<PAGE>
As filed with the Securities and Exchange Commission
on February 11, 1997
Registration No. 33-56094
811-7428
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. __ [ ]
POST-EFFECTIVE AMENDMENT NO. 39 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 41
(Check appropriate box or boxes)
__________________
NICHOLAS-APPLEGATE MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Address of Principal Executive Offices, including Zip Code)
ARTHUR E. NICHOLAS
C/O NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
600 WEST BROADWAY, 30TH FLOOR
SAN DIEGO, CALIFORNIA 92101
(Name and Address of Agent for Service)
COPY TO: ROBERT E. CARLSON
PAUL, HASTINGS, JANOFSKY & WALKER
555 S. FLOWER STREET, TWENTIETH FLOOR
LOS ANGELES, CALIFORNIA 90071
__________________
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVE DATE.
__________________
[X] 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)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii), of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has registered an indefinite number of shares by this Registration Statement.
Registrant filed a Notice under such Rule for its fiscal year ended March 31,
1996 on May 30, 1996. This Registration Statement has been executed by the
trustees and principal officers of the Registrant and of Nicholas-Applegate
Investment Trust.
__________________
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ------------- --------
PART A
Item 1. Cover Page. . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis. . . . . . . . . . . . . . . . Summary of Expenses;
Prospectus Summary
Item 3. Condensed Financial Information . . . . Financial Highlights
Item 4. General Description of Registrant . . . Cover Page; Prospectus
Summary; Investment Objectives
and Policies; Organization and
Management; Appendix
Item 5. Management of Fund. . . . . . . . . . . Organization and Management
Item 6. Capital Stock and Other Securities. . . Dividends, Distributions and
Taxes; Purchasing Shares
Item 7. Purchase of Securities Being Offered. . Purchasing Shares; Reducing
Your Sales Charge; Redeeming
Shares; Shareholder Services
Item 8. Redemption of Repurchase. . . . . . . . Redeeming Shares; Shareholder
Services
Item 9. Pending Legal Proceedings . . . . . . . Not Applicable
PART B
Item 10. Cover Page. . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . General Information
Item 13. Investment Objectives and Policies. . . Investment Objectives and
Policies; Investment
Restrictions
Item 14. Management of the Fund. . . . . . . . . Trustees and Officers;
Administrator; Distributor
Item 15. Control Persons and Principal . . . . . Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Other . . . . . Administrator; Investment
Services Adviser; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent,
Independent Auditors and Legal
Counsel
Item 17. Brokerage Allocation and Other . . . . Portfolio Transactions and
Practices Brokerage
Item 18. Capital Stock and Other Securities. . . Miscellaneous
Item 19. Purchase, Redemption and Pricing of . . Purchase and Redemption of
Securities Being Offered Portfolio Shares; Shareholder
Services
Item 20. Tax Status. . . . . . . . . . . . . . . Dividends, Distributions and
Taxes
Item 21. Underwriters. . . . . . . . . . . . . . Distributor
Item 22. Calculation of Performance Data . . . . Performance Information
Item 23. Financial Statements. . . . . . . . . . Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
<PAGE>
NICHOLAS|APPLEGATE-Registered Trademark- MUTUAL FUNDS
SUPPLEMENT TO INSTITUTIONAL INCOME PORTFOLIOS PROSPECTUS
dated July 17, 1996
FINANCIAL HIGHLIGHTS
The following financial highlights for the Portfolios have been prepared by the
Trust and are not audited.
Strategic Income High Yield Bond
Institutional Portfolio Institutional Portfolio
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
7-31-96+ 7-31-96+
to to
12-31-96 12-31-96
-------- --------
PER SHARE DATA:
Net asset value, beginning $ 12.50 $ 12.50
of period
Income from investment
operations:
Net investment income 0.39 0.47
Net realized and
unrealized gains on 0.75 0.92
securities
Total from investment 1.14 1.39
operations
Less distributions
Dividends from net 0.39 0.47
investment income
Dividends from capital 0.20 0.26
gains
Net asset value, end of $13.05 $13.16
period
TOTAL RETURN: 9.20% 11.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of $ 3,850 $ 4,392
period
Ratio of expenses to
average net assets, after 0.75% 0.75%
expense reimbursement
Ratio of expenses to
average net assets, before 1.85% 1.64%
expense reimbursement
Ratio of net income to
average net assets, after 7.18%* 8.72%*
expense reimbursement
Ratio of net income to
average net assets, before 6.65%* 8.25%*
expense reimbursement
Portfolio turnover** 154.59% 257.40%
Average commission rate $0.0600 $0.0000
per share**
* Annualized
** For the corresponding Fund of the Master Trust
+ Portfolio commenced operations on July 31, 1996
As of December 31, 1996, Sherryl A. Nicholas, Trustee of Sherryl A.
Nicholas Revocable Trust, held of record more than 25% of each of the Portfolios
and may be deemed to "control" the Portfolios.
<PAGE>
The Investment Adviser's composite performance results on page 43 of
the prospectus are updated through December 31, 1996 as set forth below. See
"Prior Performance of Investment Adviser" for information regarding the
calculation of such results and the related indices referred to below.
Investors should not consider this performance data as an indication of future
performance of either Portfolio or of the Investment Adviser.
<TABLE>
<CAPTION>
High Yield Bond Performance Strategic Income Portfolio
--------------------------- ---------------------------
Lehman
Merrill Bros.
Lynch High First Mortgage First
Investment Lehman Yield Boston Investment Backed Boston
Advisor's Bros. High Master High Yield Adviser's Securities High Yield
Year Composite Yield Index(1) Index(2) Index(3) Composite Index(4) Index(3)
---- --------- -------------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <S> <C>
1994(5) 1.45% 0.95% 0.88% 0.09%
1995 19.40 19.17 19.89 17.36
1996(5,6) 21.87 11.35 11.07 12.42 14.79% 5.36% 12.42%
Since 15.22 11.22 11.25 10.65 14.79 5.36 12.42
Inception(6)
</TABLE>
- ---------------
(1) The Lehman Brothers High Yield Index includes all U.S. domestic fixed
income securities having a maximum quality rating of Ba1 by Moody's
(including defaulted issues), a minimum principal amount outstanding
of $100 million, and a remaining term to maturity of at least one
year, other than payment-in-kind securities and Eurobonds. The Index
reflects the reinvestment of income, if any, but does not reflect
fees, dealer markups, or other expenses of investing.
(2) The Merrill Lynch High Yield Master Index includes all publicly placed
nonconvertible, coupon-bearing U.S. domestic debt securities with a
remaining term to maturity of at least one year, with par amounts
outstanding of at least $10 million at the start and close of the
performance measurement period, other than floating rate debt,
equipment trust certificates and Title 11 securities. Issues must be
rated as less than investment grade by Standard & Poor's or Moody's,
but not in default. The index reflects the reinvestment of income, if
any, but does not reflect fees, dealer markups, or other expenses of
investing.
