<PAGE>
As filed with the Securities and Exchange Commission
on July 14, 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. 43 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 45
(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 LLP
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,
1997 on May 30, 1997. This Registration Statement has been executed by the
trustees and principal officers of the Registrant.
------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ------------- --------
PART A
Item 1. Cover Page . . . . . . . . . . . . . . . . . . . .Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . . . . . . .Overview; Global
Blue Chip Fund;
Emerging Markets
Bond Fund
Item 3. Condensed Financial Information. . . . . . . . . .Global Blue Chip
Fund; Emerging
Markets Bond Fund
Item 4. General Description of Registrant. . . . . . . . .Overview; Global
Blue Chip Fund;
Emerging Markets
Bond Fund
Item 5. Management of Fund . . . . . . . . . . . . . . . .Organization and
Management;
Portfolio Teams
Item 6. Capital Stock and Other Securities . . . . . . . .Your Account
Item 7. Purchase of Securities Being Offered . . . . . . .Your Account
Item 8. Redemption or Repurchase . . . . . . . . . . . . .Your Account
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, Policies
and Risks;
Investment
Restrictions
Item 14. Management of the Fund . . . . . . . . . . . . . .Trustees and
Officers;
Administrators;
Distributor
Item 15. Control Persons and Principal Holders
of Securities. . . . . . . . . . . . . . . . . . .Not Applicable
Item 16. Investment Advisory and Other Services . . . . . .Administrators;
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 Fund
Shares; Shareholder
Services
Item 20. Tax Status. . . . . . . . . . . . . . . . . . . . Dividends,
Distributions and
Taxes
Item 21. Underwriters. . . . . . . . . . . . . . . . . . . Distributor
Item 22. Calculation of Performance Data . . . . . . . . . Performance
Information
<PAGE>
Item 23. Financial Statements. . . . . . . . . . . . . . . Not Applicable
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
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[left side: Nicholas-Applegate philosophy spread]
PROSPECTUS
This prospectus contains vital information about these Funds. For your own
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Please note that these Funds:
- - are not bank deposits
- - are not federally insured
- - are not endorsed by any bank or government agency
- - are not guaranteed to achieve their investment objectives
THE EMERGING MARKETS BOND FUND MAY INVEST WITHOUT LIMITATION IN DEBT
SECURITIES RATED BELOW INVESTMENT GRADE, SOMETIMES REFERRED TO AS "JUNK BONDS."
THESE LOWER RATED SECURITIES ARE SPECULATIVE AND INVOLVE GREATER RISKS,
INCLUDING DEFAULT, THAN HIGHER RATED SECURITIES. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
LIKE ALL MUTUAL FUND SHARES, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
GLOBAL INSTITUTIONAL
FUNDS
GLOBAL BLUE CHIP FUND
EMERGING MARKETS BOND FUND
September __, 1997
<PAGE>
TABLE OF CONTENTS
OVERVIEW
GLOBAL FUNDS
Global Blue Chip
Emerging Markets Bond Fund
YOUR ACCOUNT
Transaction Policies
Dividends and Account Policies
Opening an Account
Adding to an Account
Exchanging Shares
Selling or Redeeming Shares
Signature Guarantees
ORGANIZATION AND MANAGEMENT
Investment Adviser Compensation
Administrator Compensation
Distributor
Portfolio Trades
Investment Objectives
Diversification
Portfolio Teams
RISK FACTORS AND SPECIAL CONSIDERATIONS
<PAGE>
OVERVIEW
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FUND INFORMATION
Concise Fund descriptions begin on the next page. Each description provides the
following information:
[bullet point icon]
- - GOAL AND STRATEGY. The Fund's particular investment goals and the strategies
it intends to use in pursuing those goals.
[bullet point icon]
- - PORTFOLIO SECURITIES. The primary types of securities in which the Fund
invests. Secondary investments are described in "Risk Factors and Special
Considerations" at the end of the prospectus.
[bullet point icon]
- - RISK FACTORS. The major risk factors associated with the Fund. Other risk
factors are also described in "Risk Factors and Special Considerations."
[bullet point icon]
- - EXPENSES. The overall costs borne by an investor in the Fund.
The shares of the Nicholas-Applegate Global Blue Chip Fund and the
Nicholas-Applegate Emerging Markets Bond Fund (the "Fund" or "Funds") represent
interests in a diversified pool of securities which are portfolios of the
Nicholas-Applegate Mutual Funds (the "Trust"), and open-end management
investment company, otherwise known as a mutual fund.
WHO MAY WANT TO INVEST IN THE
GLOBAL BLUE CHIP FUND
- - those who are investing for retirement or other long-term goals
- - those who are willing to accept higher short-term risks associated with
investing in foreign companies along with higher potential long-term
results
- - those who want professional portfolio management
- - those who are seeking funds for the international portion of an asset
allocation portfolio
WHO MAY NOT WANT TO INVEST IN
THE GLOBAL BLUE CHIP FUND
- - those who are investing with a shorter frame
- - those who are uncomfortable with an investment that will go up and down in
value
- - those who are unable to accept the special risks associated with foreign
investing
WHO MAY WANT TO INVEST IN THE
EMERGING MARKETS BOND FUND
- - those who are investing for retirement or other long-term goals
- - those who need current income
- - those who are willing to accept higher risks associated with investing in
lower rated debt securities along with potential for higher total return
- - those who are will to accept higher risks associated with investing in
securities in emerging markets
- - those who want professional portfolio management
WHO MAY NOT WANT TO INVEST IN THE
EMERGING MARKETS BOND FUND
- - those who are investing with a shorter time frame
- - those who are unable to accept the special risks associated with lower
rated debt
- - those who are unable to accept the special risks associated with emerging
markets
- - those who are uncomfortable with an investment that will go up and down in
value
*******************************************************
THE INVESTMENT ADVISER
Nicholas-Applegate Capital Management (the "Investment Adviser") serves as
investment adviser to Funds. Arthur E. Nicholas and 14 other partners with a
staff of approximately 350 employees currently manage approximately $30 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.
<PAGE>
GLOBAL BLUE CHIP FUND
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[bullet point icon]
INVESTMENT OBJECTIVE: Maximum long-term capital appreciation.
[bullet point icon]
INVESTMENT STRATEGY: The Investment Adviser follows a global investment strategy
of investing primarily in common stocks traded in securities markets located in
a number of foreign countries and the U.S. The Investment Adviser focuses on a
"bottom-up" analysis that evaluates the financial conditions and competitiveness
of individual companies worldwide. It uses a blend of both traditional
fundamental research, calling on the expertise of many external analysts in
different countries throughout the world, and systematic disciplines to uncover
signs of "change at the margin" - positive business developments which are not
yet fully reflected in a company's stock price. It gathers financial data on
20,000 companies in 52 countries, and searches for successful, growing companies
managing change advantageously and poised to exceed growth expectations.
The Fund invests primarily in companies that have substantial capitalization --
generally in the top two-thirds of publicly traded companies worldwide, --
companies that have an established history of earnings, easy access to credit,
good industry position, and a reputation as a global leader in their respective
industries.
[bullet point icon]
PRINCIPAL INVESTMENTS: Under normal conditions, the Fund invests at least 65% of
its total assets in securities of issuers located in at least three different
countries, one of which may be the U.S.
Under normal conditions, the Fund invests at least 75% of its total assets in
common and preferred stocks, warrants and convertible securities. It invests
the remainder primarily in debt securities of foreign companies and foreign
governments, and their agencies and instrumentalities. The Fund may invest up
to 10% of its total assets in debt securities rated Baa or BBB, or, if unrated,
of comparable quality, and up to 5% of its total assets in debt securities rated
Ba or BB, or, if unrated, of comparable quality. The Fund may also use options
and futures contracts as hedging techniques.
[bullet point icon]
PORTFOLIO MANAGEMENT: The Investment Adviser emphasizes a team approach to
portfolio management to maximize its overall effectiveness. For a complete
listing of the portfolio team, see "Portfolio Teams" on page __ .
[bullet point icon]
RISK FACTORS. The value of the Fund's investments varies day to day in response
to the activities of individual companies and general market and economic
conditions. As with any international fund, performance also depends upon
changing values in foreign currencies, different political and regulatory
environments, and other overall economic factors in the countries where the
Fund invests. To the extent the Fund invests in bonds rated BBB or Baa and
below, such bonds may have speculative characteristics and changes in economic
conditions may affect their ability to make interest and principal payments.
For a further explanation , see "Risk Factors and Special Considerations"
starting on page _____.
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[bullet point icon]
INVESTOR EXPENSES: Investors pay various expenses, either directly or
indirectly. The figures below show the expected expenses for the Fund for its
first year of operations. Actual expenses may be more or less than
those shown.
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 FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.80%
12b-1 expenses None
Total other expenses 0.40%
Total operating expenses (after expense deferral)(1) 1.20%
1. The Investment Adviser has agreed to waive or defer its management fees
and to absorb other operating expenses payable by the Fund. Total operating
expenses are expected to be ______% absent the waiver and deferral. See
"Investment Adviser Compensation".
EXAMPLE: The table shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
1 YEAR 3 YEARS
$14 $44
THIS EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A REPRESENTATION OF THE
FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.
<PAGE>
EMERGING MARKETS BOND FUND
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[bullet point icon]
INVESTMENT OBJECTIVES: Total return and high current income.
[bullet point icon]
INVESTMENT STRATEGY: The Fund invests primarily in debt securities of issuers
located in emerging countries. Emerging countries are those, in the opinion of
the Investment Adviser, emerging as investment markets but have yet to reach a
level of economic development associated with developed, industrial nations.
When evaluating any bond, the Investment Adviser selects bonds based upon a "top
down" analysis of economic trends. It also analyzes credit quality, the yield
to maturity of the security, the currency denomination of the security, the
bond's interest rate sensitivity of the security, and the effect the security
will have on the average yield to maturity of the Fund.
[bullet point icon]
PRINCIPAL INVESTMENTS: Under normal conditions, the Fund invests at least 80% of
its total assets in debt securities of issuers located in at least three
different countries. These countries include but are not limited to: Argentina,
Brazil, Bulgaria, Chile, Columbia, the Czech Republic, Ecuador, Greece, Hungary,
India, Indonesia, Israel, Malaysia, Mexico, Morocco, Nigeria, Poland, Russia,
South Africa, Thailand, and Venezuela. The Fund may also invest up to 35% of
its total assets in debt securities of issuers located in developed markets.
There is no limit on either the portfolio maturity or the acceptable rating of
the securities bought by the Fund. The Fund may also use options and futures
contracts as hedging techniques.
[bullet point icon]
PORTFOLIO MANAGEMENT: The Investment Adviser emphasizes a team approach to
portfolio management to maximize its overall effectiveness. For a complete
listing of the portfolio team, see "Portfolio Teams" on page___.
[bullet point icon]
RISK FACTORS: As with any fund that invests in bonds, the values of the Fund's
investments fluctuate in response to movements in interest rates. If rates go
up, the value of bonds fall; if rates go down, the value of bonds rise. Bonds
with longer maturities tend to be more sensitive to interest rate movements than
those with shorter maturities. Emerging markets debt securities, while offering
higher yields, tend to be of lower credit quality and subject to greater risk of
default than higher rated securities. Periods of high interest rates and
recession may adversely affect the issuer's ability to make interest and
principal payments. Additionally, emerging markets tend to be less liquid and
more volatile, offer less regulatory protection for investors, and in countries
that have less stable governments than more established markets. The Fund's
performance may also depend upon changing currency values, different political
and regulatory environments, and other overall economic factors in the countries
where the Fund invests. For a further explanation, see "Risk Factors and Special
Considerations" starting on page ____.
<PAGE>
[bullet point icon]
INVESTOR EXPENSES: Investors pay various expenses, either directly or
indirectly. The figures below show expenses expected for the Fund in its first
year of operation. Actual expenses may be more or less than those shown.
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 FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NET ASSETS:
(AFTER EXPENSE DEFERRAL)
Management fees 0.70%
12b-1 expenses None
Total other expenses 0.25%
Total operating expenses (after expense deferral)1 0.95%
1. The Investment Adviser has agreed to waive or defer its management fees
and to absorb other operating expenses payable by the Fund. Total operating
expenses are expected to be _____% absent the waiver and deferral. See
"Investment Adviser Compensation".
EXAMPLE: The table shows what you would pay if you invested $1,000 over the
various time frames indicated. The example assumes you reinvested all dividends
and that the average annual return was 5%.
1 YEAR 3 YEARS
$10 $32
THIS EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A REPRESENTATION OF THE
FUND'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE.
<PAGE>
YOUR ACCOUNT
- ------------
TRANSACTION POLICIES
PURCHASE OF SHARES. Shares are offered at net asset value without a sales
charge to qualified retirement plans, financial and other institutions and
"wrap accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment to $10,000. The Distributor may waive these minimums from
time to time.
VALUATION OF SHARES The net asset value per share (NAV) for a Fund is
determined each business day at the close of regular trading on the New York
Stock Exchange (usually 4 p.m. Eastern Time) by dividing a Fund's net assets by
the number of its shares outstanding.
BUY AND SELL PRICES When you buy shares, you pay the NAV, as described earlier.
When you sell shares, you receive the NAV. Your financial institution may
charge you a fee to execute orders on your behalf.
EXECUTION OF REQUESTS Each Fund is open on those days when the New York Stock
Exchange is open, usually Monday - Friday. Buy and sell requests are executed
at the NAV next calculated after your request is received in good order by the
transfer agent.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing or by facsimile.
Each Fund reserves the right to reject any purchase or to suspend or modify the
continuous offering of its shares. Your financial representative is responsible
for forwarding payment promptly to the transfer agent. The Trust reserves the
right to cancel any buy request if payment is not received within three days.
In unusual circumstances, any Fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to three business days
or longer, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition the Trust will take measures
to verify the identity of the caller, such as asking for name, account number,
Social Security or taxpayer ID number and other relevant information. If these
measures are not taken, your Fund may be responsible for any losses that may
occur in your account due to an unauthorized telephone call.
CERTIFICATED SHARES Most shares are electronically recorded. If you wish to
have certificates for your shares, please write to the transfer agent.
Certificated shares can only be sold by returning the certificates to the
transfer agent, along with a letter of instruction or a stock power and a
signature guarantee.
SALES IN ADVANCE OF PURCHASE PAYMENTS When you place a request to sell shares
for which the purchase money has not yet been collected, the request will be
executed in a timely fashion, but the Fund will not release the proceeds to you
until your purchase payment clears. This may take up to fifteen calendar days
after the purchase.
SHAREHOLDER INQUIRIES Shareholder inquiries should be addressed to the Trust,
c/o the Trust's transfer agent,
State Street Bank and Trust Company,
Attention: Nicholas-Applegate Mutual Funds,
P.O. Box 8326,
Boston, MA 02266-8326.
Telephone inquiries can be made by calling 1-800-551-8043 or, from outside the
U.S. 1-617-774-5000 (collect).
The services referred to alone 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.
FEATURES AND ACCOUNT POLICIES
RETIREMENT PLANS You may invest in each Fund through various retirement plans,
including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457 plans,
and all qualified retirement plans. For further information about any of the
plans, agreements, applications and annual fees, contact the Distributor, your
financial representative or plan sponsor. To determine which retirement plan is
appropriate for you, consult your tax adviser.
ACCOUNT STATEMENTS In general, you will receive account statements as follows:
- - After every transaction that affects your account balance.
- - After any changes of name or address of the registered owner(s).
- - In all other circumstances, every quarter.
Every year you will also receive an applicable tax information statement, mailed
by January 31.
<PAGE>
DIVIDENDS The Funds generally distribute most or all of their net earnings in
the form of dividends. The Global Blue Chip pays dividends and capital gains
annually. The Emerging Markets Bond Fund pays monthly dividends of net
investment; income and makes distributions at least annually of net capital
gains, if any.
DIVIDEND REINVESTMENTS If you choose this option, or if you do not indicate any
choice, your dividends will be reinvested on the ex-dividend date.
Alternatively, you can choose to have a check for your dividends mailed to you.
TAXABILITY OF DIVIDENDS As long as a Fund meets the requirements for being a
tax-qualified regulated investment company, which each Fund has in the past and
intends to in the future, it pays no federal income tax on the earnings it
distributes to shareholders.
Consequently, dividends you receive from a Fund whether reinvested or taken as
cash, are generally considered taxable. Dividends from a Fund's long-term
capital gains are taxable as capital gains; dividends from other sources are
generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive.
The tax information statement that is mailed to you details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
TAXABILITY OF TRANSACTIONS Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the
sale price of the shares you sell or exchange, you may have a gain or a loss on
the transaction. You are responsible for any tax liabilities generated by your
transactions.
SMALL ACCOUNTS (NON-RETIREMENT ONLY) If you draw down a non-retirement account
so that its total value is less than the Fund minimum, you may be asked to
purchase more shares within 60 days. If you do not take action, the Fund may
close out your account and mail you the proceeds. Your account will not be
closed if its drop in value is due to Fund performance.
AUTOMATIC WITHDRAWALS You may make automatic withdrawals from a Fund of $250 or
more on a monthly or quarterly basis if you have an account of $15,000 or more
in the Fund. Withdrawal proceeds will normally be received prior to the end of
the month or quarter. See the account application for further information.
AUTOMATIC INVESTMENT PLAN You may make regular monthly or quarterly investments
in each Fund 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
1-800-551-8043.
CROSS-REINVESTMENT You may cross-reinvest dividends or dividends and capital
gains distributions paid by one Fund into shares of another Fund, subject to
conditions outlined in the Statement of Additional Information and the
applicable provisions of the qualified retirement plan.
<PAGE>
OPENING AN ACCOUNT
This is the minimum $250,000
initial investment
Use this type of New Account Form
application (Non-Retirement)
Before completing the Each Fund offers a variety of features, which are
application described in the Your Account section of this
prospectus. Please read this section before completing
the application.
