of the market value of the 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
B-26
<PAGE>
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.
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).
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), MasTec Inc., construction
(since 1994), and Coinmach Laundry Corporation (since 1996); 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 or its affiliates received $100,000
in 1995 and $100,000 in 1996 from the Investment Adviser as compensation for
consulting services provided from time to time to the Investment Adviser.
B-27
<PAGE>
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-28
<PAGE>
<TABLE>
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual from Trust and
Compensation as Part of Trust Benefits Upon Trust Complex
Name from 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.*/
Managing Partner and Chief Investment Officer, Nicholas-Applegate Capital
Management (since 1984), and Chairman / President Nicholas-Applegate
Securities. Director and Chairman of the Board of Directors of
Nicholas-Applegate Fund, Inc., a registered open-end investment company,
since 1987.
DANN V. ANGELOFF, TRUSTEE. 727 West Seventh Street, Los Angeles,
California. President, The Angeloff Company, corporate financial advisers
(since 1976); 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), 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 Advisors, L.P., an investment manager (since
1994); and Banyan Realty Fund (since 1987), Banyan Strategic Land Fund (since
1987), Banyan Strategic Land Fund II (since 1988), and Banyan Mortgage Fund
(since 1988), real estate investment trusts. Formerly Chairman and Chief
Executive Officer, Chicago Board Options Exchange (1979 to 1986) and Senior
Executive Vice President, Director and Member of the Executive Committee,
PaineWebber, Inc. (until 1979). Mr. Auch is considered to be an "interested
person" of the Master Trust under the 1940 Act because he is a director of a
company which has a broker-dealer subsidiary.
B-29
<PAGE>
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991) and research associate, Harvard Graduate School of Education (since 1996);
Director, Nicholas-Applegate Fund, Inc. (since 1987), Emerging Germany Fund
(since 1991), Moovies, Inc. (since 1995). Formerly Managing Director of Global
Equity Transactions Group and member of Board of Directors, Prudential
Securities (from 1986 to June 1991).
DARLENE DEREMER, TRUSTEE.*/ 155 South Street, Wrentham, Massachusetts.
President and Founder, DeRemer Associates, a marketing consultant for the
financial services industry (since 1987); Vice President, PBHG Funds, Inc.
(since 1995); formerly Vice President and Director, Asset Management Division,
State Street Bank and Trust Company (from 1982 to 1987), and Vice President, T.
Rowe Price & Associates (1979 to 1982); Director, 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).
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
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
Master Trust for the fiscal year ended March 31, 1996, to the Trustees who are
not affiliated with the Investment Adviser and the aggregate compensation paid
to such Trustees for service
B-30
<PAGE>
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):
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Master
Compensation Benefits Accrued Estimated Annual Trust and Master
from Master as Part of Master Benefits Upon Trust Complex
Name Trust Trust Expenses Retirement Paid to Trustee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dann V. Angeloff $15,500 None N/A $32,500 (13*)
Walter E. Auch $15,000 None N/A $15,000 (12*)
Theodore J. $15,000 None N/A $29,000 (13*)
Coburn
Darlene Deremer $15,000 None N/A $15,000 (12*)
George F. Keane $15,000 None N/A $15,000 (12*)
</TABLE>
* Indicates total number of funds in Master Trust complex, including the
Master Trust 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 350 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.
B-31
<PAGE>
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Master Trust and
the Investment Adviser with respect to the International Core Growth Fund,
the Master Trust retains the Investment Adviser to manage the International
Core Growth Fund's investment portfolio, subject to the direction of the
Master Trust's Board of Trustees. The Investment Adviser is authorized to
determine which securities are to be bought or sold by the Fund and in what
amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by the
International Core Growth 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 Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act of
1940). The Investment Advisory Agreement may be terminated with respect to
the International Core Growth 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 International Core Growth 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
International Core Growth 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 International
Core Growth 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 1.41% of the average net assets of the Portfolio
through March 31, 1998.
B-32
<PAGE>
ADMINISTRATORS
The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, ICAC 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. ICAC has no supervisory responsibility over the
investment operations of the Portfolios. The management or administrative
services of ICAC for the Trust are not exclusive under the terms of the
Administration Agreement and ICAC is free to, and does, render management and
administrative services to others. ICAC also serves as the Administrator for
the Master Trust.
For its services, ICAC 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, ICAC currently receives aggregate compensation at the rate of
$250,000 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, ICAC 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. ICAC 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, ICAC 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 ICAC or the
Investment Adviser, (c) out-of-pocket travel expenses for the officers and
Trustees of the Trust and other expenses of Board of Trustees' meetings, (d)
the fees and certain expenses of the Custodian, (e) the fees and expenses of
the Transfer and Dividend Disbursing Agent that relate to the maintenance of
each shareholder account, (f) the charges and expenses of the Trust's legal
counsel and independent accountants, (g) brokerage commissions and any issue
or transfer taxes chargeable to Trustees and officers of the Trust in
connection with securities transactions, (h) all taxes and corporate fees
payable by the Trust to federal, state and other governmental agencies, (i)
the fees of any trade association of which the Trust may be members, (j) the
cost of maintaining the Trust's existence, taxes and interest, (k) the cost
of fidelity and liability insurance, (l) the fees and expenses involved in
registering and maintaining the registration of the Trust and of its shares
with the Commission and registering the Trust as a broker or dealer and
qualifying their shares under state securities laws, including the
preparation and printing of
B-33
<PAGE>
the Trust's registration statement, prospectuses and statements of additional
information, (m) allocable communication expenses with respect to investor
services and all expenses of shareholders' and Board of Trustees' meetings
and of preparing, printing and mailing prospectuses and reports to
shareholders, (n) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the business of
the Trust, and (o) expenses assumed by the Trust pursuant to any plan of
distribution adopted in conformity with Rule 12b-1 under the Investment
Company Act.
The Administration Agreement provides that ICAC 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 ICAC'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
ICAC 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.
Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer
agents, accounting agents, independent accountants and legal counsel. These
services are comprised principally of assistance in coordinating with the
Trust's various service providers, providing certain officers of the Trust,
responding to inquiries from shareholders which are directed to the Trust
rather than other service providers, calculating performance data, providing
various reports to the Board of Trustees, and assistance in preparing
reports, prospectuses, proxy statements and other shareholder communications.
The Agreement contains provisions regarding liability and termination
similar to those of the Administration Agreement.
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 Portfolio. The Distributor is a California
limited partnership organized in 1992 to distribute shares of registered
investment companies. Its general partner is Nicholas-Applegate Capital
Management Holdings, L.P., the general partner of the Investment Adviser.
DISTRIBUTION AGREEMENT
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the
Portfolio, 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
B-34
<PAGE>
indemnify the Distributor to the extent permitted by applicable law against
certain liabilities under the Securities Act.
SHAREHOLDER SERVICE PLAN
The Trust has also adopted a Shareholder Service Plan with respect to
the International Growth Portfolio. Under the Shareholder Service Plan, the
Distributor is compensated at the annual rate of 0.25% of the Portfolio's
average daily net assets for certain shareholder service expenses provided by
the Distributor and fees paid to plan sponsors and others for the provision
of support services to their clients who are beneficial owners of shares of
the Portfolio.
Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in the
Portfolio's shares; processing dividend and distribution payments from the
Portfolio on behalf of clients; preparing tax reports; arranging for bank
wires; responding to client inquiries concerning their investments in the
Portfolio's shares; providing the information to the Portfolio necessary for
accounting and subaccounting; preparing tax reports, forms and related
documents; forwarding shareholder communications from the Trust (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to clients; assisting in processing
exchange and redemption requests from clients; assisting clients in changing
dividend options, account designations and addresses; and providing such
other similar services.
The Shareholder Service Plan continues in effect from year to year;
provided that each such continuance is approved at least annually by a vote
of the Board of Trustees of the Trust, including a majority of the Trustees
who have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder
Service Plan (the "Independent Trustees"), case in person at a meeting called
for the purpose of voting on such continuance. The Shareholder Service Plan
may be amended at any time by the Board, provided that any material
amendments of the terms of the Plan will be come effective only upon the
approval by a majority of the Board and a majority of the independent
Trustees pursuant to a vote cast in person at a meeting called for the
purpose of voting on the Plan. The Shareholder Service Plan may be
terminated with respect to the Portfolio at any time, without penalty, by the
Board.
Under the Shareholder Service Plan, the Distributor pays plan sponsors
and others an account servicing fee of up to 0.25% annually of the average
daily net assets of the International Core Growth Portfolio attributable to
shares in the accounts of their customers, as compensation for providing
certain shareholder-related services.
MISCELLANEOUS
Pursuant to the Shareholder Service Plan, the Board of Trustees will
review at least quarterly a written report of the service expenses incurred
on behalf of shares of the Portfolio by the Distributor. The report will
include an itemization of the distribution and service expenses and the
purposes of such expenditures.
B-35
<PAGE>
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 International Core Growth Fund's portfolio transactions and the
allocation of the brokerage business. In executing such transactions, the
Investment Adviser will seek to obtain the best price and execution for the
Fund, taking into account such factors as price, size of order, difficulty
and risk of execution and operational facilities of the firm involved.
Securities in which the Fund invest may be traded in the over-the-counter
markets, and the Fund deals directly with the dealers who make markets in
such securities except in those circumstances where better prices and
execution are available elsewhere. Commission rates are established pursuant
to negotiation with brokers or dealers based on the quality or quantity of
services provided in light of generally prevailing rates, and while the
Investment Adviser generally seeks reasonably competitive commission rates,
the Fund does not necessarily pay the lowest commissions available. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Board of Trustees of the Master Trust.
The International Core Growth 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 Portfolio 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 International Core Growth 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
B-36
<PAGE>
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.
PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the International Core Growth 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.
Payment for shares redeemed will not be made more than seven days after
receipt of a written or telephonic request in appropriate form, except as
permitted by the 1940 Act and the rules thereunder.
SHAREHOLDER SERVICES
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the International Core Growth
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 International
Core Growth 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.
B-37
<PAGE>
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of the International Core
Growth Portfolio on a monthly or quarterly basis on any day of the month or
quarter by authorizing his or her bank account to be debited to invest
specified dollar amounts in shares of the Portfolio. The investor's bank
must be a member of the Automatic Clearing House System. Participation in
the Plan will begin within 30 days after receipt of the account application.