(3) The First Boston High Yield Index includes over 180 U.S. domestic
issues with an average maturity range of seven to ten years and with a
minimum issue size of $100 million. The Index reflects the
reinvestment of income, if any, but does not reflect fees, dealer
markups, or other expenses of investing.
(4) The Lehman Brothers Mortgage-Backed Securities Index is composed of
all fixed-rate, securitized mortgage pools of GNMA, FNMA and the
FHLMC, including GNMA Graduated Payment Mortgages, with a principal
amount of at least $50 million. The Index reflects the reinvestment
of income, if any, but does not reflect fees, dealer markups, or other
expenses of investing.
(5) Commencement of investment operations is April 1, 1994 for the High
Yield Bond Composite and January 1, 1996 for the Strategic Income
Composite.
(6) Through December 31, 1996.
A Statement of Additional Information for the Portfolios dated
February 11, 1997 has been filed with the Securities and Exchange Commission
and is incorporated by reference into this Prospectus. The Statement may be
obtained, without charge, by writing to the Trust, P.O. Box 82169, San Diego,
California 92138-2169, or by calling (800) 551-8643.
February 11, 1997
<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK-MUTUAL FUNDS
- -------------------------------------------------
INSTITUTIONAL INCOME PORTFOLIOS
PROSPECTUS
Nicholas-Applegate Mutual Funds is an open-end management investment company
comprised of a number of diversified investment portfolios, including the two
portfolios ("Portfolios") offered hereby. The Portfolios are generally offered
to institutional investors, high net worth individuals and participants in
certain mutual fund asset allocation programs.
Each Portfolio, unlike many other investment companies which directly acquire
and manage their own portfolios of securities, seeks to achieve its investment
objective by investing all of its assets in a corresponding series ("Fund") of
Nicholas-Applegate Investment Trust, which has the same objective as the
Portfolio. The Funds in turn invest their assets, including those of the
Portfolios, in portfolio securities. Accordingly, the investment experience of
each Portfolio will correspond directly with the investment experience of the
related Fund. Investors should carefully consider this investment approach. See
"Investment Objectives, Policies and Risk Considerations-- Special
Considerations Regarding Master/Feeder Structure," page 7, for additional
information regarding this unique structure. There can be no assurance that any
Portfolio or Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
High Yield Bond Institutional Portfolio seeks a high level of income and capital
growth. It invests in the Nicholas-Applegate High Yield Bond Fund, which invests
primarily in debt and equity securities, with an emphasis on lower quality debt
securities.
Strategic Income Institutional Portfolio seeks a high level of current income.
It invests in the Nicholas-Applegate Strategic Income Fund, which invests
primarily in convertible, lower quality and mortgage-backed debt securities.
- --------------------------------------------------------------------------------
The Portfolios are designed for investors willing to assume additional risk
in return for seeking high return. Investors should carefully consider the risks
prior to investing.
THE ASSETS OF THE FUNDS MAY BE INVESTED WITHOUT LIMITATION IN DEBT SECURITIES
RATED BELOW INVESTMENT GRADE, SOMETIMES CALLED "JUNK BONDS," WHICH ARE
SPECULATIVE AND INVOLVE GREATER RISKS, INCLUDING RISK OF DEFAULT, THAN
HIGHER-RATED SECURITIES. SEE "APPENDIX: CORPORATE BOND RATINGS."
In addition, the Strategic Income Fund may borrow up to 33 1/3% of the value
of its total assets to buy securities, a speculative technique know as
"leverage" which subjects the Fund to greater risks than Funds that do not
borrow. See "Investment Objectives, Policies and Risk Considerations," page 7.
- --------------------------------------------------------------------------------
Shares of the Portfolios and interests in the Funds are not bank deposits and
are not federally insured by, guaranteed by, obligations of or otherwise
supported by the U.S. Government, the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other governmental agency. Investment in a
Portfolio involves investment risk, including possible loss of the principal
amount invested.
This Prospectus presents information you should know before investing in any
of the Portfolios. It should be retained for future reference. A Statement of
Additional Information for the Portfolios dated July 17, 1996 has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this Prospectus. The Statement may be obtained, without charge, by writing
to the Trust, P.O. Box 82169, San Diego, California 92138-2169, or by calling
(800) 551-8643. Inquiries regarding any of the Portfolios can also be made by
calling (800) 551-8643.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
July 17, 1996
<PAGE>
NICHOLAS--APPLEGATE MUTUAL FUNDS
- -------------------------------------------------
INSTITUTIONAL INCOME PORTFOLIOS
High Yield Bond Institutional Portfolio
Strategic Income Institutional Portfolio
Table of Contents
Summary of Expenses................................................ 3
Prospectus Summary................................................. 4
Investment Objectives, Policies and Risk Considerations............ 7
Organization and Management........................................13
Purchasing Shares..................................................15
Investor Services..................................................17
Redeeming Shares...................................................19
Dividends, Distributions and Taxes.................................20
General Information................................................21
Appendix:
Investment Policies, Strategies
and Risks.......................................................23
Corporate Bond Ratings...........................................40
Prior Performance of Investment
Adviser.........................................................42
- --------------------------------------------
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Portfolios or the Distributor. This Prospectus
does not constitute an offer by the Portfolios or the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in each of
the Portfolios. These are based on the estimated expenses of each Portfolio for
its first year of operations, and because each Portfolio invests all of its
assets in a corresponding Fund, each Portfolio's expenses include its
proportionate share of the operating expenses of the corresponding Fund. Actual
expenses may be more or less than those shown.
<TABLE>
<CAPTION>
STRATEGIC
HIGH YIELD INCOME
BOND PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases (as a percentage
of offering price) None None
Sales charge on reinvested dividends None None
Deferred sales charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) None None
Redemption fee None None
Exchange fee None None
- -----------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES AS A
PERCENTAGE OF AVERAGE NET ASSETS:
(after expense deferral)(1)
Management fees 0.60% 0.60%
All other expenses (after expense deferral)(1) 0.15% 0.15%
Total operating expenses (after expense
deferral)(1) 0.75% 0.75%
</TABLE>
The Board of Trustees of the Trust believes that the aggregate per share
expenses of each Portfolio are no greater than the expenses that the Portfolio
would incur if it retained the services of an investment adviser and the assets
of the Portfolio were invested directly in the types of securities held by the
corresponding Fund. For a detailed description of the expenses of the Portfolios
and the Funds in which they invest, see "Organization and Management."
- ---------------------------
(1)
The Investment Adviser of the Master Trust has agreed to waive or defer its
management fees payable by the Funds, and to absorb other operating expenses
payable by the Funds and the Portfolios, to ensure that the expenses for each
Portfolio (other than interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital expenditures and extraordinary
expenses) will not exceed the following respective percentage of such
Portfolio's average net assets on an annual basis: High Yield Bond-0.75%;
Strategic Income-0.75%. In subsequent years, overall operating expenses for
each Portfolio will not fall below the applicable percentage limitation until
the Investment Adviser has fully recouped fees deferred or expenses paid by the
Investment Adviser under this agreement, as each Portfolio will reimburse the
Investment Adviser when operating expenses (before recoupment) for the
Portfolio are less than the applicable percentage limitation set forth above.