Completing the If you need assistance, contact your financial
application representative, or call the Trust.
If you are sending money Mail application and check, payable to: NICHOLAS-
by CHECK APPLEGATE MUTUAL FUNDS, PO BOX 8326, BOSTON, MA 02266
8326. The Trust will not accept third-party checks.
If you are sending money Please read the bank wire or ACH section under
by BANK WIRE or ACH the "Buying Shares" section below. You will need an
account number with the Trust by sending a completed
application to: NICHOLAS-APPLEGATE MUTUAL FUNDS, PO BOX
8326, BOSTON, MA 02266 8326. To receive your account
number, call either your financial representative or
the Trust at (800)551-8043.
BUYING SHARES
This is the minimum $10,000
additional investment
The price you will receive The Trust is open on days that the New York Stock
Exchange is open. All transactions received in
good order before the market closes receives that
day's price.
If you are sending money Instruct your bank to wire the amount you
by BANK WIRE wish to invest to: STATE STREET BANK & TRUST CO. -
ABA #011000028 DDA #9904-645-0 STATE STREET BOS,
ATTN: MUTUAL FUNDS CREDIT: NICHOLAS-APPLEGATE [FUND
NAME], [YOUR NAME],[ACCOUNT NAME/NUMBER]
If you are sending money Call your bank to ensure (1) that your bank
by ACH supports ACH, and (2) this feature is active on your
bank account. To establish this option, either
complete the appropriate sections when opening an
account, or contact your financial representative or
the Trust at (800) 551-8043 for further information.
To initiate an ACH purchase, call the Trust at
(800)551-8043.
EXCHANGING SHARES
This is the minimum $250,000
exchange amount to open
a new account
The price you The Trust is open on days that the New York Stock
will receive Exchange is open. All transactions received in good order
before the market closes receives that day's price.
Things you should The exchange must be to a Fund or Portfolio in the same
know series as an account with the same registration.
If opening an account as part of an exchange, you must
obtain and read the prospectus. If you intend to keep
money in the portfolio you are exchanging from, make sure
that you leave an amount equal or greater that the portfolio's
minimum account size (see the "Opening an Account" section).
To protect other investors, the Trust may limit the number of
exchanges you can make.
How to request an Either contact your financial representative, or call the
exchange by PHONE Trust at (800) 551-8043. The Trust will accept a request by
phone if this feature was previously established on your
account. See the Your Account section for further
information.
How to request an Please put your exchange request in writing, including: the
exchange by MAIL name on the account, the name of the Fund or portfolio and
the account number you are exchanging from, the shares or
dollar amount you wish to exchange, and the fund or portfolio
you wish to exchange to. Mail this request to: PO BOX 8326,
BOSTON, MA 02266 8326.
<PAGE>
SELLING OR REDEEMING SHARES
IN WRITING BY PHONE
Certain requests may require a Selling shares by phone is a
SIGNATURE GUARANTEE. See that service option which must be
section below for further established on your account
Things you information. You may sell up to prior to making a request.
should know the full account value. The See the Your Account section,
Trust may have additional or contact your financial
requirements for redeeming shares. representative, or the Trust
Please call the Trust for more at (800) 551-8043 for
information. further information. The
maximum amount which may
be requested by phone,
regardless of account size,
is $50,000. Amounts greater
than that must be requested in
writing. I you wish to receive
your monies by bank wire, the
minimum request is $5,000.
If you purchased shares through a financial representative,
a plan administrator/sponsor, you should call them regarding the
most efficient way to sell shares. If you bought shares recently
by check, they may not be available to be sold for up to
15 calendar days from the date of purchase.
Sales by a corporation, trust or fiduciary may have special
requirements. Please call your financial representative or the
Trust for further information.
The price you The Trust is open on days that the New York Stock
will receive Exchange is open. All transactions received in good order
before the market closes receive that day's price.
If you want to Please put your request in Either contact your
receive your monies writing, including: financial representative or
by BANK WIRE the name of the account call the Trust at
owners, account number and Fund (800) 551-8043.
you are redeeming from, the The proceeds will be
share or dollar amount you wish sent to the existing
to sell, signed by all account bank wire address listed
owners. Mail this request to: on the account.
NICHOLAS-APPLEGATE MUTUAL FUNDS,
PO BOX 8326, BOSTON, MA 02266 8326.
The check will be sent to the
existing bank wire address listed on
the account.
If you want to Please call the Trust at Either contact your
receive your (800) 551-8043. financial representative
monies by ACH or call the Trust at (800)
551-8043. The proceeds
will be sent to the existing
ACH instructions on the
account and will generally be
received at your bank two
business days after your
request is received.
SIGNATURE GUARANTEES
A definition A signature guarantee is required of a financial institution
to verify individual's authenticity of an individual's
signature. It can usually be obtained from a broker,
commercial or savings bank, or credit union.
When do you need one A signature guarantee is needed when making a written
request for the following reasons:
1. When selling more than $50,000 worth of shares;
2. When you want a check or bank wire sent to a name or
address that is not currently listed on the account;
3. To sell shares from an account controlled by a
corporation, partnership, trust or fiduciary; or
4. If your address was changed within the last 60
days.
<PAGE>
ORGANIZATION AND MANAGEMENT
- ---------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER COMPENSATION. Pursuant to an investment advisory agreement,
the Emerging Markets Bond Fund pays a monthly fee at the annual rate of 0.70% of
its net assets. and Global Blue Chip Fund pays at the annual rate of .80% of its
net assets.
The Investment Adviser has agreed to waive or defer its management fees payable
by each Fund, and to absorb other operating expenses of each Fund, so that the
expenses will not exceed the following expense ratios on an annual basis through
March 31, 1998; Emerging Markets Bond - .95%; Global Blue Chip Fund - 1.20%.
Each Fund will reimburse the Investment Adviser for fees deferred or other
expenses paid pursuant to this Agreement in later years in which operating
expenses for the Fund are less than the percentage limitation set forth above
for any such year.
ADMINISTRATOR COMPENSATION. The Funds pay administrative fees for
administrative personnel and services (including certain legal and financial
reporting services). Each Fund pays Nicholas-Applegate Capital Management an
annual fee of .10% of net assets. Each Fund pays Investment Company
Administration Corporation (ICAC) an annual fee of $5,000 - $35,000 a fee at an
annual rate equal to 0.15% of average net assets.
DISTRIBUTOR OF THE TRUST'S SHARES:
Nicholas-Applegate Securities
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8045
PORTFOLIO TRADES. The Investment Adviser is responsible for each Fund's
portfolio transactions. In placing portfolio trades, the Investment Adviser may
use brokerage firms that sell shares of the Funds or that provide research
services to the Funds, but only when the Investment Adviser believes no other
firm offers a better combination of quality execution (i.e. timeliness and
completeness) and favorable price. The Investment Adviser expects high annual
portfolio turnover up to 200%. This is generally higher than other funds and
will result in the Funds incurring higher brokerage costs.
INVESTMENT OBJECTIVE. Each Fund's investment objective is fundamental and may
only be changed with shareholder approval.
DIVERSIFICATION. Both Funds are diversified.
<PAGE>
PORTFOLIO TEAMS
- --------------------------------------------------------------------------------
Equity Management - International/Global
- ----------------------------------------
NAME FUND
Catherine Somhegyi, Partner Global Blue Chip
Chief Investment Officer - Global Equity
Management
Joined firm in 1987; prior investment
experience with Professional Asset Securities, Inc.
and Pacific Century Advisers
M.B.A. and B.S. - University of Southern
California
Loretta J. Morris Global Blue Chip
Portfolio Manager - International;
Joined firm in 1990; 10 years prior investment
experience with Collins Associates
Attended California State University, Long Beach;
CFA Level II candidate
Alex Muromcew Global Blue Chip
Portfolio Manager - International
Joined firm in 1996; 6 years prior investment
experience with Jardine Fleming Securities (Japan);
Emerging Markets Investors Corporation; Teton
Partners LP
M.B.A. - Stanford University, B.A. - Dartmouth
College
FIXED INCOME
- ------------
Fred S. Robertson, III, Partner Emerging Markets Bond
Chief Investment Officer - Fixed Income
Joined firm in 1995; 17 years prior investment
experience with Criterion Investment Management; 5
years prior experience with DuPont Chemical
Pension Fund
M.B.A. - College of William and Mary; B.S. -
Cornell University
Malcom S. Day, CFA Emerging Markets Bond
Portfolio Manager
Chairman of the International Fixed Income Group
Joined firm in 1995; 3 years prior investment
experience with Payden & Rygel Investment Counsel
M.B.A. - UCLA; B.S. - Northwestern University
Jan H. Friedli Emerging Markets Bond
International Bond Specialist
Joined firm in 1997; 7 years prior investment
experience at Strong Capital Management, PIMCO,
and the Vanguard Group, Inc.
M.B.A. - University of Chicago; B.S. Villanova
University
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
- --------------------------------------------------------------------------------
MUTUAL FUND CONSIDERATIONS IN GENERAL
Prospective investors should know that any mutual fund investment is subject to
normal market fluctuations and other risks inherent in investing in securities.
There can be no assurance that your investment will increase in value. The
value of your investment will go up and down depending upon market forces and
you may not recoup your original investment. You should consider an investment
in any of the Funds a long-term investment.
DERIVATIVE CONTRACTS AND SECURITIES CONSIDERATIONS
The term "derivative" traditionally applies to certain contracts that "derive"
their value from changes in the value of the underlying securities, currencies,
commodities or index. Investors refer to certain types of securities that
incorporate the performance characteristics of these contracts as derivatives.
Derivatives are sophisticated instruments that typically involve a small
investment of cash relative to the magnitude of risks assumed. These include
swaps, agreements, options, futures, and convertible securities. The Funds seek
to use derivative contracts and securities to reduce and increase the volatility
of a Fund's total performance. While the price reaction to certain derivatives
to market changes may differ from traditional investments such as stocks and
bonds, derivatives do not necessarily present greater market risks than
traditional investments. Derivatives are also subject to credit risks related
to the counterparty's ability to perform, and any deterioration in the
counterparty's creditworthiness could adversely affect the instrument. The Funds
will only use derivatives in a manner consistent with the investment objectives,
policies and limitations of the Funds.
GLOBAL INVESTING CONSIDERATIONS
CURRENCY FLUCTUATIONS
Because the assets of each Fund may be invested in instruments issued by foreign
companies, the principal, income and sales proceeds may be paid to the Funds in
local foreign currencies. A reduction in the value of local currencies relative
to the U.S. dollar could mean a corresponding reduction in the value of the
Funds. The value of a foreign security generally tends to decrease when the
value of the U.S. dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the dollar falls
against such currency. The Funds may incur costs in connection with
conversions between currencies.
SOCIAL, POLITICAL AND ECONOMIC FACTORS
The economies of many of the countries where the Funds may invest may be subject
to a substantially greater degree of social, political and economic instability
than the United States. Such instability may result from, among other things,
the following: (1) authoritarian governments; (2) popular unrest associated
with demands for improved political, economic and social conditions; (3)
internal insurgencies and terrorist activities; (4) hostile relations with
neighboring countries; and (5) drug trafficking. This instability might impair
the financial conditions of issuers or disrupt the financial markets in which
the Funds invest.
The economies of foreign countries may differ favorably or unfavorably and
significantly from the economy of the United States in such respects as the rate
of growth of gross domestic product, rate of inflation, currency depreciation,
savings rates, fiscal balances, and balance of payments positions. Governments
of many foreign countries continue to exercise substantial control over private
enterprise and own or control many companies. Government actions could have a
significant impact on economic conditions in certain countries which could
affect the value of the securities of the Funds. For example, a foreign country
could nationalize an entire industry. In such a case, the Funds may not be
fairly compensated for their losses and might lose their entire investment in
the country involved.
The economies of certain foreign countries are heavily dependent upon
international trade and accordingly are affected by protective trade barriers
and the economic conditions of their trading partners. The enactment by the
United States or other principal trading partners of protectionist legislation
could have a significant adverse effect on the securities markets of these
countries. Some foreign countries (mostly in Africa and Latin America) are
large debtors of commercial banks, foreign governments, and supranational
organizations. These obligations, as well as future restructurings of debt, may
affect the economic
<PAGE>
performance and political and social stability of these countries.
INFLATION
Certain foreign countries, especially many emerging countries, have experienced
substantial, and in some periods extremely high and volatile, rates of
inflation. Rapid fluctuations in inflation rates and wage and price controls
may continue to have unpredictable effects on the economies, companies and
securities markets of these countries.
MARKET CHARACTERISTICS
DIFFERENCES IN SECURITIES MARKETS. The securities markets in foreign countries
have substantially less trading volume than the markets in the United States and
debt and equity securities of many companies listed on such markets may be less
liquid and more volatile than comparable securities in the United States. Some
of the stock exchanges in foreign countries, to the extent that established
markets exist, are in the earlier stages of their development. The limited
liquidity of certain securities markets may affect the ability of each Fund to
buy and sell securities at the desired price and time. In addition, the
securities markets of some foreign countries are susceptible to being influenced
by large investors trading significant blocks of stocks.
Trading practices in certain foreign countries are also significantly different
from those in the United States. Local commercial, corporation and securities
laws govern the sale and resale of securities, and certain restrictions may
apply. Although brokerage commissions are generally higher than those in the
U.S., the Investment Adviser will seek to achieve the most favorable net
results. In addition, securities settlements and clearance procedures may be
less developed and less reliable than those in the United States. Delays in
settlement could result in temporary periods in which the assets of the Funds
are not fully invested, or it could result in the Fund being unable to sell a
security in a falling market.
GOVERNMENT SUPERVISION OF SECURITIES MARKETS. Disclosure and regulatory
standards in many foreign countries are in many respects less stringent than
those in the United States. There may be less government supervision and
regulation of securities exchanges, listed companies, investors, and brokers in
foreign countries than in the United States, and enforcement of existing
regulations may be extremely limited.
FINANCIAL INFORMATION AND REPORTING STANDARDS. Issuers in foreign countries are
generally subject to accounting, auditing, and financial standards and
requirements that differ, in some cases materially, from those in the United
States. In particular, the assets and profits appearing in financial statements
may not reflect their financial position or results in the way they would be
reflected had the statements been prepared in accordance with U.S. generally
accepted accounting principles. Consequently, financial data may not reflect
the true condition of those issuers and securities markets.
THE FUNDS' INVESTMENTS
EQUITY SECURITIES
Each of the Funds may buy equity securities, including common stocks,
convertible securities, and warrants. Equity securities represent an ownership
in a company. The Funds may invest in growth companies, cyclical companies,
companies with smaller market capitalizations, or companies believed to be
undergoing a basic change in operations or markets. Although equity securities
have a history of long-term growth in value, their prices rise and fall as a
result of changes in the company's financial condition as well as movements in
the overall securities markets.
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. A convertible security is a
fixed income equity security that may be converted into a prescribed amount of
common stock at a specified formula. A convertible security entitles the owner
to receive interest until the security matures or is converted. Convertibles
have several unique investment characteristics such as: (a) higher yields than
common stocks but lower yields than straight debt securities; (b) lesser degree
of fluctuation in value than the underlying stock since they have fixed income
characteristics; and (c) potential for capital appreciation if the market price
of the underlying security increases.
CORPORATE DEBT SECURITIES
Each Fund may invest in corporate debt securities. Corporate debt securities
are subject to the risk of an issuer's inability to meet principal and interest
payments on the obligation (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the credit-worthiness of the issuer and general market liquidity (market
risk). When interest rates decline, the value of the Funds' debt securities can
be expected to rise, and when interest rates rise, the value of those securities
can be expected to decline.
Bonds rated BBB or Baa may have speculative characteristics
<PAGE>
and changes in economic circumstances are more likely to lead to a weakened
capacity to make interest and principal payments than higher rated bonds.
Bonds rated BB or Ba are below investment grade and more likely to react to
developments in market and credit risks than are more highly rated obligations,
which react primarily to movements in the level of interest rates. In the past,
economic downturns or increases in interest rates caused a higher incidence of
default by issuers of lower rated securities.
In some cases, such obligations may be highly speculative, and may have poor
prospects for reaching investment grade. To the extent the issuer defaults, a
Fund may incur additional expenses in order to enforce its rights or to
participate in a restructuring of the obligation. In addition, the prices of
lower rated securities generally tend to be more volatile and the markets less
liquid than those of higher rated securities. Consequently, the Funds may at
times experience difficulty in liquidating their investments at the desired time
and price. For a further explanation of these ratings, see the Corporate Bond
Ratings at the end of the Prospectus
SOVEREIGN DEBT SECURITIES The Emerging Market Bond Fund may invest without
limitation in sovereign debt securities issued by emerging markets governments.
The emerging market sovereign debt in which the Fund will invest may be rated
below investment grade. These securities usually offer higher yields than
higher rated securities but are also subject to greater risk than higher rated
securities.
BRADY BONDS
The Emerging Markets Bond Fund may invest in a type of sovereign debt known as
Brady Bonds. These obligations were created under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady, in which
foreign entities issued these new obligations in exchange for their existing
commercial bank loans. Brady Bonds have been issued by Argentina, Brazil,
Bulgaria, Mexico, Nigeria, Philippines, Poland, and Venezuela and may be issued
by other emerging countries.
Brady Bonds may be collateralized or uncollateralized, and are actively traded
in the over-the-counter securities markets. In light of the history of loan
defaults of countries issuing Brady Bonds, investments in Brady Bonds may be
viewed as speculative.
INVESTMENT COMPANY SECURITIES.