If the investor's bank account cannot be charged due to insufficient funds, a
stop-payment order or closing of the account, the investor's Plan may be
terminated and the related investment reversed. The investor may change the
amount of the investment or discontinue the Plan at any time by writing to
the Transfer Agent. Further information about this program and an
application form can be obtained from the Transfer Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in the International Core Growth 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 International
Core Growth 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 International
Core Growth 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
B-38
<PAGE>
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.
NET ASSET VALUE
The net asset value of a share of the International Core Growth
Portfolio is calculated by dividing (i) the value of the securities held by
the Portfolio (I.E., the value of its investments in the International Core
Growth Fund), plus any cash or other assets, minus all liabilities (including
accrued estimated expenses on an annual basis), by (ii) the total number of
shares of the Portfolio outstanding. The net asset value of an interest in
the International Core Growth 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
International Core Growth Portfolio or the International Core Growth 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 quoted bid price for such
securities, or if such prices are not available, at prices for securities of
comparable maturity, quality and type; however, when the Investment Adviser
deems it appropriate, prices obtained for the day of valuation from a bond
pricing service will be used, as discussed below. Debt securities with
maturities of 60 days or less are valued at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from
the sixty-first day prior to maturity, their value on the sixty-first day
prior to maturity if their term to maturity from date of purchase by the
International Core Growth Portfolio or the International Core Growth 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 last available bid price, except that securities with a
demand feature exercisable within one to seven days are valued at par. Such
valuations are based on
B-39
<PAGE>
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.
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.
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TAXES
MASTER TRUST'S TAX STATUS
The International Core Growth Fund will be treated as a partnership
rather than as a regulated investment company or a corporation under the
Internal Revenue Code (the "Code"). As a partnership under the Code, any
interest, dividends and gains or losses of the Master Trust attributable to
the Fund will be deemed to have been "passed through" to the Trust and other
investors in such Fund, regardless of whether the interest, dividends or
gains have been distributed by the Fund or such losses have been realized and
recognized by the Trust and other investors. Therefore, to the extent the
Fund were to accrue but not distribute any interest, dividends or gains, the
Trust and other investors in the Fund would be deemed to have realized and
recognized their proportionate shares of interest, dividends, gains or losses
realized and recognized by the Fund without receipt of any corresponding
distribution. However, the Master Trust will seek to minimize recognition by
investors in the Fund of interest, dividends, gains or losses allocable to
the Fund without a corresponding distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify the International Core Growth
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 International Core Growth
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 International Core Growth Portfolio generally will be subject to a
nondeductible excise tax of 4% to the extent that it does not meet certain
minimum
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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.
Dividends paid by the International Core Growth 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 International Core
Growth 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 International Core Growth 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
International Core Growth 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.
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A shareholder who acquires shares of the International Core Growth
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 the 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 International Core Growth Portfolio is
considered tax exempt in their particular states.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the International Core Growth 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
International Core Growth 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 International Core Growth 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 International Core Growth 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.
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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 International Core
Growth Portfolio's and the International Core Growth 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 International Core Growth Fund accrues interest or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, gains or losses
on disposition of debt securities denominated in a foreign currency and on
disposition of certain futures attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security or
contract and the date of disposition also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988"
gains or losses, may increase or decrease the amount of the International
Core Growth Portfolio's investment company taxable income to be distributed
to the shareholders.
FOREIGN TAX. Income received by the International Core Growth 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 International Core Growth 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
International Core Growth Portfolio's taxable year whether the foreign taxes
paid by the International Core Growth 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 International Core Growth 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
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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 International Core Growth Fund may be treated as debt
securities that are issued originally at a discount. Generally, the amount
of the original issue discount ("OID") is treated as interest income and is
included in income over the term of the debt security, even though payment of
that amount is not received until a later time, usually when the debt
security matures. A portion of the OID includible in income with respect to
certain high-yield corporation debt securities may be treated as a dividend
for Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the International
Core Growth 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 International
Core Growth 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 International Core Growth 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 International Core Growth 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
International Core Growth
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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 International Core Growth 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 International Core Growth Portfolio may be required to withhold
for U.S. federal income taxes 31% of all taxable distributions payable to
shareholders who fail to provide the Portfolio with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified
in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal tax liability.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states
which have income tax laws, the tax treatment of the Trust and of
shareholders of the International Core Growth 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
International Core Growth Portfolio. Any performance information should be
considered in light of the Portfolio's and the International Core Growth
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
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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 International Core Growth 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.
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.
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The Charles Schwab Trust Company, 101 Montgomery Street, San
Francisco, California 94104, serves as 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; 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 LLP, 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
Trust is currently comprised of 52 series of shares -- nine A
Portfolios, nine B Portfolios, nine C Portfolios, fifteen institutional
Portfolios, one Money Market Portfolio and nine 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 International Core Growth Portfolio's fundamental
investment policies would be voted upon only by shareholders of that
Portfolio, as would the approval of any advisory or distribution contract for
the Portfolio. However, all shares of the Trust may vote together in the
election or selection of Trustees, principal underwriters and accountants for
the Trust.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding
shares of the series of the Trust affected by the matter. Under Rule 18f-2,
a series is presumed to be affected by a matter, unless the interests of each
series in the matter are identical or the matter does not affect any interest
of such series. Under Rule 18f-2 the approval of an investment advisory
agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to the 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 the Portfolio.
As used in the International Core Growth 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
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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 the 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. In
the case of a matter affecting the International Core Growth Fund, votes will
be cast as instructed by its shareholders.
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 the 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 the Portfolio
are entitled to receive the assets attributable to the Portfolio that are
available for distribution, and a distribution of any general assets not
attributable to the Portfolio that are available for distribution in such
manner and on such basis as the Trustees in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
DECLARATIONS OF TRUST
In accordance with Delaware law and in connection with the tax
treatment sought by the Master Trust, the Master Trust's Declaration of Trust
provides that its investors will be personally and jointly and severally
responsible (with rights of contribution INTER SE in proportion to their
respective ownership interests in the Master Trust) for the Master Trust's
liabilities and obligations in the event that the Master Trust fails to
satisfy such liabilities and obligations. However, to the extent assets are
available from the Master Trust, the Master Trust will indemnify each
investor from any claim or liability to which the investor may become subject
solely by reason of his or her having been an investor to the extent such
claim or liability imposes on the investor an obligation or liability which
is greater than his or her proportionate ownership interest in the Master
Trust, and will reimburse the investor for all legal and other expenses
reasonably incurred by him or her in connection with any such claim or
liability.
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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 the Portfolio or Fund shall be enforceable against the assets
and property of the Portfolio or Fund only (and, in the case of the Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of the Portfolio, the investors therein).
REGISTRATION STATEMENT
The Registration Statements of the Trust and the Master Trust,
including the International Core Growth Portfolio's Prospectus, the Statement
of Additional Information and the exhibits filed therewith, may be examined
at the office of the Commission in Washington, D.C. Statements contained in
the Portfolio's Prospectus or the Statement of Additional Information as to
the contents of any contract or other document referred to herein or in the
Prospectus are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating
symbols of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
PRIME-1: Issuers (or related supporting institutions) rated
PRIME-1 have a superior ability for repayment of short-term promissory
obligations. PRIME-1 repayment ability will often be evidenced by the
following characteristics: (a) leading market positions in well-established
industries; (b) high rates of return on funds employed; (c) conservative
capitalization structures with moderate reliance on debt and ample asset
protection; (d) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (e) well-established access to a range
of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting
institutions) have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above in the PRIME-1 category but to a lesser degree. Earning trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated PRIME-3 (or related supporting
institutions) have an acceptable ability for repayment of short-term debt
obligations. The effect of industry characteristics and market composition
may be more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from other
sources it considers reliable. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues within the "A" category are delineated with the numbers 1, 2, and 3 to
indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding
timely payment is overwhelming or very strong. Those issuers determined to
possess overwhelming safety characteristics are denoted with a "PLUS" (+)
designation.
A-1
<PAGE>
A-2: Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as overwhelming as
for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B: Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
FITCH INVESTORS SERVICE, INC.
F-1+: Exceptionally strong credit quality. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment.
F-1: Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2: Good credit quality. Commercial paper assigned this rating
has a satisfactory degree of assurance for timely payment but the margin of
safety is not as great as for issuers assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to
be rated below investment grade.
DUFF & PHELPS
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest
rating category. The following summarizes the rating categories used by Duff
& Phelps for commercial paper:
DUFF 1+ - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
DUFF 1- - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
DUFF 2 - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
DUFF 3 - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
A-2
<PAGE>
DUFF 4 - Debt possesses speculative investment characteristics.
DUFF 5 - Issuer has failed to meet scheduled principal and/or
interest payments.
THOMSON BANKWATCH
Thomson BankWatch commercial paper ratings assess the likelihood of
an untimely payment of principal or interest of debt having a maturity of one
year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
TBW-1 - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
TBW-3 - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
IBCA
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes
the rating categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse
changes in business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative
investment qualities of bonds. Moody's employs nine designations to indicate
such relative qualities, ranging from "AAA" for the highest quality
obligations to "C" for the lowest. Issues are further refined with the
designation 1,2, and 3 to indicate the relative ranking within designations.
Bonds with the following Moody's ratings have the following investment
qualities:
A-3
<PAGE>
Aaa: Bonds in this category are judged to be of the highest
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds in this category are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A: Bonds in this category possess many favorable investment
attributes and are considered to be as upper-medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds in this category are considered medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds in this category are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds in this category generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa: Bonds in this category are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.
C: Bonds in this category are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S
A Standard & Poor's corporate debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
Ratings are graded into ten categories, ranging from "AAA" for the highest
quality obligation to "D" for debt in default. Issues are further refined
with a "PLUS" or "MINUS" sign to show relative standing within the
categories. Bonds with the following Standard & Poor's ratings have the
following investment qualities:
AAA: Bonds in this category have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
A-4
<PAGE>
AA: Bonds in this category have a very strong capacity to pay
interest and repay principal and differ from the higher rated issues only in
small degree.
A: Bonds in this category have a strong capacity to pay interest
and repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB: Bonds in this category have an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
BB: Bonds in this category have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BBB-"
rating.
B: Bonds in this category have a greater vulnerability to default
but currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The "B"
rating is also used for debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BB-" rating.