Accordingly, until all such deferred fees or expenses have been recouped by the
Investment Adviser, the Portfolio's expenses will be higher, and their yields
will be lower, than would otherwise be the case. See "Organization and
Management--Expense Limitation." Actual operating expenses for the Portfolios
for the fiscal year ended March 31, 1997 are estimated to be the following
respective percentages of such Portfolios' average net assets (annualized):
High Yield Bond-1.70%; Strategic Income-1.70%. The various operating expenses
of the Portfolios are further described under "Organization and Management."
Example of Portfolio Expenses. The following table illustrates the expenses that
an investor would pay on a hypothetical $1,000 investment in each of the
Portfolios over various time periods, assuming (1) a 5% annual return and (2)
redemption at the end of each time period. The Portfolios charge no redemption
fees.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
- -----------------------------------------------------------------------------------------
High Yield Bond Portfolio $ 8 $ 24
Strategic Income Portfolio $ 8 $ 24
</TABLE>
This Example assumes that all dividends and other distributions are reinvested
and that the percentage amounts listed under the heading "Annual Portfolio
Operating Expenses" in the fee table above remain the same in the years shown.
The Example should not be considered a representation of past or future
expenses, and a Portfolio's actual expenses may be more or less than those
shown. The hypothetical 5% annual return is used for illustrative purposes only
and should not be interpreted as an estimate of a Portfolio's annual return, as
there can be no guarantee of a Portfolio's future performance.
3
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment portfolios,
including the two Institutional Portfolios ("Portfolios") offered hereby. The
Portfolios are generally offered to institutional investors, high net worth
individuals and participants in certain mutual fund asset allocation programs.
Investment Objectives. The investment objectives of the Portfolios are described
on the front cover of this Prospectus. There can be no assurance that either
Portfolio will achieve its investment objectives. See "Investment Objectives,
Policies and Risk Considerations" and "Appendix: Investment Policies, Strategies
and Risks."
Master/Feeder Structure. The Portfolios seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
("Funds") of Nicholas-Applegate Investment Trust (the "Master Trust"), a
diversified, open-end management investment company. The Funds have the same
investment objectives as the Portfolios which invest in them. The Funds, in
turn, hold investment securities. Although the "master/feeder" structure
employed by the Portfolios to achieve their investment objectives could provide
certain efficiencies and economies of scale, it could also have potential
adverse effects such as those resulting from large-scale redemptions by other
investors of their interests in the Funds, or from the failure by investors of a
Portfolio to approve a change in investment objectives and policies that has
been approved by the investors of the corresponding Fund. There may also be
other investment companies through which you can invest in the Funds which may
have higher or lower fees and expenses than those of the Portfolios. See
"Investment Objectives, Policies and Risk Considerations-Special Considerations
Regarding Master/Feeder Structure."
A Portfolio may cease investing in a corresponding Fund only if the Trust's
Board of Trustees determines that this is in the best interests of the Portfolio
and its investors, and only with the approval of the Portfolio's investors. In
such event the Board of Trustees would consider alternative arrangements such as
investing all of the Portfolio's assets in another investment company with the
same investment objective as the Portfolio or hiring an investment adviser to
manage the Portfolio's assets in accordance with the Portfolio's investment
policies. No assurance exists that satisfactory alternative arrangements would
be available.
Investment Risks and Considerations. Investment risks and other considerations
relevant to the securities in which the Portfolios invest through corresponding
Funds are described under "Investment Objectives, Policies and Risk
Considerations" and in the Appendix-Investment Policies, Strategies and Risks.
The Portfolios may be appropriate for long-term aggressive investors who
understand the potential risks and rewards of the securities in which the Funds
invest. To achieve these potential rewards, investors must be willing to accept
the Portfolios' greater price movements and risks. These risks include the
following:
Yields on debt obligations depend on a variety of factors, including the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt obligations with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt obligations vary
depending on available yields. An increase in interest rates will generally
reduce the value of such portfolio investments, and a decline in interest rates
will generally increase the value of such portfolio investments.
4
<PAGE>
The ability of a Fund to achieve its investment objective also depends on the
continuing ability of the issuers of the debt securities in which it invests to
meet their obligations for the payment of interest and principal when due. Each
of the Funds is permitted to invest without limitation in convertible and debt
securities rated below investment grade, or in comparable unrated securities.
Such securities, commonly referred to as "junk bonds," are speculative and
subject to greater market fluctuations and risk of loss of income and principal
than higher rated bonds. In addition, each Fund may invest in equity securities
of such companies. As a result, the Portfolios' share prices may be volatile.
See "Appendix: Investment Policies, Strategies and Risks" and "Corporate Bond
Ratings" for a description of these securities and ratings.
The Strategic Income Fund may borrow up to 33 1/3% of the value of its total
assets from banks to buy securities. This speculative investment technique,
known as "leverage," may subject the Fund to various risks, including the
possibility that the Portfolio's net asset value per share will fluctuate more
than the net asset value of funds which do not borrow.
Each of the Funds is permitted to invest up to 50% of its net assets in zero
coupon securities, which may be subject to greater volatility as a result of
changes in prevailing interest rates than other debt securities.
Investments by the Funds in securities of foreign companies and governments
involve special risks in addition to the usual risks inherent in domestic
investments, including political or economic instability in the country of
issue, the possible imposition of exchange controls or other laws or
restrictions and fluctuations of foreign exchange rates. Settlement of
transactions in foreign markets may be delayed or less frequent than in the
U.S., and foreign governments may withhold taxes from dividends and interest
paid on securities held by the Funds. There is also likely to be less
publicly available information about certain foreign issuers than is
available about U.S. companies, and foreign companies are not generally
subject to uniform financial reporting standards comparable to those
applicable to U.S. companies. In addition, investment in emerging markets
involves greater risks than other foreign investments, including
less-developed economic and legal structures; less stable political systems;
illiquid securities markets; possible expropriations, nationalization or
confiscatory taxation; and possible foreign currency devaluations and
fluctuations.
Each of the Funds may purchase or write put and call options with respect to
debt securities, currencies and broadly-based indexes; effect transactions in
financial and currency futures contracts, and options on futures contracts;
enter into swap transactions; and engage in currency hedging transactions.