Each Fund may invest up to 10% of its total assets in the shares of other
investment companies. The Funds may invest in money market mutual funds in
connection with the management of their daily cash positions. The Funds may
also make indirect foreign investments through other investment companies that
have comparable investment objectives and policies as the Funds. In addition to
the advisory and operational fees each Fund bears directly in connection with
its own operation, the Funds would also bear their pro rata portions of each
other investment company's advisory and operational expenses.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in securities that are
considered illiquid. An illiquid investment is generally an investment that is
not registered under U.S. securities laws, cannot be offered for public sale
in the U.S. without first being registered under U.S. securities laws, and
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which the Fund values it. Limitations on resale may
adversely affect the marketability of illiquid securities and the Fund may not
be able to dispose of these securities at the desired time and price. A Fund
may bear additional expenses if it has to register these securities under U.S.
securities laws before being resold.
TEMPORARY INVESTMENTS
Each Fund may from time to time on a temporary basis to maintain liquidity or
when the Investment Adviser determines that the market conditions call for a
temporary defensive posture, invest all of their assets in short-term
instruments. These temporary investments include: notes issued or guaranteed
by the U.S. government, its agencies or instrumentalities; commercial paper
rated in the highest two rating categories; certificates of deposit; repurchase
agreements and other high grade corporate debt securities.
THE FUNDS' INVESTMENT TECHNIQUES
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. The purchase by the Fund of a
security that seller has agreed to buy back, usually within one to seven days.
The seller's promise to repurchase the security is fully collateralized by
securities equal in value to 102% of the purchase price, including accrued
interest. If the seller defaults and the collateral value declines, the Fund
might incur a loss. If the seller declares bankruptcy, the Fund may not be able
to sell the collateral at the desired time.
<PAGE>
The Funds enter into these agreements only with brokers, dealers, or banks that
meet credit quality standards established by the Board of Trustees of the Trust.
REVERSE REPURCHASE AGREEMENTS
Similar to borrowing cash, these transactions involve the selling by the Fund
of a portfolio security to a financial institution with a promise to repurchase
the same security in the future at a predetermined price plus interest. The
Fund uses the proceeds of the sale to purchase other securities which are
segregated at trade date and marked to the market daily and maintained until the
Fund settles the transaction. Modern portfolio managers regularly use this
type of technique which is also a form of investment leverage. Leveraging
involves a small investment of money relative to the magnitude of the risk
assumed. It also creates an opportunity for magnified capital appreciation in a
rising market but at the same time, creates a potential for magnified losses in
a declining market than if the Fund were not leveraged.
SECURITIES SWAPS
Each Fund may enter into securities swaps, a technique primarily used to
indirectly participate in the securities market of a country from which a Fund
would otherwise be precluded for lack of an established securities custody and
safekeeping system. The Fund deposits an amount of cash with its custodian (or
the broker, if legally permitted) in an amount equal to the selling price of the
underlying security. Thereafter, the Fund pays or receives cash from the broker
equal to the change in the value of the underlying security.
SHORT SALES
Each Fund may maintain short positions in securities. A "short sale" is the
sale by the Fund of a security which has been borrowed from a third party on the
expectation that the market price will drop. If the price of the security
drops, the Fund will make a profit by purchasing the security in the open market
at lower price than at which it sold the security. If the price of the security
rises, the Fund may have to cover its short position at a higher price than the
short sale price, resulting in a loss. A short sale can be covered or
uncovered. In a covered short sale, the Fund either (1) borrows and sells
securities it already owns (also known as a short sale "against the box"), or
(2) deposits in a segregated account cash, U.S. government securities, or other
liquid securities in an amount equal to the difference between the market value
of the securities and the short sale price. Use of uncovered short sales is a
speculative investment technique and has potentially unlimited risk.
Accordingly, a Fund will not make uncovered short sales in an amount exceeding
the lesser of 2% of the Fund's net assets or 2% of the securities of such class
of the issuer. The Board of Trustees has determined that no Fund will make
short sales if to do so would create liabilities or require collateral deposits
of more than 25% of the Fund's total assets.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase or sell securities for delivery at a future date,
generally 15 to 45 days after the commitment is made. The other party's failure
to complete the transaction may cause the Fund to miss a price or yield
considered to be advantageous. A 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 securities.
BORROWING
Each Fund may borrow money through reverse repurchase agreements, uncovered
short sales, and other techniques. All borrowings by a Fund cannot exceed
one-third of its total assets. As a consequence of borrowing, a Fund will incur
obligations to pay interest, resulting in an increase in expenses.
SECURITIES LENDING.
Each Fund may lend securities to financial institutions such as banks,
broker/dealers and other recognized institutional investors in amounts up to 30%
of the Fund's total assets. These loans earn income for the Fund and are
collateralized by cash, securities, letters of credit or any combination
thereof. The Fund might experience loss if the financial institution defaults
on the loan.
FOREIGN CURRENCY TRANSACTIONS
Each Fund may enter into foreign currency transactions either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange contracts
in order to have the necessary currencies to settle transactions.
Each Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates. Such efforts
could limit potential gains that might result from a relative increase in the
value of such currencies, and might, in certain cases, result in losses to a
Fund.
OPTIONS
The Funds may deal in options on securities, securities indices and foreign
currencies. The Funds may use options to manage stock prices, interest rate and
currency risks. A Fund may not purchase or sell options if more than 25% of its
net assets would be hedged. The Funds may also write covered call options and
secured put
<PAGE>
options to seek to generate income or lock in gains on up to 25% of their net
assets.
FUTURES AND OPTIONS ON
FUTURES
The Funds may enter into futures contracts, or options thereon, involving
foreign currency, interest rates, securities, and securities indices, for
hedging purposes only. 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.
As a general rule, no Fund will purchase or sell futures if, immediately
thereafter, more than 25% of its net assets would be hedged.
RISKS OF FUTURES AND OPTIONS TRANSACTIONS
When a Fund uses options, futures and options on futures as hedging devices,
there is a risk that the prices of the hedging vehicles may not correlate
perfectly with the prices of the securities in the portfolio. This may cause
the futures contract and any related options to react differently than the
Fund's portfolio securities to market changes. In addition, the Investment
Adviser could be incorrect in its expectations about the direction or the extent
of market movements. In these events, a Fund could lose money on the futures
contracts or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Investment Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market will exist for these instruments.
CORPORATE BOND
RATINGS
DESCRIPTION OF MOODY'S
CORPORATE BOND RATINGS
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be 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 other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A - Bonds Rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obli-gations (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.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa 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 rated Ca represent obligations which are specu-lative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds, and such issues can be
regarding as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay
<PAGE>
interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB rating.
CCC - Debt rated CCC has a currently identifiable vulner-ability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business financial or economic conditions, it is not likely to have the capacity
to pay interest and repay principal. The CCC rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied B or B
Rating.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C 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.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
<PAGE>
FOR MORE INFORMATION
Two documents are available
that offer further information
on the Nicholas/Applegate
Mutual Funds:
ANNUAL/SEMI-ANNUAL
REPORTS TO
SHAREHOLDERS
Includes financial statements,
detailed performance
information, portfolio holdings,
a statement from portfolio
management, and the auditor's
report.
STATEMENT OF
ADDITIONAL
INFORMATION (SAI)
The SAI contains more detailed
information on all aspects of the
Funds.
A current SAI has been filed
with the Securities and
Exchange Commission
and is incorporated by reference
into this prospectus.
To request a free copy of the
current annual/semi-annual
report or SAI , please call or
write:
Nicholas Applegate Mutual
Funds
P.O. Box 82169
San Diego, CA 92138-2169
Telephone: (800) 551-8643
<PAGE>
NICHOLAS-APPLEGATE-Registered Trademark-MUTUAL FUNDS
GLOBAL BLUE CHIP FUND
EMERGING MARKETS BOND FUND
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8643
STATEMENT OF ADDITIONAL INFORMATION
________, 1997
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified portfolios. This Statement of Additional Information contains
information regarding two of these portfolios (each a "Fund" and collectively
the "Funds"): Nicholas-Applegate Global Blue Chip Fund (the "Blue Chip Fund")
and Nicholas-Applegate Emerging Markets Bond Fund (the "Emerging Markets Fund").
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
Funds' 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 written above.
TABLE OF CONTENTS
PAGE
General Information. . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . B-22
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . B-23
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . B-24
Administrators . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-26
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . B-27
Purchase and Redemption of Fund Shares . . . . . . . . . . . . . . . B-27
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . B-28
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . B-31
Performance Information. . . . . . . . . . . . . . . . . . . . . . . B-34
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel . . . . . . . . . . . . . . B-35
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-36
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GENERAL INFORMATION
The Trust was organized in December 1992 as a business trust under the
laws of Delaware. The Trust offers shares of numerous portfolios with differing
sales load, shareholder service plan and distribution plan arrangements. This
Statement of Additional Information contains information regarding the two Funds
identified on the cover page.
The various other portfolios of the Trust seek to achieve their
respective investment objectives by investing all of their assets in
corresponding series of Nicholas-Applegate Investment Trust (the "Master
Trust"), an open-end management investment company organized as a Delaware
business trust.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of each Fund's
investment objective and policies as set forth in the Funds' Prospectus. There
can be no assurance that the investment objective of either of the Funds can be
achieved.
PREFERRED STOCK
The Blue Chip Fund may invest in preferred stock. Preferred stock,
unlike common stock, offers a stated dividend rate payable from a corporation's
earnings. Such preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. If interest rate rise, the fixed dividend on
preferred stocks may be less attractive, causing the price of preferred stocks
to decline. Preferred stock may have mandatory sinking fund provisions, as well
as call/redemption provisions prior to maturity, a negative feature when
interest rates decline. Dividends on some preferred stock may be "cumulative,"
requiring all or a portion of prior unpaid dividends to be paid before dividends
are paid on the issuer's common stock. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks on the distribution of a
corporation's assets in the event of a liquidation are generally subordinate to
the rights associated with a corporation's debt securities.
CONVERTIBLE SECURITIES AND WARRANTS
Each Fund may invest in convertible securities and warrants.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The credit standing of the issuer
and other factors may also affect the investment value of a convertible
security. The conversion value of a convertible security is determined by the
market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the convertible security is
governed principally by its investment value. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value.
The market value of convertible debt securities tends to vary
inversely with the level of interest rates. The value of the security declines
as interest rates increase and increases as interest rates decline. Although
under normal market conditions longer term debt securities have greater yields
than do shorter term debt securities of similar quality, they are subject to
greater price fluctuations. A convertible security may be subject to redemption
at the option of the issuer at a price established in the instrument governing
the convertible security. If a convertible security held by a Fund is called
for redemption, the Fund must permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Rating
requirements do not apply to convertible debt securities purchased by the Funds.
As a matter of operating policy, neither Fund will invest more than 5%
of its net assets in warrants. A warrant gives the holder a right to purchase
at any time during a specified period a predetermined number of shares of common
stock at a fixed price. Unlike convertible debt securities or preferred stock,
warrants do not pay a fixed dividend. Investments in
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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).
SYNTHETIC CONVERTIBLE SECURITIES
The Blue Chip 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 or option, which enables the Fund to have a convertible-like
position with respect to a company, group of companies or stock index.
Synthetic convertible securities are typically offered by financial institutions
and investment banks in private placement transactions. Upon conversion, the
Fund generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike
a true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market
value of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. The Fund only invests in synthetic convertibles with
respect to companies whose corporate debt securities are rated "A" or higher by
Moody's or "A" or higher by S&P and will not invest more than 15% of its net
assets in such synthetic securities and other illiquid securities.
EURODOLLAR CONVERTIBLE SECURITIES
The Blue Chip 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 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 foreign equity securities listed, or represented by ADRs listed, on the New
York Stock Exchange or the American Stock Exchange or convertible into 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 foreign equity
securities which are not listed, or represented by ADRs listed, on such
exchanges.
EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS
Each Fund may invest in Eurodollar and Yankee Dollar instruments.
Eurodollar instruments are bonds that pay interest and principal in U.S. dollars
held in banks outside the United States, primarily in Europe. Eurodollar
instruments are usually issued on behalf of multinational companies and foreign
governments by large underwriting groups composed of banks and issuing houses
from many countries. Yankee Dollar instruments are U.S. dollar denominated
bonds issued in the U.S. by foreign banks and corporations. These investments
involve risks that are different from investments in securities issued by U.S.
issuers. See "Foreign Investment Considerations."
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields.
Securities with ratings below "Baa" and/or "BBB" are commonly referred
to as "junk bonds." Such bonds are subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds for a variety of
reasons, including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate
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developments. Also, during an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaults, a Fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices of
high yield bonds and the Funds' asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions,
it may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact the Investment Adviser's ability to accurately value high yield bonds
and the Funds' assets and hinder the Funds' ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. The rating of
an issuer is also heavily weighted by past developments and does not necessarily
reflect probable future conditions. There is frequently a lag between the time
a rating is assigned and the time it is updated. Also, since credit rating
agencies may fail to timely change the credit ratings to reflect subsequent
events, the Investment Adviser must monitor the issuers of high yield bonds in
the Funds' portfolios to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
bonds' liquidity so the Funds can meet redemption requests.
SHORT-TERM INVESTMENTS
Each Fund may invest in short-term investments to maintain liquidity
for redemptions or during periods when, in the opinion of the Investment
Adviser, attractive investments are not available. Each Fund may invest in any
of the following securities and instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Funds may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.
A Fund holding instruments of foreign banks or financial institutions
may be subject to additional investment risks that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. See "Foreign Investments" below. Domestic banks and
foreign banks are subject to different governmental regulations with respect to
the amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry depends largely
upon the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry. Federal and State laws and regulations require domestic banks
to maintain specified levels of reserves, limited in the amount which they can
loan to a single borrower, and subject to other regulations designed to promote
financial soundness. However, such laws and regulations do not necessarily
apply to foreign bank obligations that a Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their
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respective investment objectives and policies stated above and in their
Prospectus, the Funds may make interest-bearing time or other interest-bearing
deposits in commercial or savings banks. Time deposits are non-negotiable
deposits maintained at a banking institution for a specified period of time at a
specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Funds may invest a portion of their assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
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 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.
Each Fund may invest in sovereign debt obligations of foreign
countries. A number of factors affect a sovereign debtor's willingness or
ability to repay principal and interest in a timely manner, including its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitments on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debt in a timely
manner.
ZERO COUPON SECURITIES
The Emerging Markets Fund may invest up to 35% of its net assets in
zero coupon securities issued or
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guaranteed by the U.S. Government and its agencies and instrumentalities. Zero
coupon securities may be issued by the U.S. Treasury or by a U.S. Government
agency, authority or instrumentality (such as the Student Loan Marketing
Association or the Resolution Funding Corporation). Zero coupon securities are
sold at a substantial discount from face value and redeemed at face value at
their maturity date without interim cash payments of interest and principal.
This discount is amortized over the life of the security and such amortization
will constitute the income earned on the security for both accounting and tax
purposes. Because of these features, such securities may be subject to greater
volatility as a result of changes in prevailing interest rates than interest
paying investments in which the Fund may invest. Because income on such
securities is accrued on a current basis, even though the Fund does not receive
the income currently in cash, the Fund may have to sell other portfolio
investments to obtain cash needed to make income distributions.
PARTICIPATION INTERESTS
The Emerging Markets Fund may invest in participation interests,
subject to the limitation on investments by the Fund in illiquid investments.
The Fund does not currently intend to invest more than 5% of its net assets in
such interests. Participation interests represent an undivided interest in or
assignment of a loan made by an issuing financial institution. No more than 5%
of the Fund's net assets can be invested in participation interests of the same
issuing borrower. Participation interests are primarily dependent upon the
financial strength of the borrowing corporation, which is obligated to make
payments of principal and interest on the loan, and there is a risk that such
borrowers may have difficulty making payments. In the event the borrower fails
to pay scheduled interest or principal payments, the Fund could experience a
reduction in its income and might experience a decline in the net asset value of
its shares. In the event of a failure by the financial institution to perform
its obligation in connection with the participation, the Fund might incur
certain costs and delays in realizing payment or may suffer a loss of principal
and/or interest. The Investment Adviser has set certain creditworthiness
standards for issuers of loan participations and monitors their
creditworthiness.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may acquire variable and floating rate instruments. Credit
agencies frequently do not rate such instruments. Any such instruments
purchased by a Fund are determined by the Investment Adviser under guidelines
established by the Trust's Board of Trustees to be of comparable quality at the
time of the purchase to those rated instruments eligible for purchase by the
Fund. In making such determinations, the Investment Adviser considers the
earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by a Fund. The absence of such an active secondary market
could make it difficult for the Fund to dispose of the variable or floating rate
instrument involved in the event of the issuer of the instrument defaulting on
its payment obligation or during periods in which the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
INDEX AND CURRENCY-LINKED SECURITIES
The Emerging Markets Fund may invest in "index-linked" or
"commodity-linked" notes, which are debt securities of companies that call for
interest payments and/or payment at maturity in different terms than the typical
note where the borrower agrees to make fixed interest payments and to pay a
fixed sum at maturity. Principal and/or interest payments on an index-linked
note depend on the performance of one or more market indices, such as the S&P
500 Index or a weighted index of commodity futures such as crude oil, gasoline
and natural gas. The Fund may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the Fund exchanges the
principal amount of an equity-linked debt security for common stock of the
issuer or pays an amount based on the issuer's common stock price at the time of
maturity. Currency-linked debt securities are short-term or intermediate term
instruments having a value at maturity, and/or an interest rate, determined by
reference to one or more foreign currencies. Payment of principal or periodic
interest may be calculated as a multiple of the movement of one currency against
another currency, or against an index.
Index and currency-linked securities are derivative instruments which
may entail substantial risks. Such instruments may be subject to significant
price volatility. The company issuing the instrument may fail to pay the amount
due on maturity. The underlying investment or security may not perform as
expected by the Investment Adviser. Markets, underlying securities and indexes
may move in a direction that was not anticipated by the Investment Adviser.
Performance
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of the derivatives may be influenced by interest rate and other market changes
in the U.S. and abroad. Certain derivative instruments may be illiquid. See
"Illiquid Securities" below.