CCC: Bonds in this category have currently identifiable
vulnerability to default, and are dependent upon favorable business,
financial and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business, financial, or
economic conditions, they are not likely to have the capacity to pay interest
and repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B" or "B-"
rating.
C: This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because
of economic conditions.
A - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
A-5
<PAGE>
BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major
categories.
FITCH INVESTORS SERVICE, INC.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings
"BB" to "C" represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or
liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
rating categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank
A-6
<PAGE>
subsidiaries. The following summarizes the rating categories used by IBCA
for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
may increase investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may
lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in higher categories.
BB, B, CCC, CC, AND C - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility
of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
AA - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
A - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
A-7
<PAGE>
BB, B, CCC, AND CC, - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded
as having speculative characteristics regarding the likelihood of timely
payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
D - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-8
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
FORM N-1A
PART C: OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. Not applicable.
b. Exhibits:
(1.1) Certificate of Trust of Registrant (f).
(1.2) Certificate of Amendment to Certificate of Trust of
Registrant (f).
(1.3) Amended and Restated Declaration of Trust of Registrant
(f).
(1.4) Certificate of Trustees dated August 6, 1993,
establishing Emerging Growth Portfolio series (f).
(1.5) Certificate of Trustees dated December 15, 1993,
establishing International Growth Portfolio series (f).
(1.6) Amendment No. 2 to Amended and Restated Declaration of
Trust (f).
(1.7) Amendment No. 3 to Amended and Restated Declaration of
Trust (f).
(1.8) Amendment No. 4 to Amended and Restated Declaration of
Trust (f).
(1.9) Amendment No. 5 to Amended and Restated Declaration of
Trust (f).
(1.10) Amendment No. 6 to Amended and Restated Declaration of
Trust (f).
(1.11) Amendment No. 7 to Amended and Restated Declaration of
Trust (f).
(1.12) Form of Amendment No. 8 to Amended and Restated
Declaration of Trust (f).
(1.13) Amendment No. 9 to Amended and Restated Declaration of
Trust (f).
(1.14) Form of Amendment No. 10 to Amended and Restated
Declaration of Trust (b).
(1.15) Amendment No. 11 to Amended and Restated Declaration of
Trust.
(1.16) Form of Amendment No. 12 to Amended and Restated
Declaration of Trust.
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
(3) None.
(4) None.
(5) None.
C-1
<PAGE>
(6.1) Distribution Agreement between Registrant and Nicholas-
Applegate Securities dated as of April 19, 1993 (f).
(6.2) Letter agreement between Registrant and Nicholas-
Applegate Securities dated May 17, 1993, adding certain
Institutional (formerly Qualified) Portfolio series and
Emerging Growth Portfolio series to Distribution
Agreement (f).
(6.3) Letter agreement between Registrant and Nicholas-
Applegate Securities dated December 15, 1993, adding
International Growth Portfolio series to Distribution
Agreement (f).
(6.4) Letter agreement between Registrant and Nicholas-
Applegate Securities dated April 22, 1994, adding
Qualified Portfolio series to Distribution Agreement
(f).
(6.5) Letter agreement between Registrant and Nicholas-
Applegate Securities, adding Emerging Countries Growth
Portfolio series, Global Growth & Income Portfolio
series and Mini-Cap Growth Portfolio series to
Distribution Agreement (f).
(6.6) Letter agreement between Registrant and Nicholas-
Applegate Securities, adding Series B Portfolios to
Distribution Agreement (f).
(6.7) Letter agreement between Registrant and Nicholas-
Applegate Securities, adding Fixed Income and Qualified
Portfolio series to Distribution Agreement (f).
(6.8) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding Value
Institutional Portfolio series to Distribution
Agreement (a).
(6.9) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding High Yield Bond
and Strategic Income Institutional Portfolio series to
Distribution Agreement (b).
(6.10) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding Large Cap Growth
and Core Growth International Portfolio series to
Distribution Agreement.
(6.11) Form of letter agreement between Registrant and
Nicholas-Applegate Securities adding Core Growth
International Portfolio C series to Distribution
Agreement.
(7) None.
(8.1) Custodian Services Agreement between Registrant and PNC
Bank dated as of April 1, 1993 (f).
(8.2) Letter agreement between Registrant and PNC Bank dated
July 19, 1993, adding certain Institutional (formerly
Qualified) Portfolio series to Custodian Services
Agreement (f).
(8.3) Letter agreement between Registrant and PNC Bank dated
August 20, 1993, adding Emerging Growth Portfolio
series to Custodian Services Agreement (f).
(8.4) Letter agreement between Registrant and PNC Bank dated
December 15, 1993, adding International Growth
Portfolio series to Custodian Services Agreement (f).
(8.5) Letter agreement between Registrant and PNC Bank dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Custodian Services Agreement (f).
(8.6) Letter agreement between Registrant and PNC Bank,
adding Emerging Countries Growth Portfolio series,
Global Growth & Income Portfolio series and Mini-Cap
Growth Portfolio series to Custodian Services Agreement
(f).
C-2
<PAGE>
(8.7) Letter agreement between Registrant and PNC Bank,
adding Series B Portfolios to Custodian Services
Agreement (f).
(8.8) Letter agreement between Registrant and PNC Bank,
adding Fixed Income Portfolio series to Custodian
Services Agreement (f).
(8.9) Form of letter agreement between Registrant and PNC
Bank adding Value Institutional Portfolio series to
Custodian Services Agreement (a).
(8.10) Form of letter agreement between Registrant and PNC
Bank adding High Yield Bond and Strategic Income
Institutional Portfolio series to Custodian Services
Agreement (b).
(8.11) Form of letter agreement between Registrant and PNC
Bank adding Large Cap Growth and Core Growth
International Portfolio series to Custodian Services
Agreement.
(8.12) Form of letter agreement between Registrant and PNC
Bank adding Core Growth International Portfolio C
series to Custodian Services Agreement
(9.1) Administration Agreement between Registrant and
Investment Company Administration Corporation dated as
of April 1, 1993 (f).
(9.2) Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company
dated as of April 1, 1993 (f).
(9.3) Letter agreement between Registrant and State Street
Bank and Trust Company dated July 19, 1993, adding
certain Institutional (formerly Qualified) Portfolio
series to Transfer Agency and Service Agreement (f).
(9.4) Letter agreement between Registrant and State Street
Bank and Trust Company dated August 20, 1993, adding
Emerging Growth Portfolio Series to Transfer Agency and
Service Agreement (f).
(9.5) Letter agreement between Registrant and State Street
Bank and Trust Company dated December 15, 1993, adding
International Growth Portfolio series to Transfer
Agency and Service Agreement (f).
(9.6) Letter agreement between Registrant and State Street
Bank and Trust Company dated April 22, 1994, adding
Core Growth Qualified Portfolio series to Transfer
Agency and Service Agreement (f).
(9.7) Letter agreement between Registrant and State Street
Bank and Trust Company, adding Emerging Countries
Growth Portfolio series, Global Growth & Income
Portfolio series and Mini-Cap Growth Portfolio series
to Transfer Agency and Service Agreement (f).
(9.8) Letter agreement between Registrant and State Street
Bank and Trust Company, adding Series B Portfolios to
Transfer Agency and Service Agreement (f).
(9.9) Form of letter agreement between Registrant and State
Street Bank and Trust Company, adding Fixed Income
Portfolio series to Transfer Agency and Service
Agreement (f).
(9.10) Form of letter agreement between Registrant and State
Street Bank and Trust Company, adding Value
Institutional Portfolio series to Transfer Agency and
Service Agreement (a).
(9.11) Form of letter agreement between Registrant and State
Street Bank and Trust Company, adding High Yield Bond
and Strategic Income Institutional Portfolio series to
Transfer Agency and Service Agreement (b).
C-3
<PAGE>
(9.12) Form of letter agreement between Registrant and State
Street Bank and Trust Company, adding Large Cap Growth
and Core Growth International Portfolio series to
Transfer Agency and Service Agreement.
(9.13) Form of letter agreement between Registrant and State
Street Bank and Trust Company adding Core Growth
International Portfolio C series to Transfer Agency and
Service Agreement.
(9.14) Shareholder Service Plan between Registrant and
Nicholas-Applegate Securities (f).
(9.15) License Agreement dated as of December 17, 1992,
between Registrant and Nicholas-Applegate Capital
Management (f).
(9.16) Accounting Services Agreement between Registrant and
PFPC Inc. dated as of April 1, 1993 (f).
(9.17) Letter agreement between Registrant and PFPC Inc. dated
July 19, 1993, adding certain Institutional (formerly
Qualified) Portfolio series to Accounting Services
Agreement (f).
(9.18) Letter agreement between Registrant and PFPC Inc. dated
August 20, 1993, adding Emerging Growth Portfolio
series to Accounting Services Agreement (f).
(9.19) Letter agreement between Registrant and PFPC Inc. dated
December 15, 1993, adding International Growth
Portfolio series to Accounting Services Agreement (f).
(9.20) Letter agreement between Registrant and PFPC Inc. dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Accounting Services Agreement (f).
(9.21) Letter agreement between Registrant and PFPC Inc.,
adding Emerging Countries Growth Portfolio series,
Global Growth & Income Portfolio series and Mini-Cap
Growth Portfolio series to Accounting Services
Agreement (f).
(9.22) Letter agreement between Registrant and PFPC Inc.,
adding Series B Portfolios to Accounting Services
Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc.,
adding Fixed Income Portfolio series to Accounting
Services Agreement (f).
(9.24) Form of letter agreement between Registrant and PFPC
Inc. adding Value Institutional Portfolio series to
Accounting Services Agreement (a).
(9.25) Form of letter agreement between Registrant and PFPC
Inc. adding High Yield Bond and Strategic Income
Institutional Portfolio series to Accounting Services
Agreement (b).
(9.26) Form of letter agreement between Registrant and PFPC
Inc. adding Large Cap Growth and Core Growth
International Portfolio series to Accounting Services
Agreement.
(9.27) Form of letter agreement between Registrant and PFPC
Inc. adding Core Growth International Portfolio C
series to Accounting Services Agreement.
(9.28) Letter agreement between Registrant and Nicholas-
Applegate Capital Management dated September 27, 1993
regarding expense reimbursements (f).