Although the Funds will generally enter into such transactions for hedging
purposes, the Strategic Income Fund may also enter into such transactions to
enhance potential gain; however, the Fund's net loss exposure resulting from
non-hedging transactions will not exceed 5% of its net assets at any time. These
are derivative instruments, whose value derives from the value of an underlying
security or index. Risks associated with the use of such instruments include the
possibility that the Investment Adviser's forecasts of interest rates, currency
rates of exchange and other factors are not correct; imperfect correlation
between the Fund's hedging technique and the asset or liability being hedged;
default by the other party to the transaction; and inability to close out a
position because of the lack of a liquid market. Investment in such derivative
instruments may not be successful, and may reduce the returns and increase the
volatility of the Funds. See "Appendix: Investment Policies, Strategies and
Risks" in this Prospectus and "Investment Objectives, Policies and Risks" in the
Statement of Additional Information.
The Funds may invest in equity securities, including common stocks, preferred
stocks, convertible equity securities and warrants, without regard to the size
or market capitalization of
5
<PAGE>
the companies issuing such securities. Although equity securities have a history
of long-term growth in value, these prices fluctuate based on changes in the
issuer's financial condition and on overall market and economic conditions. The
equity securities of smaller companies in which the Funds may invest are subject
to more volatile market movements than securities of larger, more established
companies because the issuers are typically more subject to changes in earnings
and prospects.
Each Fund may engage in short sales, which theoretically involve unlimited loss
potential and may be considered a speculative technique. See the description of
the risks of short sales under "Short Sales" in "Appendix: Investment Policies,
Strategies and Risks".
Each Fund may invest up to 15% of its net assets in illiquid securities. Each
Fund may enter into repurchase agreements and lend its portfolio securities,
which involve the risk of loss upon the default of the seller or borrower. The
Funds may also enter into reverse repurchase agreements and borrow money from
banks for temporary purposes which, among other things, may require the Funds to
sell portfolio securities to meet interest and principal payments at an
unfavorable time. See "Appendix: Investment Policies, Strategies and Risks."
The Funds commenced operation on the date of this Prospectus and have no
operating history.
Investment Adviser. The Trust has not retained the services of an investment
adviser for the Portfolios, as the Portfolios seek to achieve their investment
objectives by investing all of their assets in corresponding Funds.
Nicholas-Applegate Capital Management (the "Investment Adviser") serves as
investment adviser to the Funds. The Investment Adviser has been in the
investment advisory business since 1984 and currently manages approximately $30
billion of discretionary assets (including more than $12 billion of fixed income
securities) for numerous clients, including employee benefit plans of
corporations, public retirement systems and unions, university endowments,
foundations and other institutional investors, and individuals.
The Investment Adviser is compensated for its services to the Funds in the form
of monthly fees at the following annual rates: for the High Yield Bond Fund,
0.625% of Fund's average net assets; for the Strategic Income Fund, 0.625% of
the Fund's average net assets. See "Organization and Management."
Distributor. Nicholas-Applegate Securities (the "Distributor"), an affiliate of
the Investment Adviser, serves as distributor of shares of the Portfolios. The
Portfolios pay no distribution or other fees to the Distributor in connection
with services it provides.
Administrator, Transfer Agent and Custodian. Investment Company Administration
Corporation (the "Administrator") is the administrator for the Trust, with
responsibility for managing the daily business operations of the Portfolios,
subject to the supervision of the Trust's Board of Trustees. It also acts as
administrator for the Master Trust. PNC Bank (the "Custodian") is the custodian
for the Trust and the Master Trust, and State Street Bank and Trust Company (the
"Transfer Agent") is the transfer and dividend disbursing agent for the Trust.
Purchase of Shares. Shares of the Portfolios are generally offered to
institutional investors, high net worth individuals, and participants in certain
mutual fund asset allocation programs. Purchases may be made by check or by
wiring federal funds to the Transfer Agent. Shares are purchased at the next
offering price without any sales charge, after an order is received in proper
form by the Transfer Agent. The minimum initial investment is $250,000 and the
minimum subsequent investment is $10,000. The minimum initial and subsequent
investments are waived for individual participants of qualified retirement plans
and for certain
6
<PAGE>
others, and may be waived from time to time by the Distributor for other
investors. Shares of a Portfolio may also be purchased with securities which are
otherwise appropriate for investment by the Portfolio. See "Purchasing Shares."
Investor Services. The following services are provided to investors of a
Portfolio for their convenience and flexibility: an automatic investment plan;
automatic reinvestment and cross-reinvestment of dividends and capital gains
distributions; an exchange privilege; and automatic withdrawals. See "Investor
Services." Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
Redeeming Shares. Shares of the Portfolios may be redeemed by writing to the
Transfer Agent or by telephone if telephone redemption privileges have been
established. Redemption proceeds will be wired to your bank. Participants of
qualified retirement plans must make redemption requests to the plan sponsor or
administrator. The price received for Portfolio shares redeemed is at the next
determined net asset value after the request is received by the Transfer Agent,
which may be more or less than the purchase price. No contingent deferred sales
charge or other fee is imposed on redemptions. See "Redeeming Shares."
Dividends, Distributions and Taxes. The Portfolios declare and pay monthly
dividends. The Portfolios make distributions at least annually of any net
capital gains. All dividends and distributions will be paid in the form of
additional shares at net asset value unless cash payment is requested.
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INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The investment objectives, policies and risks of each Portfolio are discussed
below and in the "Appendix: Investment Policies, Strategies and Risks".
Special Considerations Regarding Master/Feeder Structure. The Portfolios seek to
achieve their investment objectives by investing all of their assets in
corresponding Funds, which have the same objectives as the Portfolios. The
Funds, in turn, hold investment securities. Accordingly, the investment
experience of each Portfolio will correspond directly with the investment
experience of the related Fund. For a description of the Funds' objectives,
policies, restrictions, management and expenses, see "Investment Objectives,
Policies and Risk Considerations" below, the Appendix and "Organization and
Management." There can be no assurance that any Portfolio or Fund will achieve
its investment objective. Each Portfolio's and Fund's investment objective is a
fundamental policy which may not be changed without the approval of the holders
of a majority of the outstanding shares of the Portfolio or Fund, respectively,
as defined in the Investment Company Act of 1940 (the "Investment Company Act").
Upon any such approval, each Portfolio will provide at least 30 days' written
notice to its investors before any change is made to its or the corresponding
Fund's investment objective.
There are certain risks to the Portfolios related to the use of the
"master/feeder" structure. Such risks include, but are not limited to, the
following: Large-scale redemptions by other investment companies of their
interests in the corresponding Funds, could have adverse effects, such as lack
of portfolio diversity and decreased economies of scale, and could result in the
shareholders of a Portfolio, as the remaining investor in the Fund, bearing all
the operating costs of the Fund and thus experiencing higher pro rata operating
expenses and lower returns than would otherwise be the case. In addition, the
total withdrawal by another investment company as an investor in a Fund will
cause the Fund to terminate automatically in 120 days,
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unless the corresponding Portfolio and any other investors in the Fund
unanimously agree to continue the business of the Fund. As the Portfolio is
required to submit such matters to a vote of its shareholders, it will be
required to incur the expenses of shareholder meetings in connection with such
withdrawals. If unanimous agreement is not reached to continue the Fund, the
Board of Trustees of the Trust would need to consider alternative arrangements
for the Portfolio, including investing all of the Portfolio's assets in another
investment company with the same investment objective as the Portfolio or hiring
an investment adviser to manage the Portfolio's assets in accordance with the
investment policies described below and in "Appendix: Investment Policies,
Strategies and Risks." The absence of substantial experience with the
master/feeder structure could result in accounting or other difficulties.