MORTGAGE-RELATED SECURITIES
The Emerging Markets Fund may invest in mortgage-related securities.
Mortgage-related securities are derivative interests in pools of mortgage loans
made to U.S. residential home buyers, including mortgage loans made by savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. The Fund may also
invest in debt securities which are secured with collateral consisting of U.S.
mortgage-related securities, and in other types of U.S. mortgage-related
securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-throughs." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is a
wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Agency or
guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not
insured or guaranteed by any government agency from a list of approved
seller/services which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. FHLMC is a government-sponsored corporation created to
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In periods
of falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is not
possible to predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign
CMO in which the Emerging Markets Fund may invest is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond,
interest is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, FNMA or equivalent
foreign entities.
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CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (e.g., Canada
Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States.
However, foreign mortgage markets may differ materially from the U.S. mortgage
market with respect to matters such as the sizes of loan pools, pre-payment
experience, and maturities of loans.
"ROLL" TRANSACTIONS
The Emerging Markets Fund may enter into "roll" transactions, which
are the sale of GNMA certificates and other securities together with a
commitment to purchase similar, but not identical, securities at a later date
from the same party. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase,
as well as by the interest earned on the cash proceeds of the initial sale.
Like when-issued securities or firm commitment agreements, roll transactions
involve the risk that the market value of the securities sold by the Fund may
decline below the price at which the Fund is committed to purchase similar
securities. Additionally, in the event the buyer of securities under a roll
transaction files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the transactions may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
considered to be the economic equivalent of borrowings by the Fund. To avoid
leverage, the Fund will establish a segregated account with its Custodian in
which it will maintain liquid assets in an amount sufficient to meet its payment
obligations with respect to these transactions. The Fund will not enter into
roll transactions if, as a result, more than 15% of the Fund's net assets would
be segregated to cover such contracts.
FOREIGN INVESTMENTS
Each Fund will invest in securities of foreign issuers that are not
publicly traded in the United States. Each Fund may also invest in depository
receipts.
The United States Government from time to time has imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Funds. If such restrictions should be reinstituted, it
might become necessary for such Funds to invest substantially all of their
assets in United States securities. In such event, the Board of Trustees of the
Trust would consider alternative arrangements, including reevaluation of the
Funds' investment objectives and policies. However, a Fund 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 Fund.
DEPOSITORY RECEIPTS. Each of the Funds may invest in American
Depository Receipts ("ADRs"), which are receipts issued by an American bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuers. ADRs, in registered form, are designed for use in U.S. securities
markets. Such depository receipts may be sponsored by the foreign issuer or may
be unsponsored. Each 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
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foreign issuer of the underlying securities; as a result, available information
regarding the issuer may not be as current as for sponsored depository receipts,
and the prices of unsponsored depository receipts may be more volatile than if
they were sponsored by the issuer of the underlying securities. ADRs may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in United States dollars; the underlying
security may be denominated in a foreign currency, although the underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
Market Characteristics. Settlement practices for transactions in
foreign markets may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Funds to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of a
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
Legal and Regulatory Matters. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.
Taxes. The interest payable on certain of the Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Funds' shareholders.
A shareholder otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction of
U.S. federal income tax purposes for his proportionate share of such foreign
taxes paid by the Funds.
Costs. The expense ratios of the Funds are likely to be higher than
those of investment companies investing in domestic securities, since the cost
of maintaining the custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics of
the particular company, differences between economic trends and the performance
of securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
Prospectus, depending on the Investment Adviser's assessment of prevailing
market, economic and other conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. Each 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. 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.
If a Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Adviser perceives significant short-term
risk but substantial long-term appreciation for the underlying security. The
put option acts as an insurance policy, as it protects against significant
downward price movement while it allows full participation in any upward
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movement. If the Fund holds a stock which the Investment Adviser believes has
strong fundamentals, but for some reason may be weak in the near term, the Fund
may purchase a put option on such security, thereby giving itself the right to
sell such security at a certain strike price throughout the term of the option.
Consequently, the Fund will exercise the put only if the price of such security
falls below the strike price of the put. The difference between the put's
strike price and the market price of the underlying security on the date the
Fund exercises the put, less transaction costs, is the amount by which the Fund
hedges against a decline in the underlying security. If during the period of
the option the market price for the underlying security remains at or above the
put's strike price, the put will expire worthless, representing a loss of the
price the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the premium paid for the put option less any
amount for which the put may be sold reduces the profit the Fund realizes on the
sale of the securities.
If a Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If a Fund purchases the call
option to hedge a short position in the underlying security and the price of the
underlying security thereafter falls, the premium paid for the call option less
any amount for which such option may be sold reduces the profit the Fund
realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Funds generally will purchase only those options for which the
Investment Adviser believes there is an active secondary market to facilitate
closing transactions.
WRITING CALL OPTIONS. Each Fund may write covered call options. A
call option is "covered" if a Fund owns the security underlying the call or has
an absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer
of a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer
of an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. A Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, appreciation of the underlying security owned by the
Fund generally offsets, in whole or in part, any loss to the Fund resulting from
the repurchase of a call option.
STOCK INDEX OPTIONS. The Blue Chip Fund may also purchase put and
call options with respect to the S&P 500 and other stock indices. The Fund may
purchase such options as a hedge against changes in the values of Fund
securities or securities which it intends to purchase or sell, or to reduce
risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks not found in stock options generally. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a
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particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Adviser's ability to predict correctly movements
in the direction of the stock market generally. This requires different skills
and techniques than predicting changes in the price of individual stocks.
Index prices may be distorted if circumstances disrupt trading of
certain stocks included in the index, such as if trading were halted in a
substantial number of stocks included in the index. If this happens, the Fund
would not be able to close out options which it had purchased, and if
restrictions on exercise were imposed, the Fund might be unable to exercise an
option it holds, which could result in substantial losses to the Fund. It is
the policy of the Fund to purchase put or call options only with respect to an
index which the Investment Adviser believes includes a sufficient number of
stocks to minimize the likelihood of a trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of option of underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or clearing corporation may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which a Fund may enter into options transactions may be limited by the
Internal Revenue Code requirements for qualification of the Fund as a regulated
investment company. See "Dividends, Distributions and Taxes."
In addition, foreign option exchanges do not afford to participants
many of the protections available in United States option exchanges. For
example, there may be no daily price fluctuation limits in such exchanges or
markets, and adverse market movements could therefore continue to an unlimited
extent over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this entire
amount could be lost. Moreover, a Fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements typically associated with such option writing. See
"Dealer Options" below.
DEALER OPTIONS. Each Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to
dealer options. While the Funds might look to a clearing corporation to
exercise exchange-traded options, if a Fund purchases a dealer option it must
rely on the selling dealer to perform if the Fund exercises the option. Failure
by the dealer to do so would result in the loss of the premium paid by the Fund
as well as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, a Fund can realize the value of a
dealer option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when a Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into dealer
options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists that the Fund will at any time
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Unless the Fund, as a covered dealer call option writer, can effect
a closing purchase transaction, it will not be able to liquidate securities (or
other assets) used as cover until the option expires or is exercised. In the
event of insolvency of the other party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material
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losses to the Fund. For example, because the Fund must maintain a secured
position with respect to any call option on a security it writes, the Fund may
not sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair the 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")
takes the position that purchased dealer options are illiquid securities. A
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
With that exception, however, the Fund will treat dealer options as subject to
the Fund's limitation on illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Funds may buy or sell put and call options on foreign currencies.
A put or call option on a foreign currency gives the purchaser of the option the
right to sell or purchase a foreign currency at the exercise price until the
option expires. The Funds use foreign currency options separately or in
combination to control currency volatility. Among the strategies employed to
control currency volatility is an option collar. An option collar involves the
purchase of a put option and the simultaneous sale of call option on the same
currency with the same expiration date but with different exercise (or "strike")
prices. Generally, the put option will have an out-of-the-money strike price,
while the call option will have either an at-the-money strike price or an
in-the-money strike price. Foreign currency options are derivative securities.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Funds to reduce foreign currency risk
using such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Funds could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS
The Funds may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fix number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, a Fund might
purchase a particular currency or enter into a forward currency contract to
preserve the U.S. dollar price of securities it intends to or has contracted to
purchase. Alternatively, it might sell a particular currency on either a spot
or forward basis to hedge against an anticipated decline in the dollar value of
securities it intends to or has contracted to sell. Although this strategy
could minimize the risk of loss due to a decline in the value of the hedged
currency, it could also limit any potential gain from an increase in the value
of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds may invest in futures contracts and in options on
futures contracts as a hedge against changes in market conditions or interest
rates. The Funds will trade in such derivative securities for bona fide hedging
purposes and otherwise in accordance with the rules of the Commodity Futures
Trading Commission ("CFTC"). Each Fund segregates liquid assets in a separate
account with its Custodian when required to do so by CFTC guidelines in order to
cover its obligation in connection with futures and options transactions.
A Fund does not pay or receive funds upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
deposits in a segregated account with its Custodian liquid assets equal to
approximately 5% of the contract amount. This amount is known as initial
margin. The margin requirements for foreign futures contracts may be different.
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The nature of initial margin in futures transactions differs from that
of margin in securities transactions. Futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it satisfied all contractual obligations. Subsequent
payments (called variation margin) to and from the broker will be made on a
daily basis as the price of the underlying stock index fluctuates, to reflect
movements in the price of the contract making the long and short positions in
the futures contract more or less valuable. For example, when the Fund
purchases a stock index futures contract and the price of the underlying stock
index rises, that position will have increased in value and the Fund will
receive from the broker a variation margin payment equal to that increase in
value. Conversely, when the Fund purchases a stock index futures contract and
the price of the underlying stock index declines, the position will be less
valuable, requiring the Fund to make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is made on closing the position. A Fund either pays or
receives cash, thus realizing a loss or a gain.
STOCK INDEX FUTURES CONTRACTS. The Blue Chip Fund may invest in
futures contracts on stock indices. A stock index futures contracts is a
bilateral agreement pursuant to which the parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the index value at the close of the last trading day of the contract and
the price at which the contract is originally struck. No physical delivery of
the underlying stocks in the index is made. Currently, stock index futures
contracts can be purchased or sold with respect to the S&P 500 Stock Price Index
on the Chicago Mercantile Exchange, the Major Market Index on the Chicago Board
of Trade, the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Foreign financial and stock index futures are traded on foreign exchanges
including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. Each Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures sale by a Fund
obligates the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. A futures contract purchased by a Fund obligates the Fund, as purchaser,
to take delivery of the specific type of financial instrument at a specific
future time at a specific price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near that
date. The determination would be in accordance with the rules of the exchange
on which the futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. A Fund closes out a futures contract sale by entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund receives the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the Fund
closes out futures contract purchase by entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the Fund realizes a
gain, and if the purchase price exceeds the offsetting sale price, the Fund
realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United
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States Treasury bills; and 90-day commercial paper. A Fund may trade in any
futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The Funds may use foreign
currency future contracts for hedging purposes. A foreign currency futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. The
Funds will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, a Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Adviser believes that over
time the value of a diversified portfolio will tend to move in the same
direction as the market indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Investment Adviser may still not
result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of
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trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures position, and in the event of
adverse price movements, the Funds would continue to be required to make daily
cash payments of variation margin. When futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund depends on the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund hedges against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. The Funds may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Funds because the maximum amount
at risk is limited to the premium paid for the options (plus transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS.
Except as described below under "Non-Hedging Strategic Transactions," a Fund
will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. A Fund
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.
B-15
<PAGE>
Upon the purchase of futures contracts, a Fund will deposit an amount
of cash or liquid debt or equity securities, equal to the market value of the
futures contracts, in a segregated account with the Custodian or in a margin
account with a broker to collateralize the position and thereby insure that the
use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of a Fund.
The extent to which a Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the Fund as a regulated investment company. See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
For hedging purposes, the Fixed Income Fund may enter into interest
rate and currency swap transactions and purchase or sell interest rate and
currency caps and floors. An interest rate or currency swap involves an
agreement between the Fund and another party to exchange payments calculated as
if they were interest on a specified ("notional") principal amount (e.g., an
exchange of floating rate payments by one party for fixed rate payments by the
other). An interest rate cap or floor entitles the purchaser, in exchange for a
premium, to receive payments of interest on a notional principal amount from the
seller of the cap or floor, to the extent that a specified reference rate
exceeds or falls below a predetermined level.
The Fund usually enters into such transactions on a "net" basis, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The Fund accrues the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each swap on a daily
basis, and it segregates an amount of cash or high-quality liquid securities
having an aggregate net asset value at least equal to the accrued excess with
the Trust's custodian. If the Fund enters into a swap on other than a net
basis, or sells caps or floors, the Fund maintains a segregated account in the
full amount accrued on a daily basis of the Fund's obligations with respect to
the transaction.
The Fund will not enter into any of these derivative transactions
unless at least one of the established rating agencies rates the unsecured
senior debt or the claims paying ability of the other party to the transaction
at least "high quality" (e.g., AAA or AA by S&P) at the time of purchase. The
swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standard swap documentation, and the Investment Adviser has determined
that the swap market has become relatively liquid. Swap transactions do not
involve the delivery of securities or other underlying assets or principal, and
the risk of loss with respect to such transactions is limited to the net amount
of payments that the Fund is contractually obligated to make or receive. Caps
and floors are more recent innovations for which the market has yet to develop
standardized documentation; accordingly, they are less liquid than swaps, and
caps and floors purchased by the Fund are considered to be illiquid assets.
INTEREST RATE SWAPS. As indicated above, an interest rate swap is a
contract between two entities ("counterparties") to exchange interest payments
(of the same currency) between the parties. In the most common interest rate
swap structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional principal
amount." In most such transactions, the floating rate payments are tied to the
London Interbank Offered Rate, which is the offered rate for short-term
Eurodollar deposits between major international banks. As there is no exchange
of principal amounts, an interest rate swap is not an investment or a borrowing.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future transfer of foreign exchange risk). The currency
swap market convention is to use the spot rate rather than the forward rate for
the exchange at maturity. The economic difference is realized through the
coupon exchanges over the life of the swap. In contrast to single currency
interest rate swaps, cross-currency swaps involve both interest rate risk and
foreign exchange risk.
B-16
<PAGE>
SWAP OPTIONS. The Fixed Income Fund may invest in swap options. A
swap option is a contract that gives a counterparty the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend, cancel or
otherwise change an existing swap agreement, at some designated future time on
specified terms. It is different from a forward swap, which is a commitment to
enter into a swap that starts at some future date with specified rates. A swap
option may be structured European-style (exercisable on the pre-specified date)
or American-style (exercisable during a designated period). The right pursuant
to a swap option must be exercised by the right holder. The buyer of the right
to receive fixed pursuant to a swap option is said to own a call.
CAPS AND FLOORS. The Fixed Income Fund may invest in interest rate
and currency caps and floors. An interest rate cap is a right to receive
periodic cash payments over the life of the cap equal to the difference between
any higher actual level of interest rates in the future and a specified strike
(or "cap") level. The cap buyer purchases protection for a floating rate move
above the strike. An interest rate floor is the right to receive periodic cash
payments over the life of the floor equal to the difference between any lower
actual level of interest rates in the future and a specified strike (or "floor")
level. The floor buyer purchases protection for a floating rate move below the
strike. The strikes are typically based on the three-month LIBOR (although
other indices are available) and are measured quarterly. Rights arising
pursuant to both caps and floors are exercised automatically if the strike is in
the money. Caps and floors eliminate the risk that the buyer fails to exercise
an in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate
and currency swaps and interest rate caps and floors are similar to those
described above with respect to dealer options. In connection with such
transactions, the Fund relies on the other party to the transaction to perform
its obligations pursuant to the underlying agreement. If the other party to the
transaction defaults, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the other
party, the Fund might be unable to obtain its expected benefit. In addition,
while the Fund will seek to enter into such transactions only with parties which
are capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to close out such a transaction with the
other party, or obtain an offsetting position with any other party, at any time
prior to the end of the term of the underlying agreement. This may impair the
Fund's ability to enter into other transactions at a time when doing so might be
advantageous.
NON-HEDGING STRATEGIC TRANSACTIONS
Each Fund will generally enter into options, futures and swap
transactions for hedging purposes -- to protect against possible changes in the
market values of securities held in or to be purchased for the Fund's portfolio
resulting from securities market, currency or interest rate fluctuations, to
protect the Fund's unrealized gains in the values of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchase or
sale of particular securities. However, in addition to the hedging transactions
referred to above, each Fund may write covered call and put options to enhance
potential gain in circumstances where hedging is not involved. Each Fund's net
loss exposure resulting from transactions entered into for each purposes will
not exceed 5% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. Such transactions are subject to the limitations described above
under "Options," "Futures Contracts," and "Interest Rate and Currency Swaps."
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Adviser, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price
paid by 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.
B-17
<PAGE>
Repurchase agreements are considered to be loans under the Investment Company
Act.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve
the sale of a security by a Fund and its agreement to repurchase the security
(or, in the case of mortgage-backed securities, substantially similar but not
identical securities) at a specified time and price. The agreements are subject
to the same types of risks as borrowings. To avoid leverage, a Fund will
maintain in a segregated account with the Custodian cash, U.S. Government
securities or other appropriate liquid securities in an amount sufficient to
cover its obligations under these agreements with broker-dealers (no such
collateral is required on such agreements with banks).
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each Fund may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
A Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When a Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in a
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
BORROWING
Short sales "not against the box" and roll transactions are considered
borrowings for purposes of the percentage limitations applicable to borrowings.
The use of borrowing by a Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of a Fund's assets fluctuate in value,
whereas the interest obligation resulting from a borrowing remains fixed by the
terms of the Fund's agreement with its lender, the asset value per share of the
Fund tends to increase more when its portfolio securities increase in value and
to decrease more when its portfolio assets decrease in value than would
otherwise be the case if the Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.