(9.29) Letter agreement between Registrant and Nicholas-
Applegate Capital Management dated December 15, 1993,
adding International Growth Portfolio series to
agreement regarding expense reimbursements (f).
C-4
<PAGE>
(9.30) Letter agreement between Registrant and Nicholas-
Applegate Capital Management dated April 22, 1994,
adding Qualified Portfolio series to agreement
regarding expense reimbursements (f).
(9.31) Letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Emerging Growth
Institutional Portfolio series, Global Growth & Income
Portfolio series and Mini-Cap Growth Portfolio series
to agreement regarding expense reimbursements (f).
(9.32) Letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Series B
Portfolios to agreement regarding expense reimbursement
(f).
(9.33) Letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Qualified and
Fixed Income Portfolio series to agreement regarding
expense reimbursement (f).
(9.34) Letter agreement between Registrant and Nicholas-
Applegate Capital Management revising expense
reimbursement agreement with respect to Government
Income Portfolios (f).
(9.35) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Value
Institutional Portfolio series to agreement regarding
expense reimbursement (a).
(9.36) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding High
Yield Bond and Strategic Income Institutional Portfolio
series to agreement regarding expense reimbursement
(b).
(9.37) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Large Cap
Growth and Core Growth International Portfolio series
to agreement regarding expense reimbursement.
(9.38) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Core
Growth International Portfolio C series to agreement
regarding expense reimbursement.
(9.39) Credit Agreement among Registrant, Chemical Bank and
certain other banks dated April 10, 1996 (f).
(9.40) Administrative Services Agreement between Registrant
and Nicholas-Applegate Capital Management.
(10) Opinion of Counsel (c).
(11) Not applicable.
(12) Not applicable.
(13) Investment Letter of initial investor in Registrant
dated April 1, 1993 (f).
(14.1) IRA Plan Materials (d).
(14.2) 401(k) Profit-Sharing Plan Materials (d).
(15) Amended Distribution Plan of Registrant (f)
(16) Schedule of Computation of Performance Quotations (c).
(17) Not applicable.
(18) Not applicable.
C-5
<PAGE>
(19.1) Limited Powers of Attorney of Trustees (d).
(19.2) Limited Power of Attorney of Walter E. Auch (e).
(19.3) Limited Power of Attorney of John D. Wylie (h).
(19.4) Certified Resolution of Board of Trustees of Registrant
regarding Limited Power of Attorney of John D. Wylie
(h).
- ---------------------------
(a) Filed as an Exhibit to Amendment No. 28 to Registrant's Form N-1A
Registration Statement on January 19, 1996 and incorporated herein by
reference.
(b) Filed as an Exhibit to Amendment No. 29 to Registrant's Form N-1A
Registration Statement on May 3, 1996 and incorporated herein by reference.
(c) Filed as an Exhibit to Amendment No. 1 to Registrant's Form N-1A
Registration Statement on March 15, 1993 and incorporated herein by
reference.
(d) Filed as an Exhibit to Amendment No. 12 to Registrant's Form N-1A
Registration Statement on August 1, 1994 and incorporated herein by
reference.
(e) Filed as an Exhibit to Amendment No. 14 to Registrant's Form N-1A
Registration Statement on September 26, 1994 and incorporated herein by
reference.
(f) Filed as an Exhibit to Amendment No. 32 to Registrant's Form N-1A
Registration Statement on June 3, 1996 and incorporated herein by
reference.
(g) Filed as an Exhibit to Amendment No. 37 to Registrant's Form N-1A
Registration Statement on October 15, 1996 and incorporated herein by
reference.
(h) Filed as an Exhibit to Amendment No. 38 to Registrant's Form N-1A
Registration Statement on October 25, 1996 and incorporated herein by
reference.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Fred C. Applegate, Arthur B. Laffer and Charles E. Young, members of
the Board of Trustees of Registrant, are also three of the seven members of the
Board of Directors of Nicholas-Applegate Fund, Inc., a registered investment
company. Accordingly, Registrant and Nicholas-Applegate Fund, Inc. may be
deemed to be under common control.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 31, 1996, the number of record holders of each series of
Registrant was as follows:
Title of Series Number of Record Holders
--------------- ------------------------
Core Growth Portfolio A 6,595
Emerging Growth Portfolio A 11,119
Income & Growth Portfolio A 1,906
Balanced Growth Portfolio A 543
International Growth Portfolio A 185
Worldwide Growth Portfolio A 1,825
Government Income Portfolio A 199
C-6
<PAGE>
Emerging Countries Portfolio A 1,266
Money Market Portfolio 411
Core Growth Portfolio B 2,082
Emerging Growth Portfolio B 2,427
Income & Growth Portfolio B 502
Balanced Growth Portfolio B 129
International Growth Portfolio B 210
Worldwide Growth Portfolio B 308
Government Income Portfolio B 113
Emerging Countries Portfolio B 1,140
Core Growth Portfolio C 14,254
Emerging Growth Portfolio C 17,314
Income & Growth Portfolio C 5,188
Balanced Growth Portfolio C 1,308
Worldwide Growth Portfolio C 5,795
International Growth Portfolio C 331
Government Income Portfolio C 406
Emerging Countries Portfolio C 1,108
Core Growth Institutional Portfolio 194
Emerging Growth Institutional Portfolio 188
Income & Growth Institutional Portfolio 106
Balanced Growth Institutional Portfolio 22
Worldwide Growth Institutional Portfolio 68
International Growth Institutional Portfolio 74
Emerging Countries Institutional Portfolio 124
Mini Cap Growth Institutional Portfolio 153
Fully Discretionary Institutional Fixed Income Portfolio 12
Short-Intermediate Institutional Fixed Income Portfolio 13
Value Institutional Portfolio 19
High Yield Bond Institutional Portfolio 20
Strategic Income Institutional Portfolio 16
Core Growth Qualified Portfolio 181
Income & Growth Qualified Portfolio 10
Balanced Growth Qualified Portfolio 11
Worldwide Growth Qualified Portfolio 10
Government Income Qualified Portfolio 9
Emerging Growth Qualified Portfolio 10
International Growth Qualified Portfolio 10
Emerging Countries Qualified Portfolio 8
Item 27. INDEMNIFICATION.
Registrant's trustees, officers, employees and agents against
liabilities incurred by them in connection with the defense or disposition of
any action or proceeding in which they may be involved or with which they may be
threatened, while in office or thereafter, by reason of being or having been in
such office, except with respect to matters as to which it has been determined
that they acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office
("Disabling Conduct").
Section 8 of Registrant's Administration Agreement, filed herewith as
Exhibit 9.1, provides for the indemnification of Registrant's Administrator
against all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its Disabling Conduct.
Section 9 of Registrant's Distribution Agreement, filed herewith as Exhibit 6,
provides for the indemnification of Registrant's Distributor against all
liabilities incurred by it in performing its obligations under the Agreement,
except with respect to matters involving its Disabling Conduct. Section 4 of
the Shareholder Service Agreement, filed herewith as Exhibit 9.3, provides for
the
C-7
<PAGE>
indemnification of Registrant's Distributor against all liabilities incurred by
it in performing its obligations under the Agreement, except with respect to
matters involving its Disabling Conduct.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Nicholas-Applegate Capital Management, the investment adviser to the
Master Trust, is a California limited partnership, the general partner of which
is Nicholas-Applegate Capital Management, Inc. (the "General Partner"). During
the two fiscal years ended December 31, 1995 Nicholas-Applegate Capital
Management has engaged principally in the business of providing investment
services to institutional and other clients. All of the additional information
required by this Item 28 with respect to the Investment Adviser is set forth in
the Form ADV, as amended, of Nicholas-Applegate Capital Management (File No.
801-21442), which is incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
(a) Nicholas-Applegate Securities does not act as a principal
underwriter, depositor or investment adviser to any investment company other
than Registrant.
(b) Nicholas-Applegate Securities, the Distributor of the shares of
Registrant's Portfolios, is a California limited partnership and its general
partner is Nicholas-Applegate Capital Management Holdings, L.P. (the "General
Partner"). Information is furnished below with respect to the officers,
partners and directors of the General Partner and Nicholas-Applegate Securities.
The principal business address of such persons is 600 West Broadway, 30th Floor,
San Diego, California 92101, except as otherwise indicated below.
Positions and
Offices with Positions and
Name and Principal Principal Offices with
Business Address Underwriter Registrant
- ----------------- ------------ --------------
Arthur E. Nicholas Chairman and President None
Peter J. Johnson Vice President Vice President
Thomas Pindelski Chief Financial Officer Chief Financial Officer
E. Blake Moore, Jr. Secretary Secretary
Todd Spillane Director of Compliance None
(c) Not applicable.
C-8
<PAGE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained either at the offices of the Registrant (600 West
Broadway, 30th Floor, San Diego, California 92101); the Investment Adviser to
the Trust and Master Trust, Nicholas-Applegate Capital Management (600 West
Broadway, 30th Floor, San Diego, California 92101); the Administrator for the
Trust and Master Trust, Investment Company Administration Corporation (4455 East
Camelback Road, Suite 261-E, Phoenix, Arizona 85018); the Custodian, PNC Bank
(Airport Business Center, International Court 2, 200 Stevens Drive, Lester,
Pennsylvania 19113); or the Transfer and Dividend Disbursing Agent, State Street
Bank & Trust Company (2 Heritage Drive, 7th Floor, North Quincy, Massachusetts
02171).
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the holders of
at least 10% of its outstanding shares to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, it will do so and
will assist in communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to file a post-effective amendment
containing financial statements of its International Core Growth A, B, C and
Qualified Portfolio series, which need not be certified, within four to six
months from the effective date of this Amendment to Registration Statement.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 26th day
of December, 1996.
NICHOLAS-APPLEGATE MUTUAL FUNDS
By John D. Wylie*
--------------------------
John D. Wylie
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
John D. Wylie* Principal Executive Officer December 26, 1996
- -------------------
John D. Wylie
s/Thomas Pindelski Principal Financial and December 26, 1996
- --------------------- Accounting Officer
Thomas Pindelski
Fred C. Applegate* Trustee December 26, 1996
- ----------------------
Fred C. Applegate
Arthur B. Laffer* Trustee December 26, 1996
- ----------------------
Arthur B. Laffer
Charles E. Young* Trustee December 26, 1996
- -----------------------
Charles E. Young
* s/E. Blake Moore, Jr.