Failure by investors of a Portfolio to approve a change in the investment
objective and policies of a Portfolio parallel to a change that has been
approved by the investors of the corresponding Fund would require the Portfolio
to redeem its shares of the Fund; this could result in a distribution in kind to
the Portfolio of the portfolio securities of the Fund (rather than a cash
distribution), causing the Portfolio to incur brokerage fees or other
transaction costs in converting such securities to cash, reducing the
diversification of the Portfolio's investments and adversely affecting its
liquidity. Other shareholders in the Funds may have a greater ownership interest
in the Funds than the Portfolios' interest, and could thus have effective voting
control over the operation of the Funds.
The Trust's Board of Trustees believes that the Portfolios will achieve certain
efficiencies and economies of scale through the "master/feeder" structure, and
that the aggregate expenses of the Portfolios will be less than if the
Portfolios invested directly in the securities held by the Funds. However, other
investment companies that offer their shares to the public also may invest all
or substantially all of their assets in the Funds. Accordingly, there may be
other investment companies through which investors can invest indirectly in the
Funds. The fees charged by such other investment companies may be higher or
lower than those charged by the Portfolios, which may reflect, among other
things, differences in the nature and level of the services and features offered
by such companies to their investors. Information about the availability of
other investment companies that invest in the Funds can be obtained by calling
(800) 551-8643.
A Portfolio may cease investing in a corresponding Fund only if the Board of
Trustees of the Trust determines that such action is in the best interests of
the Portfolio and its investors, and only with the approval of the Portfolio's
investors. In that event, the Board of Trustees would consider alternative
arrangements, including investing all of the Portfolio's assets in another
investment company with the same investment objective as the Portfolio or hiring
an investment adviser to manage the Portfolio's assets in accordance with the
investment policies described below and in "Appendix: Investment Policies,
Strategies and Risks."
High Yield Bond Portfolio. The High Yield Bond Portfolio seeks a high level of
income and capital growth. It invests all of its assets in the
Nicholas-Applegate High Yield Bond Fund, which has the same investment objective
as the High Yield Bond Portfolio.
The High Yield Bond Fund invests primarily in domestic and foreign debt
instruments, convertible securities, and common and preferred stocks. The Fund
has broad flexibility to invest in instruments of any type or quality, but the
Investment Adviser expects to invest principally in debt instruments and
convertible securities with an emphasis on lower-quality securities. Convertible
securities are bonds, debentures, corporate notes or preferred stocks which pay
interest or dividends and which may be converted into common stock at the option
of the holder.
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The High Yield Bond Fund may invest in a broad range of fixed-income securities
denominated in U.S. dollar and foreign currencies, including bonds, notes,
mortgage-backed securities and other real estate-related instruments,
asset-backed securities, and direct debt instruments, issued by U.S. and foreign
corporations or other entities, and sovereign debt securities of U.S. or foreign
governments or their agencies, authorities, instrumentalities or sponsored
enterprises. The Fund may purchase securities that pay interest on a fixed,
variable, floating or deferred basis. Under normal market conditions, at least
65% of the Fund's total assets will be invested in high-yield bonds (i.e., high
yield debt instruments with initial maturities of one year or more). The Fund is
not constrained as to the maximum maturity of its portfolio securities. The High
Yield Bond Fund may invest without limitation in debt securities rated below
investment grade or in unrated securities of comparable quality if the
Investment Adviser believes that the financial condition of the issuer or the
protection afforded to the particular securities is stronger than would
otherwise be indicated by such low ratings or the lack thereof. These debt
securities, commonly referred to as "junk bonds," are speculative and subject to
greater risk of loss of income and principal than higher rated securities, and
may be in default at the time they are purchased by the Fund. As a result, their
market prices tend to fluctuate more than higher-quality securities. The default
rate of lower-quality debt securities is likely to be higher when issuers have
difficulty meeting projected goals or obtaining additional financing, which
could occur during economic recessions or periods of high interest rates. They
may be thinly traded, making them difficult to sell promptly at an acceptable
price. Negative publicity or investor perceptions may make valuing such
securities difficult, and could hurt the Fund's ability to dispose of them. See
"Appendix: Investment Policies, Strategies and Risks" for a description of junk
bonds.
The High Yield Bond Fund may invest a portion of its assets (no more than 35% of
its total assets) in equity securities of U.S. and foreign companies. Such
companies may be in the earlier stages of development, growth companies,
cyclical companies or companies believed to be undergoing a basic change in
operations or markets which, in the opinion of the Investment Adviser, would
result in a significant improvement in earnings. The securities of such
companies may be subject to more volatile market movements than securities of
larger, more established companies. Although the Fund is not restricted in
investments in companies of any particular size, it currently intends to invest
principally in companies with capitalizations of at least $100 million at the
time of purchase. See "Appendix: Investment Policies, Strategies and Risks" for
a discussion of the risks associated with investment in such companies.
The High Yield Bond Fund may invest in securities issued by companies based or
operating in any country, including the United States. The Fund is not driven by
allocation considerations with respect to any particular countries, geographic
regions or economic sectors. The Investment Adviser currently selects its
portfolio securities from an investment universe of approximately 9,000 U.S.
companies and 12,000 foreign issuers in the 20 largest international markets.
Foreign countries in which investment opportunities will be sought include
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong
Kong, Italy, Japan, Malaysia, the Netherlands, New Zealand, Norway, Singapore,
Spain, Sweden, Switzerland, the United Kingdom and the United States. However,
the Fund may also invest in securities issued by companies based in other
countries such as the countries of Eastern Europe and South America, Indonesia,
Korea, Mexico, the Philippines, Portugal and Thailand. The Fund may also invest
up to 10% of its total assets in closed-end country funds. An investment in such
funds may result in duplication of fees. See "Appendix: Investment Policies,
Strategies and Risks" for a discussion of the risks associated with investment
in foreign securities and emerging market countries.
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When investing in foreign securities, the High-Yield Bond Fund intends to invest
principally in foreign securities that are listed on a bona fide securities
exchange or are actively traded in an over-the-counter market (either within or
outside the issuer's domicile country). The Fund will not invest in securities
denominated in a foreign currency unless, at the time of investment, such
currency is considered by the Investment Adviser to be fully exchangeable into
United States dollars without significant legal restriction. The Fund may
purchase securities issued by the government of, or a company located in, one
nation but denominated in the currency of another nation (or in a multinational
currency unit).