The Trust entered into a Credit Agreement on behalf of its various
portfolios (including the Funds) with several banks and The Chase Manhattan
Bank, as administrative agent for the lenders, to borrow up to $75,000,000 from
time to time
B-18
<PAGE>
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 Funds'
shareholders, in order to provide the Funds with cash to meet such redemption
requests. The Credit Agreement expires on April 10, 1998, unless renewed by the
parties.
Under the Credit Agreement, each Fund 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 bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or (ii)
the prime rate of interest of Chemical Bank. If, as a result of changes in
applicable laws, regulations or guidelines with respect to the capital adequacy
of any lender, the return on such lender's capital is reduced, the Trust may be
required to adjust the rate of interest to compensate such lender for such
reduction. Each Revolving Credit Loan is payable in thirty days, and may be
prepaid at any time in increments of $100,000 without premium or penalty. No
Fund is liable for repayment of a Revolving Credit Loan to any other Fund.
The Credit Agreement contains, among other things, covenants that
require each Fund 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 FUND SECURITIES
Under present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund
to reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Internal Revenue Code.
SHORT SALES
The Funds may make short sales of securities they own or have the
right to acquire at no added cost through conversion or exchange of other
securities they own (referred to as short sales "against the box") and short
sales of securities which they do not own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security generally
from the broker through which the short sale is made) in order to make delivery
to the buyer. The Fund must replace the security borrowed by purchasing it at
the market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with
the broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
B-19
<PAGE>
Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share tends to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
increase, although a Fund may mitigate such losses by replacing the securities
sold short before the market price has increased significantly. Under adverse
market conditions the Fund might have difficulty purchasing securities to meet
its short sale delivery obligations, and might have to sell portfolio securities
to raise the capital necessary to meet its short sale obligations at a time when
fundamental investment considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, a Fund
will deposit in escrow in a separate account with the Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.
In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act, unless
the sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities or other liquid
debt or equity securities in an amount equal to the difference between the
market value of the securities sold short at the time of the short sale and any
such collateral required to be deposited with a broker in connection with the
sale (not including the proceeds from the short sale), which difference is
adjusted daily for changes in the value of the securities sold short. The total
value of the cash, U.S. Government securities or other liquid debt or equity
securities deposited with the broker and otherwise segregated may not at any
time be less than the market value of the securities sold short at the time of
the short sale. Each Fund will comply with these requirements. In addition, as
a matter of policy, the Trust's Board of Trustees has determined that neither
Fund will make short sales of securities or maintain a short position if to do
so could create liabilities or require collateral deposits and segregation of
assets aggregating more than 25% of the Fund's total assets, taken at market
value.
The extent to which a Fund may enter into short sales transactions may
be limited by the Internal Revenue Code requirements for qualification of the
Fund as a regulated investment company. See "Dividends, Distributions and
Taxes."
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation.
B-20
<PAGE>
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a 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. A 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 developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Funds to the extent that qualified institutional buyers
become uninterested in purchasing such securities.
The Funds may invest in foreign securities that are restricted against
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions. Unless these securities are acquired directly
from the issuer or its underwriter, the Funds treat foreign securities whose
principal market is abroad as not subject to the investment limitation on
securities subject to legal or contractual restrictions on resale.
INVESTMENT TECHNIQUES AND PROCESSES
The Investment Adviser's investment techniques and processes, which it
has used in managing institutional portfolios for many years, are described
generally in the Funds' prospectus. In making decisions with respect to equity
securities for the Funds, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal, and the Investment Adviser emphasizes
growth over time through investment in securities of companies with earnings
growth potential. Its investment techniques focus on discovering positive
developments when they first show up in an issuer's earnings, but before they
are fully reflected in the price of the issuer's securities.
As indicated in the Funds' 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 Funds and the Investment Adviser's other clients. However,
information obtained from a brokerage research firm is confirmed with other
research sources or the Investment Adviser's computer-assisted quantitative
analysis (including "real time" pricing data) of a substantial universe of
potential investments.
DIVERSIFICATION
Each Fund is "diversified" within the meaning of the Investment
Company Act. In order to qualify as diversified, a Fund must diversify its
holdings so that at all times at least 75% of the value of its total assets is
represented by cash and cash items (including receivables), securities issued or
guaranteed as to principal or interest by the United States or its agencies or
instrumentalities, securities of other investment companies, and other
securities (for this purpose other securities of any one issuer are limited to
an amount not greater than 5% of the value of the total assets of the Fund and
to not more than 10% of the outstanding voting securities of the issuer).
The equity securities of each issuer that are included in the
investment portfolio of a Fund are purchased by the Investment Adviser in
approximately equal amounts, and the Investment Adviser attempts to stay fully
invested within the applicable percentage limitations set forth in the
Prospectus. In addition, for each issuer whose securities are added to an
investment portfolio, the Investment Adviser sells the securities of one of the
issuers currently included in the portfolio.
B-21
<PAGE>
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, has adopted the following
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of the appropriate Fund (as defined in the
Investment Company Act).
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
The investment objective of each Fund is a fundamental policy. In
addition, no Fund:
1. May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Fund's total assets may be invested without
regard to this restriction. This restriction also does not apply to investments
by a 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.
3. May invest 25% or more of the market value of its total assets in
the securities of issuers in any one particular industry. This restriction does
not apply to investments by a Fund in securities of the U.S. Government or its
agencies and instrumentalities.
4. May purchase or sell real estate. However, a Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.
5. May make loans of money, except that a Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. Each Fund reserves the authority to make loans of its
portfolio securities in an aggregate amount not exceeding 30% of the value of
its total assets.
6. May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the 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 Funds from
engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% 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 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 in
compliance with the Investment Company Act and applicable state securities laws,
or as part of a merger, consolidation, acquisition or reorganization
B-22
<PAGE>
involving the Fund.
12. May issue senior securities, except that a Fund may borrow money
as permitted by restrictions 6 and 7 above. This restriction shall not prohibit
the Funds from engaging in short sales, options, futures and foreign currency
transactions.
13. May enter into transactions for the purpose of arbitrage, or
invest in commodities and commodities contracts, except that a Fund may invest
in stock index, currency and financial futures contracts and related options in
accordance with any rules of the Commodity Futures Trading Commission.
14. May purchase or write options on securities, unless (i) aggregate
premiums on call options purchased by a Fund do not exceed 5% of its net assets,
(ii) aggregate premiums on put options purchased by a Fund do not exceed 5% of
its net assets, (iii) no more than 25% of the Fund's net assets would be hedged,
and (iv) no more than 25% of the Fund's net assets are used as cover for options
written by the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust, no Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships, although
a Fund may invest in the securities of companies which invest in or sponsor such
programs.
2. May lend any securities from its portfolio unless the value of
the collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market daily.
TRUSTEES AND PRINCIPAL OFFICERS
The names and addresses of the Trustees and principal officers of the
Trust, including their positions and principal occupations during the past five
years, are shown below. Trustees whose names are followed by an asterisk are
"interested persons" of the Trust (as defined by the Investment Company Act).
Unless otherwise indicated, the address of each Trustee and officer is 600 West
Broadway, 30th Floor, San Diego, California 92101.
FRED C. APPLEGATE, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES. 885
La Jolla Corona Court, La Jolla, California. President, Hightower Management
Co., a financial management firm (since January 1992); formerly President,
Nicholas-Applegate Capital Management (from August 1984 to December 1991).
Director of Nicholas-Applegate Fund, Inc. (since 1987). Mr. Applegate's
interests in Nicholas-Applegate Capital Management, Inc., the general partner of
the Investment Adviser, were acquired by Mr. Nicholas in 1991 and 1992.
ARTHUR B. LAFFER, TRUSTEE.*/ 5405 Morehouse Drive, Suite 340, San
Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an economic
consulting firm (since 1979); Chairman, Laffer Advisors Incorporated, economic
consultants (since 1981); Director, Nicholas-Applegate Fund, Inc. (since 1987);
Director, U.S. Filter Corporation (since March 1991) and MasTec, Inc.
(construction) (since 1994), and Coinmach Laundry Corporation (since 1996);
Chairman, Calport Asset Management, Inc. (since 1992); formerly Distinguished
University Professor and Director, Pepperdine University (from Sept. 1985 to May
1988) and Professor of Business Economics, University of Southern California
(1976 to 1984). Mr. Laffer is considered to be an "interested person" of the
Trust because A.B. Laffer, V.A. Canto & Associates received $100,000 in 1994
from the Investment Adviser as compensation for consulting services provided
from time to time to the Investment Adviser, and because his son is an employee
of the Investment Adviser.
CHARLES E. YOUNG, TRUSTEE. UCLA, 2224 Murphy Hall, Los Angeles,
California. Chancellor, UCLA (1968-1997); Director, Nicholas-Applegate Fund,
Inc. (since 1992); Director, Intel Corp. (since 1974), Academy of Television
Arts and Sciences Foundation (since October 1988), Los Angeles World Affairs
Council (since 1977) and Town Hall of California (since 1982).
B-23
<PAGE>
JOHN D. WYLIE, PRESIDENT. Partner (since January 1994), Chief
Investment Officer - Investor Services Group (since December 1995), and
Portfolio Manager (since January 1990), Nicholas-Applegate Capital Management.
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 & 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, 1997, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
<TABLE>
Pension or Retirement
Aggregate Compensation Benefits Accrued as Estimated Annual Total Compensation from
from Trust Part of Trust Expenses Benefits Upon Trust and Trust Complex
Name Retirement Paid to Trustee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fred C. Applegate None N/A
Arthur B. Laffer None N/A
Charles E. Young None N/A
</TABLE>
* Indicates number of funds in Trust complex, including the Funds.
INVESTMENT ADVISER
The Investment Adviser to the Funds is Nicholas-Applegate Capital
Management, a California limited partnership, with offices at 600 West Broadway,
30th Floor, San Diego, California 92101. The Investment Adviser also manages
the portfolio securities of the various series of the Master Trust, in which the
assets of the other portfolios of the Trust are invested.
The Investment Adviser was organized in 1984 to manage discretionary
accounts investing in publicly traded securities for a variety of investors.
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.
B-24
<PAGE>
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 have been adopted.
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Trust and the
Investment Adviser with respect to the Funds, the Trust retains the Investment
Adviser to manage the Funds' investment portfolios, subject to the direction of
the Trust's Board of Trustees. The Investment Adviser is authorized to
determine which securities are to be bought or sold by the Funds and in what
amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by a Fund
or the 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 Trust has agreed to indemnify the Investment
Adviser against liabilities, costs and expenses that the Investment Adviser may
incur in connection with any action, suit, investigation or other proceeding
arising out of or otherwise based on any action actually or allegedly taken or
omitted to be taken by the Investment Adviser in connection with the performance
of its duties or obligations under the Investment Advisory Agreement or
otherwise as an investment adviser of the Trust. The Investment Adviser is not
entitled to indemnification with respect to any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or of its reckless disregard of its duties and
obligations under the Investment Advisory Agreement.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to either Fund by
the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Fund, as defined in the Investment Company
Act) or the Investment Adviser upon not more than 60 days' written notice,
without payment of any penalty. The Investment Advisory Agreement provides that
it will continue in effect with respect to each Fund for a period of more than
two years from its execution only so long as such continuance is specifically
approved at least annually in conformity with the Investment Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of each Fund (including
administrative fees and distribution expenses for 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 Funds do not exceed the amounts specified in the
Funds' prospectus.
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 Funds. 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),
$30,000 for each
B-25
<PAGE>
group of four similar portfolios, $25,000 for each grouping of three similar
portfolios, $20,000 for a grouping of two similar portfolios and $5,000 for one
portfolio, except as follows: ICAC receives $15,000 for its services with
respect to the Emerging Growth Portfolios. As a result, ICAC currently receives
aggregate compensation at the rate of $_________ 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.
In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel and
pays all expenses incurred in connection with managing the ordinary course of
the business of the Trust, other than expenses assumed by the Trust as described
below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with 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 a member, (j) the cost of maintaining the
Trust's existence, taxes and interest, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining the
registration of the Trust and of its shares with the Commission and registering
the Trust as a broker or dealer and qualifying their shares under state
securities laws, including the preparation and printing of the Trust's
registration statement, prospectuses and statements of additional information,
(m) allocable communication expenses with respect to investor services and all
expenses of shareholders' and Board of Trustees' meetings and of preparing,
printing and mailing prospectuses and reports to shareholders, (n) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the business of the Trust, and (o) expenses assumed by
the Trust pursuant to any plan of distribution adopted in conformity with Rule
12b-1 under the Investment Company Act.
The Administration Agreement provides that 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 either 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 in conformity with the Investment Company Act.
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 Funds. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect
B-26
<PAGE>
sales of shares of the Funds, 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. The minimum assets for Investors in the Institutional Fund may
be waived from time to time. Pursuant to the Distribution Agreement, the Trust
has agreed to indemnify the Distributor to the extent permitted by applicable
law against certain liabilities under the Securities Act.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Funds' portfolio transactions and allocates the
brokerage business. In executing such transactions, the Investment Adviser
seeks to obtain the best price and execution for the Funds, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Funds
invest may be traded in the over-the-counter markets, and the Funds deal
directly with the dealers who make markets in such securities except in those
circumstances where better prices and execution are available elsewhere. The
Investment Adviser negotiates commission rates with brokers or dealers based on
the quality or quantity of services provided in light of generally prevailing
rates, and while the Investment Adviser generally seeks reasonably competitive
commission rates, the Funds do not necessarily pay the lowest commissions
available. The Board of Trustees of the Trust periodically reviews the
commission rates and the allocation of orders.
The Funds have no obligation to deal with any broker or group of
brokers in executing transactions in portfolio securities. Subject to obtaining
the best price and execution, brokers who sell shares of the Funds or other
series of the Trust or provide supplemental research, market and statistical
information and other research services and products to the Investment Adviser
may receive orders for transactions by the Funds. Such information, services
and products are those which brokerage houses customarily provide to
institutional investors, and include items such as statistical and economic
data, research reports on particular companies and industries, and computer
software used for research with respect to investment decisions. Information,
services and products so received are in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the Investment
Advisory Agreement, and the expenses of the Investment Adviser are not
necessarily reduced as a result of the receipt of such supplemental information,
services and products. Such information, services and products may be useful to
the Investment Adviser in providing services to clients other than the Trust,
and not all such information, services and products are used by the Investment
Adviser in connection with the Funds. Similarly, such information, services and
products provided to the Investment Adviser by brokers and dealers through whom
other clients of the Investment Adviser effect securities transactions may be
useful to the Investment Adviser in providing services to the Funds. The
Investment Adviser may pay higher commissions on brokerage transactions for the
Funds to brokers in order to secure the information, services and products
described above, subject to review by the Trust's Board of Trustees from time to
time as to the extent and continuation of this practice.
Although the Investment Adviser makes investment decisions for the
Trust independently from those of its other accounts, investments of the kind
made by the Funds may often also be made by such other accounts. When the
Investment Adviser buys or sells the same security at the same time on behalf of
the Funds and one or more other accounts managed by the Investment Adviser, the
Investment Adviser allocates available investments by such means as, in its
judgment, result in fair treatment. The Investment Adviser aggregates orders
for purchases and sales of securities of the same issuer on the same day among
the Funds and its other managed accounts, and the price paid to or received by
the Funds and those accounts is the average obtained in those orders. In some
cases, such aggregation and allocation procedures may affect adversely the price
paid or received by the Funds or the size of the position purchased or sold by
the Funds.
Securities trade in the over-the-counter market 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 FUND SHARES
Shares of the Funds may be purchased and redeemed at their net asset
value without any initial or deferred sales
B-27
<PAGE>
charge.
The price paid for purchases and redemptions of shares of the
Institutional Portfolios is based on the net asset value per share, which is
calculated once daily at the close of trading (normally 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,
Martin Luther King's Birthday, 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 any sub-transfer agent
prior to the time of determination of net asset value. Dealers are responsible
for promptly transmitting purchase orders to the Transfer Agent or a
sub-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. Payment for shares redeemed will be made not
more than seven days after receipt of a written or telephone request in
appropriate form, except as permitted by the Investment Company Act and the
rules thereunder. 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.
SHAREHOLDER SERVICES
The services offered by the Trust to shareholders of the Funds can
vary, depending on the needs of the qualified retirement plan, and should be
arranged by contacting the Trust, the Distributor, the Administrator or the
Transfer Agent.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of a Fund, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. Certificates will be issued for
shares of the Funds as indicated in the Prospectus.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable Fund at
net asset value. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the case
of recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the dealer.
Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of a Fund 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
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to participants of the Automatic
Investment Plan. Participation in the Plan will begin within 30 days after
receipt of the account application. If the investor's bank account cannot be
charged due to insufficient funds, a stop-payment order or closing of the
account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer Agent. Further information
about this program and an application form can be obtained from the Transfer
Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in one Fund may elect to cross-reinvest dividends or
dividends and capital gain distributions paid
B-28
<PAGE>
by that Fund (the "paying Fund") into the other Fund or any other Institutional
Portfolio Series of the Trust (the "receiving Fund") subject to the following
conditions: (i) the aggregate value of the shareholder's account(s) in the
paying Fund(s) must equal or exceed $5,000 (this condition is waived if the
value of the account in the receiving Fund equals or exceeds that Fund's minimum
initial investment requirement), (ii) as long as the value of the account in the
receiving Fund is below that Fund's minimum initial investment requirement,
dividends and capital gain distributions paid by the receiving Fund must be
automatically reinvested in the receiving Fund, (iii) if this privilege is
discontinued with respect to a particular receiving Fund, the value of the
account in that Fund must equal or exceed the Fund's minimum initial investment
requirement or the Fund 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 Fund of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of a Fund redeemed,
but the Trust reserves the right to make payment wholly or partly in shares of
portfolio securities. In such cases, a shareholder may incur brokerage costs in
converting such securities to cash. However, the Trust has elected to be
governed by the provisions of Rule 18f-1 under the Investment Company Act,
pursuant to which it is obligated to pay in cash all requests for redemptions by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of $250,000 or 1% of the net asset value
of the Trust at the beginning of such period.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged into shares of the other Fund or any
Institutional Portfolio Series of the Trust as provided in the Prospectus. 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 Fund expenses.