----------------------
By: E. Blake Moore, Jr.
Attorney In Fact
</TABLE>
C-10
<PAGE>
SIGNATURES
Nicholas-Applegate Investment Trust has duly caused this Amendment to
Registration Statement on Form N-1A of Nicholas-Applegate Mutual Funds to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, State of California, on the 26th day of December, 1996.
NICHOLAS-APPLEGATE INVESTMENT TRUST
By John D. Wylie*
--------------------------
John D. Wylie
President
This Amendment to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
John D. Wylie* Principal Executive Officer December 26, 1996
- ---------------------
John D. Wylie
s/Thomas Pindelski Principal Financial December 26, 1996
- --------------------- and Accounting Officer
Thomas Pindelski
George F. Keane* Trustee December 26, 1996
- ----------------------
George F. Keane
Dann V. Angeloff* Trustee December 26, 1996
- ----------------------
Dann V. Angeloff
Walter E. Auch* Trustee December 26, 1996
- -----------------------
Walter E. Auch
Theodore J. Coburn* Trustee December 26, 1996
- ------------------------
Theodore J. Coburn
Darlene DeRemer* Trustee December 26, 1996
- ------------------------
Darlene DeRemer
Arthur E. Nicholas* Trustee December 26, 1996
- ------------------------
Arthur E. Nicholas
* s/E. Blake Moore, Jr.
- -------------------------
By: E. Blake Moore, Jr.
Attorney in Fact
</TABLE>
C-11
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE MUTUAL FUNDS
AMENDMENT NO. 40 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
Exhibit No. Title of Exhibit
- ----------- ----------------
(1.1) Certificate of Trust of Registrant (f).
(1.2) Certificate of Amendment to Certificate of Trust of
Registrant (f).
(1.3) Amended and Restated Declaration of Trust of Registrant (f).
(1.4) Certificate of Trustees dated August 6, 1993, establishing
Emerging Growth Portfolio series (f).
(1.5) Certificate of Trustees dated December 15, 1993,
establishing International Growth Portfolio series (f).
(1.6) Amendment No. 2 to Amended and Restated Declaration of Trust
(f).
(1.7) Amendment No. 3 to Amended and Restated Declaration of Trust
(f).
(1.8) Amendment No. 4 to Amended and Restated Declaration of Trust
(f).
(1.9) Amendment No. 5 to Amended and Restated Declaration of Trust
(f).
(1.10) Amendment No. 6 to Amended and Restated Declaration of Trust
(f).
(1.11) Amendment No. 7 to Amended and Restated Declaration of Trust
(f).
(1.12) Form of Amendment No. 8 to Amended and Restated Declaration
of Trust (f).
(1.13) Amendment No. 9 to Amended and Restated Declaration of Trust
(f).
(1.14) Form of Amendment No. 10 to Amended and Restated Declaration
of Trust (b).
(1.15) Amendment No. 11 to Amended and Restated Declaration of
Trust.
(1.16) Form of Amendment No. 12 to Amended and Restated Declaration
of Trust.
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
(3) None.
(4) None.
(5) None.
(6.1) Distribution Agreement between Registrant and Nicholas-
Applegate Securities dated as of April 19, 1993 (f).
C-12
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(6.2) Letter agreement between Registrant and Nicholas-Applegate
Securities dated May 17, 1993, adding certain Institutional
(formerly Qualified) Portfolio series and Emerging Growth
Portfolio series to Distribution Agreement (f).
(6.3) Letter agreement between Registrant and Nicholas-Applegate
Securities dated December 15, 1993, adding International
Growth Portfolio series to Distribution Agreement (f).
(6.4) Letter agreement between Registrant and Nicholas-Applegate
Securities dated April 22, 1994, adding Qualified Portfolio
series to Distribution Agreement (f).
(6.5) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Emerging Countries Growth Portfolio
series, Global Growth & Income Portfolio series and Mini-Cap
Growth Portfolio series to Distribution Agreement (f).
(6.6) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Series B Portfolios to Distribution
Agreement (f).
(6.7) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Fixed Income and Qualified Portfolio
series to Distribution Agreement (f).
(6.8) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding Value Institutional Portfolio
series to Distribution Agreement (a).
(6.9) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding High Yield Bond and Strategic
Income Institutional Portfolio series to Distribution
Agreement (b).
(6.10) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Large Cap Growth and Core Growth
International Portfolio series to Distribution Agreement.
(6.11) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Core Growth International
Portfolio C series to Distribution Agreement.
(7) None.
(8.1) Custodian Services Agreement between Registrant and PNC Bank
dated as of April 1, 1993 (f).
(8.2) Letter agreement between Registrant and PNC Bank dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Custodian Services Agreement (f).
(8.3) Letter agreement between Registrant and PNC Bank dated
August 20, 1993, adding Emerging Growth Portfolio series to
Custodian Services Agreement (f).
(8.4) Letter agreement between Registrant and PNC Bank dated
December 15, 1993, adding International Growth Portfolio
series to Custodian Services Agreement (f).
(8.5) Letter agreement between Registrant and PNC Bank dated April
22, 1994, adding Core Growth Qualified Portfolio series to
Custodian Services Agreement (f).
(8.6) Letter agreement between Registrant and PNC Bank, adding
Emerging Countries Growth Portfolio series, Global Growth &
Income Portfolio series and Mini-Cap Growth Portfolio series
to Custodian Services Agreement (f).
C-13
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(8.7) Letter agreement between Registrant and PNC Bank, adding
Series B Portfolios to Custodian Services Agreement (f).
(8.8) Letter agreement between Registrant and PNC Bank, adding
Fixed Income Portfolio series to Custodian Services
Agreement (f).
(8.9) Form of letter agreement between Registrant and PNC Bank
adding Value Institutional Portfolio series to Custodian
Services Agreement (a).
(8.10) Form of letter agreement between Registrant and PNC Bank
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Custodian Services Agreement (b).
(8.11) Form of letter agreement between Registrant and PNC Bank
adding Large Cap Growth and Core Growth International
Portfolio series to Custodian Services Agreement.
(8.12) Form of letter agreement between Registrant and PNC Bank
adding Core Growth International Portfolio C series to
Custodian Services Agreement
(9.1) Administration Agreement between Registrant and Investment
Company Administration Corporation dated as of April 1, 1993
(f).
(9.2) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1,
1993 (f).
(9.3) Letter agreement between Registrant and State Street Bank
and Trust Company dated July 19, 1993, adding certain
Institutional (formerly Qualified) Portfolio series to
Transfer Agency and Service Agreement (f).
(9.4) Letter agreement between Registrant and State Street Bank
and Trust Company dated August 20, 1993, adding Emerging
Growth Portfolio Series to Transfer Agency and Service
Agreement (f).
(9.5) Letter agreement between Registrant and State Street Bank
and Trust Company dated December 15, 1993, adding
International Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.6) Letter agreement between Registrant and State Street Bank
and Trust Company dated April 22, 1994, adding Core Growth
Qualified Portfolio series to Transfer Agency and Service
Agreement (f).
(9.7) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Emerging Countries Growth
Portfolio series, Global Growth & Income Portfolio series
and Mini-Cap Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.8) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Series B Portfolios to Transfer
Agency and Service Agreement (f).
(9.9) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Fixed Income Portfolio series
to Transfer Agency and Service Agreement (f).
(9.10) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Value Institutional Portfolio
series to Transfer Agency and Service Agreement (a).
C-14
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(9.11) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding High Yield Bond and Strategic
Income Institutional Portfolio series to Transfer Agency and
Service Agreement (b).
(9.12) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Large Cap Growth and Core
Growth International Portfolio series to Transfer Agency and
Service Agreement.
(9.13) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Core Growth International
Portfolio C series to Transfer Agency and Service Agreement.
(9.14) Shareholder Service Plan between Registrant and Nicholas-
Applegate Securities (f).
(9.15) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (f).
(9.16) Accounting Services Agreement between Registrant and PFPC
Inc. dated as of April 1, 1993 (f).
(9.17) Letter agreement between Registrant and PFPC Inc. dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Accounting Services Agreement (f).
(9.18) Letter agreement between Registrant and PFPC Inc. dated
August 20, 1993, adding Emerging Growth Portfolio series to
Accounting Services Agreement (f).
(9.19) Letter agreement between Registrant and PFPC Inc. dated
December 15, 1993, adding International Growth Portfolio
series to Accounting Services Agreement (f).
(9.20) Letter agreement between Registrant and PFPC Inc. dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Accounting Services Agreement (f).
(9.21) Letter agreement between Registrant and PFPC Inc., adding
Emerging Countries Growth Portfolio series, Global Growth &
Income Portfolio series and Mini-Cap Growth Portfolio series
to Accounting Services Agreement (f).
(9.22) Letter agreement between Registrant and PFPC Inc., adding
Series B Portfolios to Accounting Services Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc., adding
Fixed Income Portfolio series to Accounting Services
Agreement (f).
(9.24) Form of letter agreement between Registrant and PFPC Inc.
adding Value Institutional Portfolio series to Accounting
Services Agreement (a).
(9.25) Form of letter agreement between Registrant and PFPC Inc.
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Accounting Services Agreement (b).
(9.26) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth and Core Growth International
Portfolio series to Accounting Services Agreement.
(9.27) Form of letter agreement between Registrant and PFPC Inc.
adding Core Growth International Portfolio C series to
Accounting Services Agreement.
C-15
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(9.28) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated September 27, 1993 regarding
expense reimbursements (f).
(9.29) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated December 15, 1993, adding
International Growth Portfolio series to agreement regarding
expense reimbursements (f).
(9.30) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated April 22, 1994, adding Qualified
Portfolio series to agreement regarding expense
reimbursements (f).
(9.31) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Emerging Growth Institutional
Portfolio series, Global Growth & Income Portfolio series
and Mini-Cap Growth Portfolio series to agreement regarding
expense reimbursements (f).
(9.32) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Series B Portfolios to agreement
regarding expense reimbursement (f).
(9.33) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Qualified and Fixed Income
Portfolio series to agreement regarding expense
reimbursement (f).
(9.34) Letter agreement between Registrant and Nicholas-Applegate
Capital Management revising expense reimbursement agreement
with respect to Government Income Portfolios (f).
(9.35) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Value Institutional
Portfolio series to agreement regarding expense
reimbursement (a).