The Fund may acquire over-the-counter and illiquid securities, and may utilize
techniques such as when-issued securities and firm commitment agreements,
forward roll transactions, swap transactions, futures contracts, short sales,
securities lending, and borrowing. See "Appendix: Investment Policies,
Strategies and Risks" and the Statement of Additional Information for a
description of the Fund's investment securities and techniques.
The High Yield Bond Fund may adopt a temporary defensive position during adverse
market conditions by investing principally in high quality money market
instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements, and high quality
preferred stocks.
Strategic Income Portfolio. The Strategic Income Portfolio seeks a high level of
current income. It invests all of its assets in the Nicholas-Applegate Strategic
Income Fund, which has the same investment objective as the Strategic Income
Portfolio.
The Strategic Income Fund invests principally in three domestic and foreign
market sectors: convertible securities; lower-rated, high yield debt securities;
and mortgage-backed securities, including collateralized mortgage obligations.
Under normal market conditions, the Fund will invest in each of these three
sectors, but from time to time the Investment Adviser will adjust the amounts
the Fund invests in each sector. By investing in all three sectors, the Fund
seeks to reduce the volatility of fluctuations in its net asset value per share,
because the overall securities price and interest rate movements in each of the
sectors are not necessarily correlated with each other. Changes in one sector
may be offset by changes in another sector that moves in a different direction.
However, the Fund may invest up to 100% of its assets in any one sector if the
Investment Adviser believes that in doing so the Fund can achieve its objective
without undue risk.
The Strategic Income Fund may invest in a broad range of fixed-income
securities, including bonds, notes, and mortgage-backed securities, asset-backed
securities, and direct debt instruments, issued by domestic and foreign
corporations and other entities, and sovereign debt securities of U.S. and
foreign governments or their agencies, authorities, instrumentalities or
sponsored enterprises. The Fund may purchase securities that pay interest on a
fixed, variable, or floating basis. The Fund will acquire listed or actively
traded securities of foreign issuers which are denominated in foreign currencies
considered to fully exchangeable into U.S. dollars, in the same manner as
described above for the High Yield Bond Fund. The average maturity of the Fund's
portfolio will be adjusted as the Investment Adviser determines market
conditions warrant. The Fund is not constrained as to the maturity of its
individual portfolio securities or its overall portfolio.
The Strategic Income Fund may invest without limitation in debt securities rated
below investment grade or in unrated securities of comparable quality if the
Investment Adviser believes that the financial condition of the issuer or the
protection afforded to the particular
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securities is stronger than would otherwise be indicated by such low ratings or
the lack thereof. These debt securities, commonly referred to as "junk bonds,"
are speculative and subject to greater risk of loss of income and principal than
higher rated securities, and may be in default at the time they are purchased by
the Fund. See "High Yield Bond Fund" above and "Appendix: Investment Policies,
Strategies and Risks" for a description of junk bonds.
Under normal market conditions, at least 65% of the Fund's total assets will be
invested in the income producing securities described above. The Strategic
Income Fund may also invest a portion of its assets (no more than 35% of its
total assets) in equity securities of U.S. and foreign companies. See "High
Yield Bond Fund" above and "Appendix: Investment Policies, Strategies and Risks"
for a description of such securities.
The Strategic Income Fund may acquire over-the-counter and illiquid securities,
and may utilize techniques such as when-issued securities and firm commitment
agreements, forward roll transactions, put and call options on securities, swap
transactions, futures contracts and options, securities lending, and borrowing.
See "Appendix: Investment Policies, Strategies and Risks" and the Statement of
Additional Information for a description of the Fund's investment securities and
techniques.
The Strategic Income Fund may adopt a temporary defensive position during
adverse market conditions by investing principally in high quality money market
instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
Investment Techniques and Processes. The decision to invest assets of a Fund in
any particular debt security will be based on such factors as the Investment
Adviser's analysis of the effect of the yield to maturity of the security on the
average yield to maturity of the total debt security portfolio of the Fund, the
Investment Adviser's assessment of the credit quality of the issuer and other
factors the Investment Adviser deems relevant. In order to achieve the Fund's
investment objectives, the Investment Adviser will seek to add value by moving
portfolio investments among market sectors (e.g., U.S. Treasury securities,
corporate securities and mortgage-backed securities), positioning investments in
the most attractive maturities along the yield curve, selecting undervalued
investments in order to take advantage of lower prices and higher yields, and
varying the average maturity of the Fund's portfolio to reflect interest rate
forecasts. There can be no assurance that use of these techniques will be
successful.
The focus of the Investment Adviser's equity investment program is growth over
time-Registered Trademark-. In making decisions with respect to equity
securities for the Funds, the Investment Adviser uses a proprietary investment
methodology which is designed to capture positive change at an early stage. It
adheres rigorously to this methodology, and applies it to various segments of
the capital markets, domestically and internationally. This methodology consists
of investment techniques and processes designed to identify companies with
attractive earnings and dividend growth potential and to evaluate their
investment prospects. These techniques and processes include relationships with
an extensive network of brokerage and research firms located throughout the
world; computer-assisted fundamental analysis of thousands of domestic and
foreign companies; established criteria for the purchase and sale of individual
securities; portfolio structuring and rebalancing guidelines; securities trading
techniques; and continual monitoring and reevaluation of all holdings with a
view to maintaining the most attractive mix of investments. The Investment
Adviser collects data on approximately 26,000 companies in 35 countries
(adjusting for reporting and accounting differences). There can be no assurance
that use of this proprietary investment methodology will be successful.
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Investment Policies, Strategies and Risks. The Appendix and Statement of
Additional Information describe certain investment securities and techniques of
the Funds, and the associated risks. These include short-term investments in
cash and cash equivalents; investment in securities issued or guaranteed by the
U.S. Government or its agencies and instrumentalities; commercial paper of
domestic and foreign entities; municipal securities; zero coupon securities;
floating and variable rate demand notes and bonds; commercial paper; non-
convertible corporate debt securities; convertible securities, synthetic
convertible securities, and warrants; Eurodollar and Yankee Dollar instruments;
depository receipts; index and currency-linked securities; mortgage-backed
securities; other real estate-related instruments; asset-backed securities;
foreign securities; over-the-counter securities; when-issued and firm commitment
agreements; short sales; roll transactions; foreign exchange contracts; put and
call options; futures contracts and related options; interest rate and currency
swaps; repurchase agreements; and reverse repurchase requirements; illiquid
securities; securities lending; and borrowing.
Investment Restrictions. Each Portfolio and Fund is subject to certain
investment restrictions which constitute fundamental policies. Fundamental
policies may not be changed without the approval of the holders of a majority of
the outstanding shares of the affected Portfolio or Fund, respectively, as
defined in the Investment Company Act. An investment policy or restriction which
is not described as fundamental in this Prospectus or the Statement of
Additional Information may be changed or modified by the Board of Trustees of
the Trust or Master Trust, as the case may be, without shareholder approval.