Before effecting an exchange, investors 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
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 applications as provided in the
Prospectus.
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 or redemption. No Fund 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 an investor with respect to the telephone privilege.
REPORTS TO INVESTORS
B-29
<PAGE>
Each Fund 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
Funds may provide one annual and semi-annual report and annual prospectus per
household. In addition, quarterly unaudited financial data are available from
the Funds upon request.
NET ASSET VALUE
The net asset value of a share of a Fund is calculated by dividing (i)
the value of the securities held by the 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 Fund outstanding. The value of the
investments and assets of the Fund is determined each business day. Investment
securities, including ADRs and EDRs, that are traded on a stock exchange or on
the NASDAQ National Market System are valued at the last sale price as of the
close of business on the New York Stock Exchange (normally 4:00 P.M. New York
time) on the day the securities are being valued, or lacking any sales, at the
mean between the closing bid and asked prices. Securities listed or traded on
certain foreign exchanges whose operations are similar to the United States
over-the-counter market are valued at the price within the limits of the latest
available current bid and asked prices deemed by the Investment Adviser best to
reflect fair value. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security by the Investment Adviser. Listed securities that are
not traded on a particular day and other over-the-counter securities are valued
at the mean between the closing bid and asked prices.
In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are traded adopt different
trading hours on either a permanent or temporary basis, the Board of Trustees of
the Trust will reconsider the time at which the Funds compute net asset value.
In addition, the asset value of the Funds may be computed as of any time
permitted pursuant to any exemption, order or statement of the Commission or its
staff.
The Funds value long-term debt obligations at the quoted bid prices
for such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality and type; however, the Investment
Adviser will use, when it deems it appropriate, prices obtained for the day of
valuation from a bond pricing service, as discussed below. The Funds value debt
securities with maturities of 60 days or less 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 a Fund is more than
60 days, unless this is determined by the Board of Trustees of the Trust not to
represent fair value. The Funds value repurchase agreements at cost plus
accrued interest.
The Funds value U.S. Government securities which trade in the
over-the-counter market at the last available bid prices, except that securities
with a demand feature exercisable within one to seven days are valued at par.
Such valuations are based on quotations of one or more dealers that make markets
in the securities as obtained from such dealers, or on the evaluation of a
pricing service.
The Funds value options, futures contracts and options thereon which
trade on exchanges at their last sale or settlement price as of the close of
such exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. If an options or futures exchange closes later
than 4:00 p.m. New York time, the options or futures traded on it are valued
based on the sale price, or on the mean between the bid and ask prices, as the
case may be, as of 4:00 p.m. New York time.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of business
day in New York. In addition, foreign securities trading may not take place on
all business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such 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 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.
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Securities and assets for which market quotations are not readily
available, or for which the 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 Trust's Board of Trustees. Such valuations and procedures
will be reviewed periodically by the Board of Trustees.
The Trust may use a pricing service approved by its Board of Trustees.
Prices provided by such a service represent evaluations of the mean between
current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers and other market data. Such services may use electronic
data processing techniques and/or a matrix system to determine valuations. The
procedures of such services are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of its Board of Trustees,
which may replace a service at any time if it determines that it is in the best
interests of the Funds to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Funds declare and pay annual dividends of net investment income.
Each Fund makes distributions at least annually of its net capital gains, if
any. In determining amounts of capital gains to be distributed by a Fund, any
capital loss carryovers from prior years will be offset against its capital
gains.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify each Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code"), and
intends that each Fund will remain so qualified.
As a regulated investment company, a Fund 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 a Fund (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 Fund'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 Fund's assets and 10% of the outstanding voting securities
of such issuer) and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. Government or
foreign government securities or the securities of other regulated investment
companies), or two or more issuers which the Trust controls and which are
determined to be engaged in the same or similar trades or businesses; and
(d) distribute at least 90% of its investment company taxable income (which
includes dividends, interest, and net short-term capital gains in excess of net
long-term capital losses) each taxable year.
A Fund generally will be subject to a nondeductible excise tax of 4%
to the extent that it does not meet certain minimum distribution requirements as
of the end of each calendar year. To avoid the tax, a Fund 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 Fund in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Fund 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 Funds intend to make timely distributions of their
income in compliance with these requirements and anticipate that they will not
be subject to the excise tax.
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Dividends paid by a Fund from ordinary income, and distributions of
the Fund'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 Funds is derived from dividends on common or preferred stock of
domestic corporations. Dividend income earned by a Fund will be eligible for
the dividends received deduction only if the Fund has 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 Fund 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 Fund will send to its shareholders a written notice
designating the amount of any distributions made during such year which may be
taken into account by its shareholders for purposes of such deduction provisions
of the Code. Net capital gain distributions are not eligible for the dividends
received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to a Fund'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 Fund as a capital gains distribution
in a written notice to its shareholders which accompanies the distribution
payment. Any loss on the sale of shares held for less than six months will be
treated as a long-term capital loss for federal tax purposes to the extent a
shareholder receives net capital gain distributions on such shares. The maximum
federal income tax rate applicable to long-term capital gains is currently 28%
for individual shareholders and 35% for corporate shareholders. Dividends and
distributions are taxable as such whether received in cash or reinvested in
additional shares of a Fund.
Any loss realized on a sale, redemption or exchange of shares of a
Fund by a shareholder will be disallowed to the extent the shares are replaced
within a 61-day period (beginning 30 days before the disposition of shares).
Shares purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of a Fund 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 Fund
if the shareholder acquires shares in a Fund of the Trust pursuant to a
reinvestment right that reduces the sales charges in the subsequent acquisition
of shares.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from a Fund provided that certain conditions are satisfied. Interest
received on repurchase agreements collateralized by U.S. Government obligations
normally is not exempt from state taxation. The Trust will inform 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 Fund is
considered tax exempt in their particular states.
SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Funds are "section 1256 contracts." Any gains or losses
on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Funds at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized and the resulting gain or loss is
treated as ordinary or 60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Funds. In
addition, losses realized by a Fund on positions that are part of a straddle may
be deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Funds are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by a Fund which is taxed
as
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ordinary income when distributed to shareholders.
The Funds may make one or more of the elections available under the
Code which are applicable to straddles. If the Funds make any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because applications of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to the shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options,
futures, and forward contracts held less than three months and the qualifying
income and diversification requirements applicable to the Funds' assets may
limit the extent to which the Funds will be able to engage in transactions in
options, futures contracts or forward contracts.
SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the Fund's investment company taxable income to be
distributed to the shareholders.
FOREIGN TAX. Foreign countries may impose withholding and other taxes
on income received by a Fund from sources within those countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Investment Adviser intends to manage the Funds with the
intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through" to the Fund'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 Fund's taxable year whether the
foreign taxes paid by the Fund will be "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the Fund elects
pass-through treatment, the source of the Fund's income flows through to
shareholders of the Fund. With respect to such election, the Fund treats gains
from the sale of securities as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit applies separately to foreign
source passive income, and to certain other types of income. Shareholders may
be unable to claim a credit for the full amount of their proportion at share of
the foreign taxes paid by the Fund. The foreign tax credit is modified for
purposes of the federal alternative minimum tax and can be used to offset only
90% of the alternative minimum tax imposed on corporations and individuals and
foreign taxes generally are not deductible in computing alternative minimum
taxable income.
SHORT SALES. Generally, capital gain or loss realized by a Fund in a
short sale may be long-term or short term depending on the holding period of the
short position. Under a special rule, however, the capital gain will be
short-term gain if (1) as of the date of the short sale, the Fund owned property
for the short-term holding period that was substantially identical to that which
the Fund used to close the sale or (2) after the short sale and on or before its
closing, the Fund acquired substantially similar property. Similarly, if the
Fund held property substantially identical to that sold short 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. The Funds may treat some of the debt
securities (with a fixed maturity date of more than one year from the date of
issuance) they may acquire as issued originally at a discount. Generally, the
Funds treat the amount of the original issue discount ("OID") as interest income
and include it in income over the term of the debt security,
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<PAGE>
even though they do no receive payment of that amount until a later time,
usually when the debt security matures. The Funds treat a portion of the OID
includable in income with respect to certain high-yield corporation debt
securities as a dividend for federal income tax purposes.
The Funds may treat some of the debt securities (with a fixed maturity
date of more than one year from the date of issuance) that they may acquire in
the secondary market as having market discount. Generally, A Fund treats any
gain recognized on the disposition of, and any partial payment of principal on,
a debt security having market discount as ordinary income to the extent the
gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Funds may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing the recognition of income.
The Funds may treat some of the debt securities (with a fixed maturity
date of one year or less from the date of issuance) that they may acquire as
having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, a Fund must 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 Funds generally must distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though the Funds have yet to receive cash representing such income. The
Funds may obtain cash to pay such dividends from sales proceeds of securities
held by the Funds.
OTHER TAX INFORMATION
The Funds may be required to withhold for U.S. federal income taxes
31% of all taxable distributions payable to shareholders who fail to provide the
Trust with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal tax liability.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of a
Fund with respect to distributions by the Fund may differ from federal tax
treatment. Distributions to shareholders may be subject to additional state and
local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise total returns and yields for
the Funds, compare Fund performance to various indices, and publish rankings of
the Funds prepared by various ranking services. Any performance information
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the its portfolio, and the market conditions
during the given period, and should not be considered to be representative of
what may be achieved in the future.
TOTAL RETURN
The total return for a Fund 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 Fund over the relevant time periods are invested at net
asset value. It is then assumed that, at the end of each period, the entire
amount is redeemed without regard to any redemption fees or costs. The average
annual total return is then determined by calculating the annual rate required
for the initial payment to grow to the amount which would have been received
upon redemption. Total return does not take into account any federal or state
income taxes.
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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.
YIELD
The yield for a Fund is calculated based on a 30-day or one-month
period, according to the following formula:
6
Yield = 2[{a - b + 1) -1]
-----
{c x d }
For purposes of this formula, "a" is total dividends and interest
earned during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
COMPARISON TO INDICES AND RANKINGS
A Fund may compare its performance to various unmanaged indices such
as the Dow Jones Composite Average or its component averages, Standard and
Poor's 500 Stock Index or its component indices, Standard and Poor's 100 Stock
Index, the Russell Mid Cap Index, the Russell 2000 Growth Index, the CS First
Boston Convertible Index, the Morgan Stanley Capital International World Index,
the Morgan Stanley Capital International Emerging Markets Free Index, the Morgan
Stanley Capital International Europe, Australia and Far East Index, the IFC
Emerging Markets Investible Index, The New York Stock Exchange composite or
component indices, the Wilshire 5000 Equity Index, indices prepared by Lipper
Analytical Services and Morningstar, Inc., the CDA Mutual Fund Report published
by CDA Investment Technologies, Inc., performance statistics reported in
financial publications such as The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines, the Consumer Price
Index (or Cost of Living Index) published by the U.S. Bureau of Labor
Statistics, Stocks, Bonds, Bills, and Inflation published by Ibbotson
Associates, Savings and Loan Historical Interest Rates as published in the U.S.
Savings & Loan League Fact Book, and historical data supplied by the research
departments of First Boston Corporation, The J.P. Morgan companies, Salomon
Brothers, Merrill Lynch, Lehman Brothers, Smith Barney Shearson and Bloomberg
L.P. Unmanaged indices (i.e., other than Lipper) generally do not reflect
deductions for administrative and management costs and expenses.
A number of independent mutual fund ranking entities prepare
performance rankings. These entities categorize and rank funds by various
criteria, including fund type, performance over a given period of years, total
return, standardized yield, variations in sales charges and risk\reward
considerations.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT AUDITORS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Funds and in that capacity maintains certain
financial and accounting books and records pursuant to an agreement with the
Trust. PFPC Inc., 103 Bellevue Parkway, Wilmington, Delaware, an affiliate of
the Custodian, provides additional accounting services to the Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor,
North Quincy, Massachusetts, 02171, serves as the Dividend Disbursing Agent and
as the Transfer Agent for the Funds. The Transfer Agent provides customary
transfer agency services to the Trust, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, and related functions. The Dividend Disbursing
Agent provides customary dividend disbursing services to the Trust, including
payment of dividends and distributions and related functions.
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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
Funds. The following act as sub-transfer agents for the Funds: 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 South Flower Street, Los Angeles,
California 90071, serves as the independent auditors for the Trust, and in that
capacity examines the annual financial statements of the 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 legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 59 series of shares -- 10 A
Portfolios, 10 B Portfolios, 10 C Portfolios, 18 Institutional Portfolios, one
Money Market Portfolio and 10 Qualified Portfolios.
On any matter submitted to a vote of shareholders of the Trust, all
shares then entitled to vote will be voted by the affected series 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 a Fund's
fundamental investment policies would be voted upon only by shareholders of that
Fund, as would the approval of any advisory or distribution contract for the
Fund. 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 Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding 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 Fund only if approved by a majority of its outstanding shares.
However, the rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by the shareholders of the Trust
voting without regard to Portfolio.
As used in the Funds' prospectuses and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of a Fund, means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of the Trust, means
the vote of the lesser of (i) 67% of the Trust's shares represented at a meeting
if the holders of more than 50% of the Trust's outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Trust's outstanding shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held. Unless otherwise provided by law (for
example, by Rule 18f-2 discussed above) or by the Trust's Declaration of Trust
or Bylaws, the Trust may take or authorize any action upon the favorable vote of
the holders of more than 50% of the outstanding shares of the Trust.
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 Fund represents an equal proportional interest in the
Fund with each other share and is entitled to such dividends and distributions
out of the income earned on the assets belonging to the Fund as are declared in
the
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discretion of the Trustees. In the event of the liquidation or dissolution of
the Trust, shareholders of a Fund are entitled to receive the assets
attributable to the Fund that are available for distribution, and a distribution
of any general assets not attributable to a particular Fund 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
The Declaration of Trust of the Trust provides that obligations of the
Trust are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the Trust or its investors for any action or failure to act, but
nothing in the 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 Declaration of Trust also provides that the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to a designated portfolio shall be enforceable against the assets and
property of such portfolio only, and not against the assets or property of any
other portfolio.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including the Funds'
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 Funds' 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 these Registration Statements, each such statement being qualified in
all respects by such reference.
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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 (i).
(1.16) Form of Amendment No. 12 to Amended and Restated Declaration
of Trust (i).
(1.17) Amendment No. 13 to Amended and Restated Declaration of
Trust (j).
(1.18) Form of Amendment No. 14 to Amended and Restated Declaration
of Trust (j).
(1.19) Form of Amendment No. 15 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).
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(3) None.
(4) None.
(5) Form of Investment Advisory Agreement between Registrant and
Nicholas-Applegate Capital Management, with respect to
Global Blue Chip Fund and Emerging Markets Bond Fund.
(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
(i).
(6.11) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Core Growth International
Portfolio C series to Distribution Agreement (i).
(6.12) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Large Cap Growth Portfolio A, B,
C and Q series to Distribution Agreement (j).
(6.13) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding Global Blue Chip Fund and
Emerging Markets Bond Fund 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
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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).
(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 (i).
(8.12) Form of letter agreement between Registrant and PNC Bank
adding Core Growth International Portfolio C series to
Custodian Services Agreement (i).
(8.13) Form of letter agreement between Registrant and PNC Bank
adding Large Cap Growth Portfolio A, B, C and Q series to
Custodian Services Agreement (j).
(8.14) Form of letter agreement between Registrant and PNC Bank,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Custodian Services Agreement.
(9.1) Administration Agreement between Registrant and Investment
Company Administration Corporation dated as of April 1, 1993
(f).
(9.2) Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management dated as of November
18, 1996 (i).
(9.3) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1,
1993 (f).
(9.4) 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).
(9.5) 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).
(9.6) 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).
(9.7) Letter agreement between Registrant and State Street Bank
and Trust Company dated April 22, 1994, adding
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Core Growth Qualified Portfolio series to Transfer Agency
and Service Agreement (f).
(9.8) 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).
(9.9) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Series B Portfolios to Transfer
Agency and Service Agreement (f).
(9.10) 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).
(9.11) 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).
(9.12) 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).
(9.13) 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 (i).
(9.14) 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
(i).
(9.15) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Large Cap Growth Portfolio A,
B, C and Q series to Transfer Agency and Service Agreement
(j).
(9.16) Form of letter agreement between Registrant and State Street
Bank and Trust company, adding Global Blue Chip Fund and
Emerging Markets Bond Fund to Transfer Agency and Service
Agreement.
(9.17) Shareholder Service Plan between Registrant and Nicholas-
Applegate Securities (f).
(9.18) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (f).
(9.19) Accounting Services Agreement between Registrant and PFPC
Inc. dated as of April 1, 1993 (f).
(9.20) Letter agreement between Registrant and PFPC Inc. dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Accounting Services Agreement (f).
(9.21) Letter agreement between Registrant and PFPC Inc. dated
August 20, 1993, adding Emerging Growth Portfolio series to
Accounting Services Agreement (f).
(9.22) Letter agreement between Registrant and PFPC Inc. dated
December 15, 1993, adding International Growth Portfolio
series to Accounting Services Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc. dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Accounting Services Agreement (f).
(9.24) 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).
(9.25) Letter agreement between Registrant and PFPC Inc., adding
Series B Portfolios to Accounting Services Agreement (f).
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(9.26) Letter agreement between Registrant and PFPC Inc., adding
Fixed Income Portfolio series to Accounting Services
Agreement (f).