(9.36) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding High Yield Bond and
Strategic Income Institutional Portfolio series to agreement
regarding expense reimbursement (b).
(9.37) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Large Cap Growth and
Core Growth International Portfolio series to agreement
regarding expense reimbursement.
(9.38) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Core Growth
International Portfolio C series to agreement regarding
expense reimbursement.
(9.39) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (f).
(9.40) Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management.
(10) Opinion of Counsel (c).
(11) Not applicable.
(12) Not applicable.
(13) Investment Letter of initial investor in Registrant dated
April 1, 1993 (f).
C-16
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(14.1) IRA Plan Materials (d).
(14.2) 401(k) Profit-Sharing Plan Materials (d).
(15) Amended Distribution Plan of Registrant (f)
(16) Schedule of Computation of Performance Quotations (c).
(17) Not applicable.
(18) Not applicable.
(19.1) Limited Powers of Attorney of Trustees (d).
(19.2) Limited Power of Attorney of Walter E. Auch (e).
(19.3) Limited Power of Attorney of John D. Wylie (h).
(19.4) Certified Resolution of Board of Trustees of Registrant
regarding Limited Power of Attorney of John D. Wylie (h).
- -----------------------
(i) Filed as an Exhibit to Amendment No. 28 to Registrant's Form N-1A
Registration Statement on January 19, 1996 and incorporated herein by
reference.
(j) Filed as an Exhibit to Amendment No. 29 to Registrant's Form N-1A
Registration Statement on May 3, 1996 and incorporated herein by reference.
(k) Filed as an Exhibit to Amendment No. 1 to Registrant's Form N-1A
Registration Statement on March 15, 1993 and incorporated herein by
reference.
(l) Filed as an Exhibit to Amendment No. 12 to Registrant's Form N-1A
Registration Statement on August 1, 1994 and incorporated herein by
reference.
(m) Filed as an Exhibit to Amendment No. 14 to Registrant's Form N-1A
Registration Statement on September 26, 1994 and incorporated herein by
reference.
(n) Filed as an Exhibit to Amendment No. 32 to Registrant's Form N-1A
Registration Statement on June 3, 1996 and incorporated herein by
reference.
(o) Filed as an Exhibit to Amendment No. 37 to Registrant's Form N-1A
Registration Statement on October 15, 1996 and incorporated herein by
reference.
(p) Filed as an Exhibit to Amendment No. 38 to Registrant's Form N-1A
Registration Statement on October 25, 1996 and incorporated herein by
reference.
C-17
<PAGE>
Exhibit 1.15
AMENDMENT NO. 11 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 11 TO THE AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the 15th day of November, 1996
by the undersigned, constituting a majority of the Trustees of the Trust.
WHEREAS, the Amended and Restated Declaration of Trust of the Trust
adopted as of December 17, 1992, as heretofore amended, designated certain
series of Interests of the Trust; and
WHEREAS, the undersigned wish to designate the Nicholas-Applegate
Large Cap Growth Institutional Portfolio, Nicholas-Applegate International Core
Growth Portfolio A, International Core Growth Portfolio B, International Core
Growth Institutional Portfolio and International Core Growth Qualified Portfolio
as new series of the Trust;
NOW THEREFORE, the Board of Trustees hereby amends the first sentence
of Section 8.8 of the Amended and Restated Declaration of Trust of the Trust to
read in full as follows:
"Without limiting the authority of the Trustees
set forth in this Section 8.8 to establish and designate any further
series, the Trustees hereby establish and designate fifty-eight
series, as follows:
Nicholas-Applegate Core Growth Portfolio A
Nicholas-Applegate Core Growth Portfolio B
Nicholas-Applegate Core Growth Portfolio C
Nicholas-Applegate Core Growth Institutional Portfolio
Nicholas-Applegate Core Growth Qualified Portfolio
Nicholas-Applegate Government Income Portfolio A
Nicholas-Applegate Government Income Portfolio B
Nicholas-Applegate Government Income Portfolio C
Nicholas-Applegate Government Income Institutional Portfolio
Nicholas-Applegate Government Income Qualified Portfolio
Nicholas-Applegate Income & Growth Portfolio A
Nicholas-Applegate Income & Growth Portfolio B
Nicholas-Applegate Income & Growth Portfolio C
Nicholas-Applegate Income & Growth Institutional Portfolio
Nicholas-Applegate Income & Growth Qualified Portfolio
Nicholas-Applegate Balanced Growth Portfolio A
Nicholas-Applegate Balanced Growth Portfolio B
Nicholas-Applegate Balanced Growth Portfolio C
Nicholas-Applegate Balanced Growth Institutional Portfolio
Nicholas-Applegate Balanced Growth Qualified Portfolio
Nicholas-Applegate Worldwide Growth Portfolio A
Nicholas-Applegate Worldwide Growth Portfolio B
Nicholas-Applegate Worldwide Growth Portfolio C
Nicholas-Applegate Worldwide Growth Institutional Portfolio
Nicholas-Applegate Worldwide Growth Qualified Portfolio
Nicholas-Applegate Emerging Growth Portfolio A
Nicholas-Applegate Emerging Growth Portfolio B
Nicholas-Applegate Emerging Growth Portfolio C
Nicholas-Applegate Emerging Growth Institutional Portfolio
Nicholas-Applegate Emerging Growth Qualified Portfolio
Nicholas-Applegate International Growth Portfolio A
Nicholas-Applegate International Growth Portfolio B
Nicholas-Applegate International Growth Portfolio C
Nicholas-Applegate International Growth Institutional Portfolio
<PAGE>
Nicholas-Applegate International Growth Qualified Portfolio
Nicholas-Applegate Money Market Portfolio
Nicholas-Applegate Money Market Institutional Portfolio
Nicholas-Applegate Emerging Countries Portfolio A
Nicholas-Applegate Emerging Countries Portfolio B
Nicholas-Applegate Emerging Countries Portfolio C
Nicholas-Applegate Emerging Countries Institutional Portfolio
Nicholas-Applegate Emerging Countries Qualified Portfolio
Nicholas-Applegate Global Growth & Income Portfolio A
Nicholas-Applegate Global Growth & Income Portfolio B
Nicholas-Applegate Global Growth & Income Portfolio C
Nicholas-Applegate Global Growth & Income Institutional Portfolio
Nicholas-Applegate Global Growth & Income Qualified Portfolio
Nicholas-Applegate Short-Intermediate Institutional Fixed Income Portfolio
Nicholas-Applegate Fully Discretionary Institutional Fixed Income Portfolio
Nicholas-Applegate Mini-Cap Growth Institutional Portfolio
Nicholas-Applegate Value Institutional Portfolio
Nicholas-Applegate High Yield Bond Institutional Portfolio
Nicholas-Applegate Strategic Income Institutional Portfolio
Nicholas-Applegate Large Cap Growth Institutional Portfolio
Nicholas-Applegate International Core Growth Portfolio A
Nicholas-Applegate International Core Growth Portfolio B
Nicholas-Applegate International Core Growth Institutional Portfolio
Nicholas-Applegate International Core Growth Qualified Portfolio
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
s/Arthur B. Laffer s/Fred C. Applegate
- -------------------------------- -----------------------------------
Arthur B. Laffer Fred C. Applegate
s/Charles E. Young
- --------------------------------
Charles E. Young
<PAGE>
Exhibit 1.16
AMENDMENT NO. 12 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 12 TO THE AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the ___ day of _______, 1997 by
the undersigned, constituting a majority of the Trustees of the Trust.
WHEREAS, the Amended and Restated Declaration of Trust of the Trust
adopted as of December 17, 1992, as heretofore amended, designated certain
series of Interests of the Trust; and
WHEREAS, the undersigned wish to designate the Nicholas-Applegate
International Core Growth Portfolio C as a new series of the Trust;
NOW THEREFORE, the Board of Trustees hereby amends the first sentence
of Section 8.8 of the Amended and Restated Declaration of Trust of the Trust to
read in full as follows:
"Without limiting the authority of the Trustees
set forth in this Section 8.8 to establish and designate any further
series, the Trustees hereby establish and designate fifty-nine series,
as follows:
Nicholas-Applegate Core Growth Portfolio A
Nicholas-Applegate Core Growth Portfolio B
Nicholas-Applegate Core Growth Portfolio C
Nicholas-Applegate Core Growth Institutional Portfolio
Nicholas-Applegate Core Growth Qualified Portfolio
Nicholas-Applegate Government Income Portfolio A
Nicholas-Applegate Government Income Portfolio B
Nicholas-Applegate Government Income Portfolio C
Nicholas-Applegate Government Income Institutional Portfolio
Nicholas-Applegate Government Income Qualified Portfolio
Nicholas-Applegate Income & Growth Portfolio A
Nicholas-Applegate Income & Growth Portfolio B
Nicholas-Applegate Income & Growth Portfolio C
Nicholas-Applegate Income & Growth Institutional Portfolio
Nicholas-Applegate Income & Growth Qualified Portfolio
Nicholas-Applegate Balanced Growth Portfolio A
Nicholas-Applegate Balanced Growth Portfolio B
Nicholas-Applegate Balanced Growth Portfolio C
Nicholas-Applegate Balanced Growth Institutional Portfolio
Nicholas-Applegate Balanced Growth Qualified Portfolio
Nicholas-Applegate Worldwide Growth Portfolio A
Nicholas-Applegate Worldwide Growth Portfolio B
Nicholas-Applegate Worldwide Growth Portfolio C
Nicholas-Applegate Worldwide Growth Institutional Portfolio
Nicholas-Applegate Worldwide Growth Qualified Portfolio
Nicholas-Applegate Emerging Growth Portfolio A
Nicholas-Applegate Emerging Growth Portfolio B
Nicholas-Applegate Emerging Growth Portfolio C
Nicholas-Applegate Emerging Growth Institutional Portfolio
Nicholas-Applegate Emerging Growth Qualified Portfolio
Nicholas-Applegate International Growth Portfolio A
Nicholas-Applegate International Growth Portfolio B
Nicholas-Applegate International Growth Portfolio C
Nicholas-Applegate International Growth Institutional Portfolio
Nicholas-Applegate International Growth Qualified Portfolio
Nicholas-Applegate Money Market Portfolio
<PAGE>
Nicholas-Applegate Money Market Institutional Portfolio
Nicholas-Applegate Emerging Countries Portfolio A
Nicholas-Applegate Emerging Countries Portfolio B
Nicholas-Applegate Emerging Countries Portfolio C
Nicholas-Applegate Emerging Countries Institutional Portfolio
Nicholas-Applegate Emerging Countries Qualified Portfolio
Nicholas-Applegate Global Growth & Income Portfolio A
Nicholas-Applegate Global Growth & Income Portfolio B
Nicholas-Applegate Global Growth & Income Portfolio C
Nicholas-Applegate Global Growth & Income Institutional Portfolio
Nicholas-Applegate Global Growth & Income Qualified Portfolio
Nicholas-Applegate Short-Intermediate Institutional Fixed Income Portfolio
Nicholas-Applegate Fully Discretionary Institutional Fixed Income Portfolio
Nicholas-Applegate Mini-Cap Growth Institutional Portfolio
Nicholas-Applegate Value Institutional Portfolio
Nicholas-Applegate High Yield Bond Institutional Portfolio
Nicholas-Applegate Strategic Income Institutional Portfolio
Nicholas-Applegate Large Cap Growth Institutional Portfolio
Nicholas-Applegate International Core Growth Portfolio A
Nicholas-Applegate International Core Growth Portfolio B
Nicholas-Applegate International Core Growth Portfolio C
Nicholas-Applegate International Core Growth Institutional Portfolio
Nicholas-Applegate International Core Growth Qualified Portfolio
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
- ----------------------------- ----------------------------
Arthur B. Laffer Fred C. Applegate
- -----------------------------
Charles E. Young
<PAGE>
Exhibit 6.10
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
December 27, 1996
Nicholas-Applegate Securities
600 West Broadway
30th Floor
San Diego, CA 92101
Ladies and Gentlemen:
This will confirm our agreement that the Distribution Agreement
between us dated April 19, 1993, as previously amended, is hereby further
amended by adding the following as additional Portfolios thereunder:
NICHOLAS-APPLEGATE LARGE CAP GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO A
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO B
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH INSTITUTIONAL PORTFOLIO
In all other respects, the Distribution Agreement, as previously
amended, will remain in full force and effect. Please sign this letter below to
confirm your agreement with this amendment.