The investment objective of each Fund and Portfolio is a fundamental policy.
Certain of the investment restrictions which are fundamental policies are set
forth below. Additional investment restrictions are discussed in the Appendix
and Statement of Additional Information.
1. No Portfolio or Fund may invest more than 5% of its total assets in the
securities of any one issuer. However, up to 25% of a Portfolio's or
Fund's total assets may be invested without regard to this limitation, and
this limitation does not apply to investments in securities of the U.S.
Government or its agencies and instrumentalities.
2. No Portfolio or Fund may purchase more than 10% of the outstanding voting
securities of any one issuer, or purchase the securities of any issuer for
the purpose of exercising control.
3. No Portfolio or Fund may invest 25% or more of its total assets in any one
particular industry; however, this restriction does not apply to the
securities of the U.S. Government, its agencies and instrumentalities.
4. No Portfolio or Fund may make loans of its portfolio securities in an
aggregate amount exceeding 30% of the value of its total assets.
5. The High Yield Bond Portfolio or Fund may not borrow money except from
banks for temporary, extraordinary or emergency purposes or for the
clearance of transactions and in an aggregate amount not exceeding 20% of
the value of its total assets. The Strategic Income Portfolio or Fund may
borrow up to 50% of the value of its net assets from banks for such
purposes or to buy securities.
6. No Portfolio or Fund may invest more than 15% of its net assets in
illiquid securities.
The investment restrictions described above do not apply to an investment by a
Portfolio of all of its assets in a corresponding Fund.
Portfolio Turnover. The Investment Adviser's investment approach results in
above-average portfolio turnover for each Fund as the Investment Adviser sells
portfolio securities when it
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believes the reasons for their initial purchase are no longer valid or when it
believes that the sale of a security owned by a Fund and the purchase of another
security of better value can enhance principal or increase income. A security
may also be sold to avoid a prospective decline in market value or purchased in
anticipation of a market rise. Although it is not possible to predict future
portfolio turnover rates accurately, and such rates may vary greatly from year
to year, the Investment Adviser anticipates that the annual portfolio turnover
rate for each Fund may be up to 300%, which is substantially greater than that
of many other investment companies. A high rate of portfolio turnover (100% or
more) will result in a Fund paying greater brokerage commissions on equity
securities (other than those effected with dealers on a principal basis) than
would otherwise be the case, which will be borne directly by the Fund and by
investors of the corresponding Portfolio. High Portfolio turnover should not
result in either Fund paying greater brokerage commission expense on debt
securities, as most transactions in debt securities are effected with dealers on
a principal basis. However, debt securities, as well as equity securities traded
on a principal basis, are subject to a mark-up by the dealers. High portfolio
turnover (100% or more) may also result in the realization of substantial net
capital gains, and any distributions derived from such gains may be ordinary
income for federal tax purposes.
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ORGANIZATION AND MANAGEMENT
Organization. Each Portfolio is a series of Nicholas-Applegate Mutual Funds, a
Delaware business trust. The Board of Trustees of the Trust, in addition to
reviewing the actions of the Trust's Administrator and Distributor, as set forth
below, decides upon matters of general policy with respect to each Portfolio.
See "General Information". The trustees and officers of the Trust and of the
Master Trust are described in the Statement of Additional Information. None of
the disinterested trustees of the Trust are the same individuals as the
disinterested trustees of the Master Trust.
Investment Adviser. The Trust has not retained the services of an investment
adviser for the Portfolios, as the Portfolios seek to achieve their investment
objectives by investing all of their assets in corresponding Funds.
Nicholas-Applegate Capital Management, 600 West Broadway, 30th Floor, San Diego,
California 92101, serves as the Investment Adviser to the Funds. The Investment
Adviser currently manages approximately $30 billion of discretionary assets
(including over $12 billion of fixed income assets) for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations and other institutional investors,
and individuals. The Investment Adviser was organized in 1984 as a California
limited partnership. Its general partner is Nicholas-Applegate Capital
Management Holdings, L.P., a California limited partnership controlled by Arthur
E. Nicholas. He and 13 other partners manage a staff of approximately 325
employees.
As compensation for the services it provides, the Investment Adviser receives a
monthly fee at the following annual rates: for the High Yield Bond Fund, 0.60%
of the Fund's average net assets; for the Strategic Income Fund, 0.60% of the
Fund's average net assets.
The Funds are managed under the general supervision of John D. Wylie, the Chief
Investment Officer-Investor Services Group of the Investment Adviser. The
Investment Adviser's fixed income management team headed by Fred S. Robertson
III, the Chief Investment Officer -- Fixed Income of the Investment Adviser,
will be primarily responsible for the Investment Adviser's day-to-day management
of the Funds' portfolios. Mr. Robertson has managed institutional accounts for
the Investment Adviser since May 1995; for more than five years
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prior to May 1995, he managed institutional accounts for Criterion Investment
Management Company, which was acquired by the Investment Adviser at that time.
Mr. Wylie has managed institutional accounts for the Investment Adviser for more
than the last five years.
For historical performance information regarding institutional accounts managed
by the Investment Adviser that have investment objectives, policies, strategies
and risks substantially similar to those of the Portfolios, see "Appendix: Prior
Performance of Investment Adviser."
Administrator. Investment Company Administration Corporation, a Delaware
corporation, is the Administrator of each Portfolio. Pursuant to an
Administration Agreement with the Trust, and subject to the supervision of the
Board of Trustees of the Trust, the Administrator supervises the overall
administration of the Trust. Its responsibilities include preparing and filing
all documents required for compliance by the Trust with applicable laws and
regulations, arranging for the maintenance of books and records of the Trust and
supervision of other organizations that provide services to the Trust. Certain
officers of the Trust are also provided by the Administrator. For the services
it provides to the Trust, the Administrator receives an annual fee of between
$5,000 and $35,000 for each of the groups of portfolios of the Trust investing
in the various series of the Master Trust; the fee is allocated among various
series of the Trust, including the Portfolios, in accordance with relative net
asset values. The Administrator provides similar services as the administrator
of the Master Trust, subject to the supervision of its Board of Trustees, and is
compensated separately for the services rendered to each Fund at an annual rate
of approximately 0.015% of the average daily net assets of the Fund.
Expense Limitation. To limit the expenses of each Portfolio, the Investment
Adviser has agreed to defer its management fees payable by the Funds, and to
absorb the other operating expenses payable by the Funds and the Portfolios, to
ensure that the expenses of each Portfolio (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures and
extraordinary expenses, but including such Portfolio's proportionate share of
the corresponding Fund's similar operating expenses) do not exceed the following
respective percentage of such Portfolio's average net assets on an annual basis
or any lower expense limitation imposed by any state during any fiscal period:
High Yield Bond Fund-- 0.75%; Strategic Income Fund--0.75%. Each Portfolio will
reimburse the Investment Adviser for fees deferred or other expenses paid by the
Investment Adviser pursuant to this agreement in later years in which operating
expenses for the Portfolio are less than the applicable percentage limitation
set forth above for any such year. No interest, carrying or finance charge will
be paid by a Portfolio with respect to any amounts representing fees deferred or
other expenses paid by the Investment Adviser. In addition, no Portfolio or Fund
will be required to repay any unreimbursed amounts to the Investment Adviser
upon termination or non-renewal of its Investment Advisory Agreement with the
Master Trust.