(9.27) Form of letter agreement between Registrant and PFPC Inc.
adding Value Institutional Portfolio series to Accounting
Services Agreement (a).
(9.28) Form of letter agreement between Registrant and PFPC Inc.
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Accounting Services Agreement (b).
(9.29) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth and Core Growth International
Portfolio series to Accounting Services Agreement (i).
(9.30) Form of letter agreement between Registrant and PFPC Inc.
adding Core Growth International Portfolio C series to
Accounting Services Agreement (i).
(9.31) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth Portfolio A, B, C and Q series to
Accounting Services Agreement (j).
(9.32) Form of letter agreement between Registrant and PFPC Inc.,
adding Global Blue Chip Fund and Emerging Markets Bond Fund
to Accounting Services Agreement.
(9.33) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated September 27, 1993 regarding
expense reimbursements (f).
(9.34) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated December 15, 1993, adding
International Growth Portfolio series to agreement regarding
expense reimbursements (f).
(9.35) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated April 22, 1994, adding Qualified
Portfolio series to agreement regarding expense
reimbursements (f).
(9.36) 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).
(9.37) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Series B Portfolios to agreement
regarding expense reimbursement (f).
(9.38) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Qualified and Fixed Income
Portfolio series to agreement regarding expense
reimbursement (f).
(9.39) Letter agreement between Registrant and Nicholas-Applegate
Capital Management revising expense reimbursement agreement
with respect to Government Income Portfolios (f).
(9.40) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Value Institutional
Portfolio series to agreement regarding expense
reimbursement (a).
(9.41) 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).
(9.42) 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 (i).
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<PAGE>
(9.43) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Core Growth
International Portfolio C series to agreement regarding
expense reimbursement (i).
(9.44) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Large Cap Growth
Portfolio A, B, C and Q series to agreement regarding
expense reimbursement (j).
(9.45) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Global Blue Chip Fund
and Emerging Markets Bond Fund to agreement regarding
expense reimbursement.
(9.46) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (f).
(9.47) First Amendment Agreement to Credit Agreement dated as of
April 9, 1997 among Registrant, The Chase Manhattan Bank,
and certain other banks^.
(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.
(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).
(19.5) Limited Power of Attorney of Thomas Pindelski (k).
(19.6) Certified Resolution of Board of Trustees regarding Limited
Power of Attorney of Thomas Pindelski (k).
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______________________________
(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.
(i) Filed as an Exhibit to Amendment No. 40 to Registrant's Form N-1A
Registration Statement on January 3, 1997 and incorporated herein by
reference.
(j) Filed as an Exhibit to Amendment No. 42 to Registrant's Form N-1A
Registration Statement on May 1, 1997 and incorporated herein by reference.
(k) Filed as an Exhibit to Amendment No. 44 to Registrant's Form N-1A
Registration Statement on May 22, 1997 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 June 30, 1997, the number of record holders of each series of
Registrant was as follows:
Title of Series Number of Record Holders
--------------- ------------------------
Large Cap Growth Portfolio A --
Core Growth Portfolio A 6,807
Emerging Growth Portfolio A 11,164
Income & Growth Portfolio A 2,284
Balanced Growth Portfolio A 846
Government Income Portfolio A 434
Money Market Portfolio --
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International Core Growth Portfolio A 3
Worldwide Growth Portfolio A 1,974
International Small Cap Growth Portfolio A 404
Emerging Countries Portfolio A 2,883
Large Cap Growth Portfolio B --
Core Growth Portfolio B 2,895
Emerging Growth Portfolio B 3,314
Income & Growth Portfolio B 916
Balanced Growth Portfolio B 260
Government Income Portfolio B 178
International Core Growth Portfolio B 3
Worldwide Growth Portfolio B 495
International Small Cap Growth Portfolio B 502
Emerging Countries Portfolio B 2,141
Large Cap Growth Portfolio C --
Core Growth Portfolio C 14,157
Emerging Growth Portfolio C 17,204
Income & Growth Portfolio C 5,265
Balanced Growth Portfolio C 1,383
Government Income Portfolio C 476
International Core Growth Portfolio C 14
Worldwide Growth Portfolio C 5,682
International Small Cap Growth Portfolio C 642
Emerging Countries Portfolio C 2,068
Large Cap Growth Institutional Portfolio 31
Core Growth Institutional Portfolio 195
Emerging Growth Institutional Portfolio 191
Income & Growth Institutional Portfolio 112
Balanced Growth Institutional Portfolio 24
International Core Growth Institutional Portfolio 39
Worldwide Growth Institutional Portfolio 70
International Small Cap Growth Institutional Portfolio 81
Emerging Countries Institutional Portfolio 174
Mini Cap Growth Institutional Portfolio 164
Fully Discretionary Institutional Fixed Income Portfolio 12
Short-Intermediate Institutional Fixed Income Portfolio 14
Value Institutional Portfolio 26
High Yield Bond Institutional Portfolio 22
Strategic Income Institutional Portfolio 16
Global Growth & Income Institutional Portfolio --
Large Cap Growth Qualified Portfolio --
Core Growth Qualified Portfolio 203
Emerging Growth Qualified Portfolio 18
Income & Growth Qualified Portfolio 11
Balanced Growth Qualified Portfolio 11
Government Income Qualified Portfolio 9
International Core Growth Qualified Portfolio 2
Worldwide Growth Qualified Portfolio 10
International Small Cap Growth Qualified Portfolio 10
Emerging Countries Qualified Portfolio 61
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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 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, 1996, 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.
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<PAGE>
Positions and Positions and
Name and Principal Offices with Principal Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
Arthur E. Nicholas Chairman None
John D. Wylie President President
Peter J. Johnson Vice President Vice President
Thomas Pindelski Chief Financial Officer Chief Financial
Officer
E. Blake Moore, Jr. Secretary Secretary
Todd Spillane Director of Compliance None
(c) Not Applicable.
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 primary 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 undertakes to file a Post-Effective amendment containing
reasonably current financial statements with respect to its Global Blue Chip
Fund and Emerging Markets Bond Fund, which need not be certified, within four to
six months from the effective date of this Amendment.
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 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.
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<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 11th day
of July, 1997.
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.
John D. Wylie* Principal Executive July 11, 1997
------------------------- Officer
John D. Wylie
Thomas Pindelski* Principal Financial and
------------------------- Accounting Officer July 11, 1997
Thomas Pindelski
Fred C. Applegate* Trustee July 11, 1997
-------------------------
Fred C. Applegate
Arthur B. Laffer* Trustee July 11, 1997
-------------------------
Arthur B. Laffer
Charles E. Young* Trustee July 11, 1997
-------------------------
Charles E. Young
* s/E. Blake Moore, Jr.
-------------------------
By: E. Blake Moore, Jr.
Attorney In Fact
C-11
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE MUTUAL FUNDS
AMENDMENT NO. 45 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
Exhibit No. Title of Exhibit
----------- ----------------
(1.19) Form of Amendment No. 15 to Amended and Restated
Declaration of Trust.
(5) Form of Investment Advisory Agreement between Registrant
and Nicholas-Applegate Capital Management, with respect
to Global Blue Chip Fund and Emerging Markets Bond Fund.
(6.13) Form of letter agreement between Registrant and
Nicholas-Applegate Securities, adding Global Blue Chip
Fund and Emerging Markets Bond Fund to Distribution
Agreement.
(8.14) Form of letter agreement between Registrant and PNC
Bank, adding Global Blue Chip Fund and Emerging Markets
Bond Fund to Custodian Services Agreement.
(9.16) Form of letter agreement between Registrant and State
Street Bank and Trust Company, adding Global Blue Chip
Fund and Emerging Markets Bond Fund to Transfer Agent
and Service Agreement.
(9.32) Form of letter agreement between Registrant and PFPC
Inc., adding Global Blue Chip Fund and Emerging Markets
Bond Fund to Accounting Services Agreement.
(9.45) Form of letter agreement between Registrant and
Nicholas-Applegate Capital Management, adding Global
Blue Chip Fund and Emerging Markets Bond Fund to
agreement regarding expense reimbursement.
(9.47) First Amendment Agreement to Credit Agreement dated as
of April 9, 1997 among Registrant, The Chase Manhattan
Bank, and certain other banks.
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<PAGE>
Exhibit 1.19
AMENDMENT NO. 15 TO
AMENDED AND RESTATED DECLARATION OF TRUST
OF NICHOLAS-APPLEGATE MUTUAL FUNDS
THIS AMENDMENT NO. 14 TO THE AMENDED AND RESTATED DECLARATION OF TRUST OF
NICHOLAS-APPLEGATE MUTUAL FUNDS is made as of the 16th day of May, 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 as additional series of
Interests of the Trust the Nicholas-Applegate Global Blue Chip Fund and the
Nicholas-Applegate Emerging Markets Bond Fund;
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 sixty-one 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
<PAGE>
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 Small Cap Growth
Portfolio A
Nicholas-Applegate International Small Cap Growth
Portfolio B
Nicholas-Applegate International Small Cap Growth
Portfolio C
Nicholas-Applegate International Small Cap Growth
Institutional Portfolio
Nicholas-Applegate International Small Cap 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 Portfolio A
Nicholas-Applegate Large Cap Growth Portfolio B
Nicholas-Applegate Large Cap Growth Portfolio C
Nicholas-Applegate Large Cap Growth Institutional
Portfolio
Nicholas-Applegate Large Cap Growth Qualified 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
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
-2-
<PAGE>
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
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<PAGE>
Exhibit 5
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT is made as of _____________, 1997
between NICHOLAS-APPLEGATE MUTUAL FUNDS, a Delaware business trust (the
"Trust"), and NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, a California limited
partnership (the "Investment Adviser").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory services to the Nicholas-Applegate Global Blue Chip Fund and
Nicholas-Applegate Emerging Countries Bond Fund Series of the Trust (each a
"Fund" and collectively the "Funds");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. APPOINTMENT.
(a) The Trust hereby appoints the Investment Adviser to serve as
investment adviser to each of the Funds for the period and on the terms set
forth in this Agreement. The Investment Adviser accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
(b) In the event that the Trust desires to retain the Investment
Adviser to serve as investment adviser hereunder with respect to one or more
series of the Trust other than the Funds, it will so notify the Investment
Adviser in writing. If the Investment Adviser is willing to render such
services under this Agreement it will so notify the Trust in writing, whereupon
such series will become a "Fund" (as defined hereunder) and will be subject to
the provisions of this Agreement to the same extent as the Funds except to the
extent that such provisions (including those relating to the compensation
payable by the Fund to the Investment Adviser) are modified with respect to such
Fund in writing by the Trust and the Adviser at the time.
2. SERVICES. Subject to the supervision of the Trust's Board of
Trustees (the "Board"), the Investment Adviser will provide a continuous
investment program for each of the Funds, including investment research and
management with respect to all securities and investments and cash equivalents
in the Funds. The Investment Adviser will determine from time to time what
securities and other investments will be purchased, retained or sold by the
Trust with respect to each Fund. The Investment Adviser will provide the
services under this Agreement in accordance with each Fund's investment
objective, policies and restrictions as stated in the Fund's prospectus and
statement of additional information, as currently in effect and as from time to
time amended (collectively, the "Prospectus"), and resolutions of the Board.
The Investment Adviser further agrees that it:
(b) Will conform with all applicable rules and regulations of
the Securities and Exchange Commission and will in addition conduct its
activities under this Agreement in accordance with other applicable law.
(c) Will place all orders for the purchase and sale of portfolio
securities for the account of each Fund with brokers or dealers selected by the
Investment Adviser. In executing portfolio transactions and selecting brokers
or dealers, the Investment Adviser will use its best efforts to seek on behalf
of the Trust and each Fund the best available price and execution. In assessing
the best overall terms available for any transaction, the Investment Adviser
will consider all factors it deems relevant, including the breadth of the market
in the security, the price of the security, the size of the order, the
difficulty and risk of execution, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis.
<PAGE>
In evaluating the best overall terms available, and in selecting the
broker or dealer to execute a particular transaction, the Investment Adviser may
also consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934, as amended) provided to
any Fund and/or other accounts over which the Investment Adviser or any
affiliate of the Investment Adviser exercises investment discretion. The
Investment Adviser is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission or spread for executing a portfolio
transaction for any Fund which is in excess of the amount of commission or
spread another broker or dealer would have charged for effecting that
transaction if, but only if, the Investment Adviser determines in good faith
that such commission or spread is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer viewed in
terms of that particular transaction or in terms of the overall responsibilities
of the Investment Adviser to the particular Fund and to the Trust. The
Investment Adviser may also select brokers who sell shares of the various series
of Nicholas-Applegate Mutual Funds to execute portfolio transactions. The
extent and continuation of these practices will be subject to periodic review by
the Board.
In executing portfolio transactions for any Fund, the Investment
Adviser may, but will not be obligated to, aggregate the securities to be sold
or purchased with those of other Funds and its other clients where such
aggregation is not inconsistent with the policies set forth in the Prospectus,
to the extent permitted by applicable laws and regulations. In such event, the
Investment Adviser will allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Funds and such
other clients.
(d) Will maintain all books and records with respect to the
securities transactions of the Funds, keep books of account with respect to the
Funds and furnish the Board with such periodic and special reports as the Board
may request.
(e) Will treat confidentially and as proprietary
information of the Trust all records and other information relative to the Trust
and shareholders of the Trust ("Shareholders") or those persons or entities who
respond to inquiries concerning investment in the Trust, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder or under any other agreement with the
Trust except after prior notification to and approval in writing by the Trust,
which approval will not be unreasonably withheld and may not be withheld where
the Investment Adviser may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust. Nothing contained
herein, however, will prohibit the Investment Adviser from advertising to or
soliciting the public generally with respect to other products or services,
including, but not limited to, any advertising or marketing via radio,
television, newspapers, magazines or direct mail solicitation, regardless of
whether such advertisement or solicitation may coincidentally include prior or
present Shareholders or those persons or entities who have responded to
inquiries regarding the Trust.
(e) Will obtain the prior written approval of the Board before
retaining the services of any sub-adviser to manage the assets and portfolio
investments of any Fund.
3. SERVICES NOT EXCLUSIVE. The Investment Adviser will for all
purposes herein be deemed to be an independent contractor and will, unless
otherwise expressly provided herein or authorized by the Board from time to
time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent. The investment management services furnished by
the Investment Adviser hereunder are not deemed exclusive, and the Investment
Adviser will be free to furnish similar services to others so long as its
services under this Agreement are not impaired thereby.
4. BOOKS AND RECORDS. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Investment Adviser agrees that all records which
it maintains for the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any such records upon the Trust's request. In
addition, the Investment Adviser agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
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<PAGE>
5. EXPENSES. During the term of this Agreement, the Investment
Adviser will pay all expenses incurred by it in connection with its activities
under this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Trust.
6. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Investment Adviser and the
Investment Adviser will accept as full compensation therefor a fee, computed
daily and paid monthly (in arrears), at the annual rates set forth in Schedule A
hereto. Such fee as is attributable to each Fund will be a separate charge to
each such Fund and will be the several (and not joint or joint and several)
obligation of each such Fund.
The Investment Adviser may also from time to time agree to reduce its
fees or absorb other operating expenses to ensure that the expenses of a Fund do
not exceed certain limitations imposed by the Fund.
7. REPRESENTATIONS AND WARRANTIES.
(a) The Trust represents and warrants to the Investment Adviser that:
(i) it is a business trust duly organized and existing and in good standing
under the laws of the State of Delaware and is duly qualified to conduct its
business in the State of Delaware and in such other jurisdictions wherein the
nature of its activities or its properties owned or leased makes such
qualification necessary; (ii) it is a registered open-end management investment
company under the 1940 Act; (iii) a registration statement on Form N-1A under
the Securities Act of 1933, as amended, on behalf of the Funds is currently
effective and will remain effective, and appropriate state securities law
filings have been made and will continue to be made, with respect to all shares
of the Funds being offered for sale; (iv) it is empowered under applicable laws
and by its Declaration of Trust and Bylaws to enter into and perform this
Agreement; and (v) all requisite trust proceedings have been taken to authorize
it to enter into and perform this Agreement.
(b) The Investment Adviser represents and warrants to the Trust that:
(i) it is a limited partnership duly organized and existing and in good standing
under the laws of the State of California and is duly qualified to conduct its
business in the State of California and in such other jurisdictions wherein the
nature of its activities or its properties owned or leased makes such
qualification necessary; (ii) it is empowered under applicable laws and by its
partnership agreement to enter into and perform this Agreement; (iii) all
requisite partnership proceedings have been taken to authorize it to enter into
and perform this Agreement; and (iv) it is a registered investment adviser under
the Investment Advisers Act of 1940.
8. LIMITATION OF LIABILITY; INDEMNIFICATION.
(a) The Investment Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by a Fund or the Trust in
connection with the matters to which this Agreement relates, except for
liability resulting from willful misfeasance, bad faith or gross negligence on
the part of the Investment Adviser in the performance of its duties, or by
reason of the Investment Adviser's reckless disregard of its obligations and
duties under this Agreement.
The Trust will indemnify and hold harmless the Investment Adviser from and
against all liabilities, damages, costs and expenses that the Investment Adviser
may incur in connection with any action, suit, investigation or proceeding
arising out of or otherwise based on any action actually or allegedly taken or
omitted to be taken by the Investment Adviser with respect to the performance of
its duties or obligations hereunder or otherwise as an investment adviser of the
Trust and the Funds; provided, however, that the Investment Adviser will not be
entitled to indemnification with respect to any liability to the Trust or the
Shareholders by reason of willful misfeasance, bad faith or gross negligence on
the part of the Investment Adviser in the performance of its duties, or by
reason of the Investment Adviser's reckless disregard of its obligations and
duties under this Agreement.