Very truly yours,
- -----------------------------
John D. Wylie, President
AGREED:
Nicholas-Applegate Securities
By: Nicholas-Applegate Capital
Management Holdings, L.P.,
its general partner
By: Nicholas-Applegate Capital
Management Holdings, Inc.,
its general partner
By:
----------------------------------
E. Blake Moore, Jr., Secretary
<PAGE>
Exhibit 6.11
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
_______________, 1997
Nicholas-Applegate Securities
600 West Broadway
30th Floor
San Diego, CA 92101
Ladies and Gentlemen:
This will confirm our agreement that the Distribution Agreement
between us dated April 19, 1993, as previously amended, is hereby further
amended by adding the following as additional Portfolio thereunder:
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO C
In all other respects, the Distribution Agreement, as previously amended, will
remain in full force and effect. Please sign this letter below to confirm your
agreement with this amendment.
Very truly yours,
- ------------------------
John D. Wylie, President
AGREED:
Nicholas-Applegate Securities
By: Nicholas-Applegate Capital
Management Holdings, L.P.,
its general partner
By: Nicholas-Applegate Capital
Management Holdings, Inc.,
its general partner
By:
---------------------------------
E. Blake Moore, Jr., Secretary
<PAGE>
Exhibit 8.11
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
December 27, 1996
PNC Bank, National Association
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Custodian Services Agreement between us dated
as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, we wish to add the following
PortfolioS to the Agreement:
NICHOLAS-APPLEGATE LARGE CAP GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO A
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO B
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
APPOINTMENT ACCEPTED:
PNC BANK, NATIONAL ASSOCIATION
By:
---------------------------
Title:
-------------------------
<PAGE>
Exhibit 8.12
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
_________________, 1997
PNC Bank, National Association
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
Ladies and Gentlemen:
Reference is made to the Custodian Services Agreement between us dated
as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, we wish to add the following
PortfolioS to the Agreement:
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO C
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
APPOINTMENT ACCEPTED:
PNC BANK, NATIONAL ASSOCIATION
By:
----------------------------
Title:
------------------------
<PAGE>
Exhibit 9.12
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
December 27, 1996
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies and Gentlemen:
Reference is made to the Transfer Agency and Service Agreement between
us dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 10.01 of the Agreement, we wish to add the
following Portfolios to the Agreement:
NICHOLAS-APPLEGATE LARGE CAP GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO A
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO B
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
APPOINTMENT ACCEPTED:
STATE STREET BANK AND TRUST COMPANY
By:
---------------------------
Title:
-----------------------
<PAGE>
Exhibit 9.13
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
_________________, 1997
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies and Gentlemen:
Reference is made to the Transfer Agency and Service Agreement between
us dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 10.01 of the Agreement, we wish to add the
following Portfolio to the Agreement:
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO C
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
APPOINTMENT ACCEPTED:
STATE STREET BANK AND TRUST COMPANY
By:
---------------------------
Title:
-------------------------
<PAGE>
Exhibit 9.26
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
December 27, 1996
PFPC Inc.
103 Bellevue Parkway
Wilmington, Delaware 19809
Ladies and Gentlemen:
Reference is made to the Accounting Services Agreement between us
dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, we wish to add the following
Portfolios to the Agreement:
NICHOLAS-APPLEGATE LARGE CAP GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH INSTITUTIONAL PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH QUALIFIED PORTFOLIO
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO A
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO B
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
APPOINTMENT ACCEPTED:
PFPC INC.
By:
--------------------------
Title:
------------------------
<PAGE>
Exhibit 9.27
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, CA 92101
____________, 1997
PFPC Inc.
103 Bellevue Parkway
Wilmington, Delaware 19809
Ladies and Gentlemen:
Reference is made to the Accounting Services Agreement between us
dated as of April 1, 1993 (the "Agreement").
Pursuant to Section 2 of the Agreement, we wish to add the following
Portfolio to the Agreement:
NICHOLAS-APPLEGATE INTERNATIONAL CORE GROWTH PORTFOLIO C
Please indicate your acceptance of this addition by signing the letter
below and returning a copy to us. Thank you for your assistance regarding this
matter.
Sincerely,
E. Blake Moore, Jr.
Secretary
APPOINTMENT ACCEPTED:
PFPC INC.
By:
--------------------------
Title:
-----------------------
<PAGE>
Exhibit 9.37
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
December 27, 1996
Nicholas-Applegate Capital Management
600 West Broadway
30th Floor
San Diego, CA 92101
Ladies and Gentlemen:
This will confirm our agreement that the expense limitation letter
agreement between us dated September 27, 1993, as previously amended, is hereby
further amended to add the following new Portfolios and Percentage Limitations
to Appendix A thereof:
Name of Portfolio Percentage Limitation
----------------- ---------------------
Nicholas-Applegate LargeCap Growth
Institutional Portfolio 1.00%
Nicholas-Applegate International Core
Growth Portfolio A 1.95%
Nicholas-Applegate International Core
Growth Portfolio B 2.60%
Nicholas-Applegate International Core
Growth Qualified Portfolio 1.65%
Nicholas-Applegate International Core
Growth Institutional Portfolio 1.40%
The Percentage Limitations set forth above will continue until March
31, 1998, unless voluntarily extended by you, and will be subject to the
reimbursement provisions set forth in the Portfolios' prospectus.
<PAGE>
In all other respects, the expense limitation letter agreement, as
previously amended, will remain in full force and effect. Please sign this
letter below to confirm your agreement with these amendments.
Sincerely,
- ------------------------
E. Blake Moore, Jr.
Secretary
AGREED:
Nicholas-Applegate Capital Management
By: Nicholas-Applegate Capital
Management Holdings, L.P.,
its general partner
By: Nicholas-Applegate Capital
Management Holdings, Inc.,
its general partner
By:
-------------------------------
E. Blake Moore, Jr.
Secretary
<PAGE>
Exhibit 9.38
Nicholas-Applegate Mutual Funds
600 West Broadway
30th Floor
San Diego, California 92101
________________, 1997
Nicholas-Applegate Capital Management
600 West Broadway
30th Floor
San Diego, CA 92101
Ladies and Gentlemen:
This will confirm our agreement that the expense limitation letter
agreement between us dated September 27, 1993, as previously amended, is hereby
further amended to add the following new Portfolio and Percentage Limitation to
Appendix A thereof:
Name of Portfolio Percentage Limitation
------------------ ---------------------
Nicholas-Applegate International Core
Growth Portfolio C 2.60%
The Percentage Limitation set forth above will continue until March
31, 1998, unless voluntarily extended by you, and will be subject to the
reimbursement provisions set forth in the Portfolio's prospectus.
In all other respects, the expense limitation letter agreement, as
previously amended, will remain in full force and effect. Please sign this
letter below to confirm your agreement with these amendments.
Sincerely,
- -------------------------
E. Blake Moore, Jr.
Secretary
AGREED:
Nicholas-Applegate Capital Management
By: Nicholas-Applegate Capital
Management Holdings, L.P.,
its general partner
By: Nicholas-Applegate Capital
Management Holdings, Inc.,
its general partner
By:
-------------------------------
E. Blake Moore, Jr.
Secretary
<PAGE>
Exhibit 9.40
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT made as of November 18, 1996, by and between the NICHOLAS-
APPLEGATE MUTUAL FUNDS, a Delaware business trust (the "Trust"), and NICHOLAS-
APPLEGATE CAPITAL MANAGEMENT, a California limited partnership (the "Company").
WHEREAS, the Trust is engaged in business as an open-end management
investment company of the series type and registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust desires to retain the Company to provide certain
administrative services to the Trust and each of its several series, set forth
in Schedule A or hereafter organized (the "Portfolios"), in the manner and on
the terms and conditions hereafter set forth;
NOW THEREFORE, in consideration of the premises and mutual covenants and
agreements hereinafter set forth, the parties intending to be legally bound, do
hereby agree as follows:
1. DUTIES AND RESPONSIBILITIES OF THE COMPANY.
The Company shall oversee the administration of the Trust's and each
Portfolio's business and affairs as set forth herein and shall provide all
administrative services required for effective administration of the Trust and
the Portfolios which are not provided by the Trust's adviser, distributor,
administrator, custodian, transfer agents, accounting agents, independent
accountants and legal counsel. In connection therewith, the Company shall:
1.1 AGENTS. Assist the Trust in selecting, coordinating the
activities of, and negotiating with any person or agent engaged by the Trust,
including the Trust's consultants, transfer agent, sub-transfer agents,
intermediaries with respect to mutual fund alliance programs, dividend
disbursing agent, co-administrator, independent accountants, and independent
legal counsel;
1.2 TRUSTEES AND OFFICERS. Authorize and permit the Company's
officers and employees that may be elected or appointed as trustees or officers
of the Trust to serve in such capacities, without remuneration from or
additional cost to the Trust.