(b) No trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever, in his or her official or
individual capacity, to any person, including the Investment Adviser, other than
the Trust or its Shareholders, in connection with Trust property or the affairs
of the Trust, save only that arising from his or
-3-
<PAGE>
her bad faith, willful misfeasance, gross negligence or reckless disregard of
his or her duty to such person; and all such persons shall look solely to the
Trust property for satisfaction of claims of any nature against a trustee,
officer, employee or agent of the Trust arising in connection with the affairs
of the Trust. Moreover, the debts, liabilities, obligations and expenses
incurred, contracted for or otherwise existing with respect to a Fund shall be
enforceable against the assets and property of the Fund only, and not against
the assets and property of any other series of the Trust.
9. DURATION AND TERMINATION. This Agreement will become effective
with respect to each existing Fund on the date first written above. This
Agreement will become effective with respect to any additional Fund on the date
of receipt by the Trust of notice from the Investment Adviser in accordance with
Section 1(b) hereof that the Investment Adviser is willing to serve as
investment adviser with respect to such Fund.
Unless sooner terminated as provided herein, this Agreement will continue
in effect for a period of two years from the date hereof. Thereafter, if not
terminated, this Agreement will continue in effect as to a particular Fund for
successive annual periods, provided such continuance is specifically approved at
least annually (a) by the vote of a majority of those members of the Board who
are not interested persons of any party to this Agreement, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by the Board
or by vote of a majority of the outstanding voting securities of such Fund.
Notwithstanding the foregoing, this Agreement may be terminated as to any Fund
at any time, without the payment of any penalty, by the Trust (by vote of the
Board or by vote of a majority of the outstanding voting securities of such
Fund), or by the Investment Adviser, upon not less than 60 days' written notice.
This Agreement will immediately terminate in the event of its assignment. (As
used in this Agreement, the terms "majority of the outstanding voting
securities," "interested persons" and "assignment" have the same meanings as the
meanings of such terms in the 1940 Act.)
10. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement will be
effective as to a particular Fund until approved by vote of a majority of the
outstanding voting securities of such Fund, except as otherwise permitted by the
1940 Act.
11. NOTIFICATION OF CHANGE OF PARTNERS. During the term of this
Agreement, the Investment Adviser will notify the Trust of any change in the
membership of the Investment Adviser's partnership within a reasonable time
after such change.
12. NOTICES. Notices of any kind to be given to the Investment
Adviser hereunder by the Trust will be in writing and will be duly given if
mailed, delivered or communicated by answer back facsimile transmission to the
Investment Adviser at 600 West Broadway, San Diego, California 92101, Facsimile:
(619) 234-7726, Attention: President, or at such other address or to such
individual as may be so specified by the Investment Adviser. Notices of any
kind to be given to the Trust hereunder by the Investment Adviser will be in
writing and will be duly given if mailed or delivered to the Trust at 600 West
Broadway, San Diego, California 92101, Facsimile: (619) 234-7726, Attention:
President, or at such other address or to such individual as may be so specified
by the Trust to the Investment Adviser.
13. MISCELLANEOUS.
(a) This Agreement constitutes the entire agreement and understanding
between the parties hereto, and supersedes all prior agreements and
understandings relating to the subject matter hereof.
(b) The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(c) If any provision of this Agreement is held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement will
not be affected thereby.
(d) This Agreement will be binding upon and will inure to the benefit
of the parties hereto and
-4-
<PAGE>
their respective successors and will be governed by the internal laws, and not
the law of conflicts of laws, of the State of California; provided that nothing
herein will be construed in a manner inconsistent with the 1940 Act, the
Investment Advisers Act of 1940, as amended, or any rule or regulation of the
Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the date first above written.
NICHOLAS-APPLEGATE INVESTMENT TRUST
By:
-------------------------------
John D. Wylie, President
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:
----------
Arthur E. Nicholas,
President
-5-
<PAGE>
SCHEDULE A
INVESTMENT ADVISORY FEES
The Investment Adviser will be compensated for its services under the
Agreement with respect to the Funds at the following annual rates:
1. For the Global Blue Chip Fund, 0.80% of the Fund's average daily
net assets.
2. For the Emerging Markets Bond Fund, 0.70% of the Fund's average
daily net assets.
-6-
<PAGE>
Exhibit 6.13
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 Portfolios thereunder:
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
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,
______________________________
E. Blake Moore, Jr., Secretary
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 8.14
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 series
to the Agreement:
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
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 9.16
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
series to the Agreement:
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
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 9.32
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 series
to the Agreement:
Nicholas-Applegate Global Blue Chip Fund
Nicholas-Applegate Emerging Markets Bond Fund
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 9.45
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 Portfolios and Percentage Limitations
to Appendix A thereof:
Name of Portfolio Percentage Limitation
- ----------------- ---------------------
Nicholas-Applegate Global Blue Chip Fund 1.20%
Nicholas-Applegate Emerging Markets Bond Fund 0.95%
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 9.47
- --------------------------------------------------------------------------------
FIRST AMENDMENT AGREEMENT
dated as of April 9, 1997
among
NICHOLAS-APPLEGATE MUTUAL FUNDS
on behalf of each series
of shares named herein,
and
THE CHASE MANHATTAN BANK,
formerly known as CHEMICAL BANK,
as Administrative Agent,
and
THE LENDERS NAMED HEREIN
________________________
To The Credit Agreement Dated as of April 10, 1996
____________________________
- --------------------------------------------------------------------------------
<PAGE>
THIS FIRST AMENDMENT AGREEMENT, dated as of April 9, 1997 (this "FIRST
AMENDMENT"), among Nicholas-Applegate Mutual Funds, a Delaware business trust
(the "FUND"), on behalf of itself and each series of shares of the Fund listed
on SCHEDULE I hereto as revised from time to time (collectively, all such
series, the "BORROWERS" and each series individually, a "BORROWER"), the banks
and other financial institutions (the "LENDERS") from time to time parties to
the Agreement (as hereinafter defined) and The Chase Manhattan Bank, formerly
known as Chemical Bank, as successor to Chemical Bank, a New York banking
corporation, as administrative agent for the Lenders hereunder (in such
capacity, the "ADMINISTRATIVE AGENT"), to the Credit Agreement, dated as of
April 10, 1996 among all of such parties (the "AGREEMENT").
W I T N E S S E T H :
WHEREAS, the Fund on behalf of the Borrowers has requested the Lenders
to amend the Agreement as of April 9, 1997 (the "FIRST AMENDMENT EFFECTIVE
DATE") in order to (i) increase each Lender's Commitment, pro rata, such that
the sum of such Commitments is increased from $50,000,000 to $75,000,000 and
(ii) extend the period during which loans are made under the Agreement; and
WHEREAS, the Fund desires, and each Lender and the Administrative
Agent are willing, on the terms and conditions set forth below, to modify
certain terms of the Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
SECTION 1. DEFINED TERMS. Capitalized terms used herein and not
defined herein shall have the meanings specified in the Agreement.
SECTION 2. AMENDMENTS TO THE AGREEMENT; NOTICE OF ADDRESS.
(A) The definition of "Chemical" contained in Section 1.1 (Defined Terms)
of the Agreement is hereby amended and restated to read in its entirety as
follows:
"CHEMICAL" or "CHEMICAL BANK": The Chase Manhattan Bank, formerly
known as Chemical Bank, as successor to Chemical Bank, a New York banking
corporation.
(B) The definition of "Designated Borrower" contained in Section 1.1
(Defined Terms) of the Agreement is hereby amended and restated to read in its
entirety as follows:
"DESIGNATED BORROWER": any of the entities designated as such on
Schedule VIII hereto.
(C) The definition of "Termination Date" contained in Section 1.1 (Defined
Terms) of the Agreement is hereby amended and restated to read in its entirety
as follows:
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<PAGE>
"TERMINATION DATE": the date which is 364 days following the First
Amendment Effective Date, or such earlier date on which the Commitments
shall terminate as provided herein.
(D) Section 1.1 (Defined Terms) of the Agreement is hereby amended by
adding the following definition in the proper alphabetical order:
"FIRST AMENDMENT EFFECTIVE DATE': April 9, 1997."
(E) SCHEDULE I of the Agreement is hereby amended and restated by deleting
such Schedule in its entirety and inserting in lieu thereof SCHEDULE I attached
to this First Amendment.
(F) SCHEDULE II of the Agreement is hereby amended and restated by
deleting such Schedule in its entirety and inserting in lieu thereof SCHEDULE II
attached to this First Amendment.
(G) The Administrative Agent hereby gives notice to the parties hereto
that, under Section 9.2 of the Agreement, the following are the notice
addresses:
The Administrative Agent: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attention: Mr. Roger Parker
Facsimile: (212) 270-1789
and: Chase Manhattan Bank Agency
140 East 45th Street, 29th Flr
New York, New York 10017
Attention: Sandra Miklave
Facsimile: (212) 622-0130
SECTION 3. CONDITIONS TO EFFECTIVENESS. This First Amendment shall
become effective only upon the satisfaction or waiver of all of the following
conditions precedent:
(A) The parties hereto shall have duly executed and delivered this First
Amendment.
(B) The Administrative Agent shall have received a certificate of the
Secretary or Assistant Secretary of the Fund dated as of the First Amendment
Effective Date, certifying (i) that attached thereto are true and complete
copies of the resolutions of the board of trustees of the Fund authorizing the
execution, delivery and performance by the Fund of this First Amendment and
borrowing under the Agreement as amended hereby, (ii) that said resolutions are
all of the resolutions adopted by the board of trustees of the
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<PAGE>
Fund in connection with the transactions contemplated hereby and are in full
force and effect without modification as of such date, (iii) that the Fund's By-
laws either are attached to such certificate, or to the extent not attached have
not been amended since the Closing Date, (iv) that its charter or certificate,
as the case may be, either is attached to such certificate or to the extent not
attached has not been amended since the Closing Date, and (v) as to the
incumbency and signatures of each of its officers executing this First Amendment
and any other documents to which it is a party.
(C) The Administrative Agent shall have received from the Borrowers the
fees and expense reimbursements referred to under Section 6 hereof.
(D) The Administrative Agent shall have received (i) a duly executed
Designation of New Borrowers in the form of Exhibit 9.16(a) of the Agreement
(with a copy of the Agreement attached thereto) with respect to the addition of
Nicholas-Applegate International Core Growth A, Nicholas-Applegate International
Core Growth B, Nicholas-Applegate International Core Growth C, Nicholas-
Applegate International Core Growth Qualified Portfolio, Nicholas-Applegate
International Core Growth Institutional Portfolio and Nicholas-Applegate Large
Cap Institutional Portfolio as Borrowers (collectively, the "NEW BORROWERS");
(ii) with a copy for each Lender, true and correct copies, certified as to
authenticity by the Fund, of each New Borrower's most recent: prospectus;
Administration Agreement; Custody Agreement; Distribution Agreement;
registration statement; annual and semi-annual financial reports; debt
instruments, security agreements and other material contracts to which it is a
party; and publicly available financial information (which includes a list of
portfolio securities); (iii) the Investment Advisory Agreement of NAIT with
respect to the series of NAIT in which the assets of each New Borrower are
invested; and (iv) an executed legal opinion of counsel to the Fund and each New
Borrower substantially in the form of Exhibit 4.1(h) to the Agreement.
(E) The Administrative Agent shall have received such other documents,
opinions, approvals or appraisals as the Administrative Agent may reasonably
request.
SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce the
Lenders and Administrative Agent to enter into this First Amendment, the Fund
hereby represents and warrants to the Administrative Agent, on behalf of itself
and on behalf of each Borrower: (i) the representations and warranties contained
in the Agreement are true and correct on and as of the First Amendment Effective
Date as though made on and as of such date, except for changes which have
occurred and which were not prohibited by the terms of the Agreement, (ii) no
Default or Event of Default has occurred and is continuing, or would result from
the execution, delivery and performance by the Fund and each Borrower, of this
First Amendment or the Agreement (as amended by this First Amendment), (iii)
that the Fund has full power, right and legal authority to execute, deliver and
perform its obligations under this First Amendment; (iv) that the Fund has taken
all action necessary to authorize the execution and delivery of, and the
performance of its obligations, and the obligations of each Borrower, under this
First Amendment, including, without limitation, receiving the approval of the
majority of non-interested
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<PAGE>
members of the board of trustees of the Fund as to entering into the
transactions contemplated by this First Amendment; and (v) that this First
Amendment constitutes a legal, valid and binding obligation of the Fund and each
Borrower enforceable against the Fund and each Borrower in accordance with its
terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization or moratorium or similar laws affecting the rights of creditors
generally and by general equitable principles (whether enforcement is sought by
proceedings in equity or at law).
SECTION 5. REFERENCE TO AND EFFECT ON THE DOCUMENTS. Each reference in
the Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import, and each reference to the Agreement in documents related to the
Agreement, shall mean and be a reference to the Agreement as amended hereby.
Except as specifically amended hereby, the Agreement and all such related
documents, and all other documents, agreements, instruments or writings entered
into in connection therewith, shall remain in full force and effect and are
hereby ratified, confirmed and acknowledged by the Fund, on behalf of itself and
on behalf of each Borrower.
SECTION 6. FEES AND EXPENSES. The Borrowers agree severally to pay or
reimburse the Administrative Agent, as stated in Section 9.5 of the Agreement
(as amended hereby), for its reasonable out-of-pocket costs and expenses,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent incurred by the Administrative Agent in connection
with the preparation, reproduction, execution and delivery of this First
Amendment and any other instruments and documents to be delivered hereunder.
SECTION 7. GOVERNING LAW. This First Amendment and the rights and
obligations of the parties hereunder shall be governed by and construed and
interpreted in accordance with the substantive laws of the State of New York,
without regard to its conflict of laws principles.
SECTION 8. COUNTERPARTS. This First Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this First Amendment by
signing any such counterpart.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
NICHOLAS-APPLEGATE MUTUAL FUNDS,
FOR ITSELF AND ON BEHALF OF EACH BORROWER
By: S/E. Blake Moore, Jr.
---------------------------
Name: E. Blake Moore, Jr.
Title: Secretary
THE CHASE MANHATTAN BANK, d/b/a
CHEMICAL BANK, AS ADMINISTRATIVE
AGENT AND AS A LENDER
By: S\Roger A. Parker
---------------------------
Name: Roger A. Parker
Title: Vice President
UNION BANK OF CALIFORNIA, N.A., AS
LENDER
By: S\David C. Hunts
---------------------------
Name: David C. Hunts
Title: Vice President
AUSTRALIA AND NEW ZEALAND
BANKING GROUP LIMITED, AS LENDER
By: S\Michael Murphy
---------------------------
Name: Michael Murphy
Title: Vice President
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<PAGE>
Nicholas-Applegate Investment Trust, in its individual capacity and on behalf of
the series listed on Schedule III, does hereby acknowledge receipt of the above
First Amendment.
NICHOLAS-APPLEGATE INVESTMENT TRUST,
IN ITS INDIVIDUAL CAPACITY, AND ON
ON BEHALF OF THE SERIES LISTED ON
SCHEDULE III ATTACHED HERETO
By:S\E. Blake Moore, Jr.
---------------------------
Name: E. Blake Moore, Jr.
Its: Secretary
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<PAGE>
SCHEDULE I
BORROWERS
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 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 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 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 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 Government Income Portfolio A
Nicholas-Applegate Government Income Portfolio B
Nicholas-Applegate Government Income Portfolio C
Nicholas-Applegate Government Income Qualified Portfolio
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<PAGE>
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 Short-Intermediate Institutional Fixed Income Portfolio
Nicholas-Applegate Fully Discretionary Institutional Fixed Income Portfolio
Nicholas-Applegate Mini Cap Growth Institutional Portfolio
Nicholas-Applegate High Yield Institutional Portfolio
Nicholas-Applegate Strategic Income Institutional Portfolio
Nicholas-Applegate Value Institutional Portfolio
Nicholas-Applegate International Core Growth A
Nicholas-Applegate International Core Growth B
Nicholas-Applegate International Core Growth C
Nicholas-Applegate International Core Growth Institutional Portfolio
Nicholas-Applegate International Core Growth Qualified Portfolio
Nicholas-Applegate Large Cap Institutional Portfolio
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<PAGE>
SCHEDULE II
COMMITMENTS, ADDRESSES, ETC.
Amount of
Name and Address of Lender Commitment
- -------------------------- ----------
THE CHASE MANHATTAN BANK $30,000,000
270 Park Avenue
New York, New York 10017
Attention: Mr. Roger Parker
Facsimile: (212) 270-1789
UNION BANK OF CALIFORNIA, N.A. $22,500,000
350 California Street, 11th Floor
San Francisco, CA 94104
Attention: David C. Hants, V.P.
Facsimile: (415) 705-7037
AUSTRALIA AND NEW ZEALAND $22,500,000
BANKING GROUP LIMITED
1177 Avenue of the Americas
New York, New York 10036
Attention: Amit K. Walia, First V.P.
Facsimile: (212) 801-9131
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<PAGE>
SCHEDULE III
SERIES OF NICHOLAS-APPLEGATE INVESTMENT TRUST
Nicholas-Applegate Emerging Growth Fund
Nicholas-Applegate Core Growth Fund
Nicholas-Applegate Worldwide Growth Fund
Nicholas-Applegate Income & Growth Fund
Nicholas-Applegate Balanced Growth Fund
Nicholas-Applegate Emerging Countries Fund
Nicholas-Applegate Government Income Fund
Nicholas-Applegate International Growth Fund
Nicholas-Applegate Short-Intermediate Fixed Income Fund
Nicholas-Applegate Fully Discretionary Fixed Income Fund
Nicholas-Applegate Mini Cap Growth Fund
Nicholas-Applegate High Yield Bond Fund
Nicholas-Applegate Strategic Income Fund
Nicholas-Applegate International Core Growth Fund
Nicholas-Applegate Domestic Large Cap Fund
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