1.3 SHAREHOLDER INQUIRIES. Respond to all inquires from Trust
shareholders and/or their registered representative, or otherwise answer
communications from Trust shareholders and/or the registered representative if
such inquiries or communications are directed to the Company. If any such
inquiry or communication would be more properly answered by one of the agents
listed in Section 1.1 above, the Administrator will coordinate, as needed, the
provision of their response.
1.4 PERFORMANCE CALCULATION. Calculate performance data of
Trusts for dissemination to information services covering the investment company
industry, shareholders, and appropriate regulatory agencies.
1.5 REPORTS TO THE TRUST. Furnish to or place at the disposal
of the Trust such information, reports, evaluations, analyses, and opinions
relating to its administrative functions as may be requested by the Board of
Trustees of the Trust or as the Company deems desirable. The Company also will
assist in the preparation of agendas and other materials for meetings of the
Trust's Board of Trustees and will attend such meetings.
1.6 REPORTS AND FILINGS. Provide appropriate assistance in the
development and/or preparation of all reports, prospectuses, proxy statements,
and communications by the Trust to Trust shareholders, and coordinate the layout
and printing of publicly disseminated prospectuses and reports.
<PAGE>
1.7 OFFICE AND OTHER FACILITIES. Furnish, without cost to the
Trust, or provide and pay the cost of, such office facilities, furnishings, and
office equipment as are necessary for the performance of the Company's duties to
the Trust under this Agreement.
2. OWNERSHIP AND CONFIDENTIALITY OF RECORDS.
All records required to be maintained and preserved by the Trust, pursuant
to rules or regulations of the Securities and Exchange Commission under Section
31(a) of the 1940 Act, that are maintained and preserved by the Company on
behalf of the Trust, are the property of the Trust and shall be surrendered by
the Company promptly on request by the Trust. The Company shall not disclose or
use any record or information obtained pursuant to this Agreement in any manner
whatsoever except as expressly authorized by this Agreement and applicable law.
The Company shall keep confidential any information obtained in connection with
its duties hereunder and shall disclose such information only if the Trust has
authorized such disclosure or if such disclosure is expressly required by
applicable law or federal or state regulatory authorities.
3. STANDARD OF CARE; INDEMNIFICATION.
3.1 The Company shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement. The Company shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Trusts) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
Any person, even though also an officer, partner, employee or agent of the
Company, who may be or become an officer, trustee, employee or agent of the
Trust or who may act on any business of the Trust (other than services or
business in connection with the duties of the Company hereunder or the duties of
any affiliate of the Company pursuant to any other agreement with the Company)
shall be considered to be rendering such services to or acting solely for the
Trust and not as an officer, partner, employee or agent or one under the control
or direction of the Company even though paid by the Company.
3.2 The Trust shall indemnify the Company, its officers,
employees and partners, and hold them harmless from and against any and all
actions, suits and claims, and from and against all losses, damages (excluding
consequential, punitive or other indirect damages), costs, charges, reasonable
counsel fees and disbursements, payments, expenses, and liabilities (including
reasonable investigation expenses) arising out of any action taken or thing done
by them in performing the services in accordance with the above standards.
3.3 In order that the indemnification provisions contained in
this Article 3. shall apply, however, it is understood that if in any case the
Trust may be asked to indemnify or save the Company, its officers, employees and
partners, harmless, the Trust shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Company will use all reasonable care to identify and notify
the Trust promptly concerning any situation which presents or appears likely to
present the probability of such a claim for indemnification against the Trust.
The Trust shall have the option to defend them against any claim which may be
subject to this indemnification. In the event that the Trust so elects, it will
so notify the parties and thereupon the Trust shall take over complete defense
of the claim with counsel reasonably acceptable to the parties, and the parties
shall in such situation initiate no further legal or other expenses for which
they shall seek indemnification under this Article. An indemnified party shall
in no case confess any claim or make any compromise in any case in which the
Trust will be asked to indemnify the party except with the Trust's prior written
consent.
4. INDEMNIFICATION BY THE COMPANY.
4.1 The Company shall indemnify the Trust and the Portfolios,
their officers and trustees and hold them harmless from and against any and all
actions, suits and claims, whether groundless or otherwise, and from and against
any and all losses, damages (excluding consequential, punitive or other
- 2 -
<PAGE>
indirect damages), costs, charges, reasonable counsel fees and disbursements,
payments, expenses, and liabilities (including reasonable investigation
expenses) arising directly or indirectly out of the services rendered hereunder
and arising or based upon the willful misfeasance, bad faith, or negligence of
the Company, its partners, officers, employees, and agents in the performance of
its or their duties on behalf of the Trust and the Portfolios.
4.2 In order that the indemnification provision contained herein
shall apply, however, it is understood that if in any case the Company may be
asked to indemnify or hold the Trust and the Portfolios, their officers, and
trustees harmless, the Company shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Trust and the Portfolios will use all reasonable care to
identify and notify the Company promptly concerning any situation which presents
or appears likely to present the probability of such a claim for indemnification
against the Company. The Company shall have the option to defend the Trust
against any claim which may be the subject to this indemnification. In the
event that the Company so elects, it will so notify the Trust and thereupon the
Company shall take over complete defense of the claim with counsel reasonably
acceptable to the parties, and the parties shall in such situation initiate no
further legal or other expenses for which they shall seek indemnification under
this Article. An indemnified party shall in no case confess any claim or make
any compromise in any case in which the Company will be asked to indemnify the
party except with the Company's prior written consent.
5. COMPENSATION AND EXPENSES.
5.1 The Trust will compensate the Company for the Administrative
Services in accordance with the fees agreed upon from time to time between the
parties hereto. Such fees do not include out-of-pocket and other third-party
disbursements of the Company for which the Trusts shall reimburse the Company
separately. The Company may at any time and from time to time waive any part or
all of any fee payable to it pursuant to this Agreement.
5.2 The fee shall accrue daily and the sum of the accruals shall
be paid monthly on or before the fifth (5th) business day of the month. The fee
for the period from the effective date of this Agreement with respect to a
Portfolio to the end of the initial month shall be prorated according to the
proportion that such period bears to the full month period. Upon any
termination of this Agreement before the end of any month, the fee for such
period shall be prorated according to the proportion which such period bears to
the full month period.
5.3 The Company, in its sole discretion, may from time to time
subcontract to, employ or associate with itself such person or persons as the
Company may believe to be particularly suited to assist it in performing any of
the services under this Agreement. Such person or persons may be affiliates of
the Company, third-party service providers, or officers and employees who are
employed by both the Company and the Trust; provided, however, that the Company
shall be as fully responsible to each Trust for the acts and omissions of any
such subcontractor as it is for its own acts and omissions. Except as herein
provided, the compensation of such person or persons shall be paid by the
Company and no obligation shall be incurred on behalf of the Trust or the
Portfolios in such respect.
6. ASSIGNMENT.
Except as provided herein, neither this Agreement nor any of the rights or
obligations under this Agreement may be assigned by either party without the
written consent of the other party.
7. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall be effective from November 18, 1996, and shall
continue until June 1, 1997. Thereafter, the Agreement will continue annually,
provided such continuance is specifically approved by a vote of a majority of
those members of the Board who are not "interested persons" of any party to this
Agreement, as such term is defined in the 1940 Act. This Agreement may be
terminated by any of the parties, without the payment of any penalty, upon sixty
(60) days' notice. The termination date for all original or after-added
- 3 -
<PAGE>
Portfolios which are or become a party to this Agreement shall be coterminous,
except that Portfolios that merge or dissolve during the term shall cease to be
a party on the effective date of such merger or dissolution.
Should the Trust exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and materials will be borne by
the Trusts or the appropriate Trust.
8. AMENDMENT.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by a written agreement executed by both parties.
9. GOVERNING LAW.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of California.
10. NOTICES.
Except as otherwise specifically provided herein, notices and other
writings delivered or mailed postage prepaid to:
THE FUND: Nicholas-Applegate Mutual Trusts
600 West Broadway, 29th Floor
San Diego, CA 92101
THE COMPANY: Nicholas-Applegate Services Company
600 West Broadway, 29th Floor
San Diego, CA 92101
or to such other address as the Trust or the Company may hereafter specify,
shall be deemed to have been properly delivered or given hereunder.
11. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original.
12. MERGER OF AGREEMENT.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.
13. FORCE MAJEURE.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Trust as a result of work stoppage, power
or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.
14. ASSIGNMENT; SUCCESSORS.
This Agreement shall not be assigned by either party without the prior
written consent of the other party. Nothing in this Article 14 shall prevent
the Company from delegating its responsibilities to another entity to the extent
provided herein.
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15. SEVERABILITY.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
16. LIMITATIONS OF LIABILITY OF TRUSTEES AND SHAREHOLDERS OF THE TRUST.
The execution and delivery of this Agreement have been authorized by the
trustees of the Trust and signed by an authorized officer of the Trust, acting
as such, and neither such authorization by such trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, and the
obligations of this Agreement are not binding upon any of the trustees or
shareholders of the Trust, but bind only the appropriate property of the Trust,
or any Portfolio, as provided in the Declaration of Trust. The debts,
liabilities and obligations with respect to each Portfolio shall be enforceable
against the assets and property of such Portfolio only, and not against the
assets and property of any other Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
THE TRUST THE COMPANY
NICHOLAS-APPLEGATE NICHOLAS-APPLEGATE
MUTUAL FUNDS CAPITAL MANAGEMENT
By:/s/E. Blake Moore, Jr. By:/s/E. Blake Moore, Jr.
--------------------------------- --------------------------
Its: Secretary Its: General Counsel
-------------------------------- --------------------------
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