Distributor. Nicholas-Applegate Securities, 600 West Broadway, 30th Floor, San
Diego, California 92101, a California limited partnership, serves as the
Distributor of shares of each Portfolio. The general partner of the Distributor
is Nicholas-Applegate Capital Management Holdings, L.P. and its limited partner
is the Investment Adviser.
Custodian and Transfer and Dividend Disbursing Agent. PNC Bank, Airport Business
Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania, 19113,
serves as Custodian for the Portfolios and the Funds. PFPC Inc., an affiliate of
the Custodian, provides accounting services to the Portfolios and the Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171, is the Transfer Agent and the Dividend Disbursing Agent for
the Portfolios.
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Portfolio Transactions and Brokerage. The Investment Adviser is responsible for
the Funds' portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser seeks to obtain the best
price and execution for the Funds. Subject to obtaining the best price and
execution, the Investment Adviser may effect transactions through brokers who
sell shares of the Portfolios or provide research services to the Investment
Adviser.
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PURCHASING SHARES
How to Purchase Shares. Shares of the Portfolios are offered to institutional
investors, high net worth individuals and participants in mutual fund asset
allocation programs sponsored by certain broker-dealers. Shares of the
Portfolios are also offered to former limited partners and participants of
certain investment partnerships and pooled trusts previously managed by the
Investment Adviser (the "former partners"); to partners, officers and employees
of the Investment Adviser and Distributor and their immediate family members; to
trustees and officers of the Trust and the Master Trust and their immediate
family members; and to certain other persons determined from time to time by the
Distributor.
Investments by individual participants of qualified retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
all orders for the purchase, redemption and exchange of Portfolio shares. The
availability of an investment by a plan participant in the Portfolios, and the
procedures for investing, depend upon the provisions of the qualified retirement
plan and whether the plan sponsor or administrator has contracted with the Trust
or the Transfer Agent for special processing services, including subaccounting.
Other institutional investors and eligible purchasers must arrange for services
through the Transfer Agent or Distributor by calling (800) 551-8043.
Shares of the Portfolios may be purchased at net asset value without a sales
charge. The minimum initial investment is $250,000 and the minimum subsequent
investment is $10,000. The minimum initial and subsequent investments are waived
for individual participants of qualified retirement plans and for the former
partners and trust participants described above, and may be waived from time to
time by the Distributor for other investors (but not below $10,000). Shares will
be purchased for a participant of a qualified retirement plan only upon receipt
by the plan's recordkeeper of the participant's funds accompanied by the
information necessary to determine the proper share allocation for the
participant.
An account may be opened by completing and signing an account application and
sending it to the address indicated on the application. Account applications can
be obtained from the Distributor or Transfer Agent. Individual participants of
qualified retirement plans can obtain an account application from their plan
sponsor or administrator. Plan sponsors and administrators will be responsible
for forwarding to the Transfer Agent all relevant information and account
applications for plan participants.
Purchases of shares of the Portfolio can be made by check or by wiring federal
funds to the Transfer Agent. Checks should be in U.S. dollars and made payable
to Nicholas-Applegate Mutual Funds or, in the case of a retirement account, the
custodian or trustee. Third party checks will not be accepted. Checks should be
sent to the Transfer Agent, State Street Bank and Trust Company, P.O. Box 8326,
Boston, Massachusetts 02266-8326, Attention: Nicholas-Applegate Mutual Funds.
Please specify the name of the Portfolio, the account number
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assigned by the Transfer Agent, and your name. See "Purchase by Wire" below for
wiring instructions. Shares of a Portfolio may also be purchased with securities
which are otherwise appropriate for investment by the Portfolio.
Purchase by Wire. Purchases of shares of the Portfolios can only be made by
wiring federal funds to the Transfer Agent. Before wiring federal funds, you
must first telephone the Transfer Agent at (800) 551-8043 (toll-free) between
the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day when the New York
Stock Exchange is open for normal trading to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to the Portfolio's Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts, 02110, ABA No. 011000028, DDA No.
9904-645-0 Attention: Nicholas-Applegate Mutual Funds, specifying on the wire
the name of the Portfolio, the account number assigned by the Transfer Agent and
your name. If you arrange for receipt by the Transfer Agent of federal funds
prior to close of trading (currently 4:00 P.M., Eastern time) of the New York
Stock Exchange on a day when the Exchange is open for normal trading, you may
purchase shares of the Portfolio as of that day. Your bank is likely to charge
you a fee for wire transfers.
Subsequent purchases by wire may be made at any time by calling the Transfer
Agent and wiring federal funds as outlined above.
Individual participants of qualified retirement plans should purchase Portfolio
shares through their plan sponsor or administrator who is responsible for
forwarding payment to the Transfer Agent.
Share Price. Shares are purchased at the next offering price after the order is
received in proper form by the Transfer Agent or a sub-transfer agent. An order
in proper form must include all correct and complete information, documents and
signatures required to process your purchase, as well as a check or bank wire
payment properly drawn and collectable. For purchases by a qualified retirement
plan, an order in proper form is defined as receipt of funds and the information
necessary to determine the proper share allocation for each participant. The
price per share is its net asset value, which is determined as of the close of
trading of the New York Stock Exchange on each day the Exchange is open for
normal trading. Orders received before 4:00 P.M. (Eastern time) on a day when
the Exchange is open for normal trading will be processed as of the close of
trading on that day. Otherwise, processing will occur on the next business day.
To determine a Portfolio's net asset value per share, the current value of the
Portfolio's total assets, less all liabilities, is divided by the total number
of shares outstanding, and the result is rounded to the nearer cent.
Retirement Plans. You may invest in each Portfolio through various retirement
plans including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans (including 401(k) plans). For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please consult your tax adviser.
Other Portfolios. Currently, the Trust has thirteen Institutional Portfolios.
Two Institutional Income Portfolios are offered pursuant to this Prospectus;
eleven other domestic and global Institutional Portfolios are offered pursuant
to separate prospectuses which can be obtained by calling (800) 551-8643. The
Distributor also offers shares of other portfolios of the Trust which invest in
the same Funds of the Master Trust as the Portfolios. These other portfolios
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have different sales charges and other expenses than the Portfolios, which may
affect their performance. Information about these other portfolios can be
obtained from your dealer or by calling (800) 551-8045.
Other Purchase Information. The Portfolios reserve the right to reject any
purchase order or to suspend or modify the continuous offering of their shares.
Purchases of Portfolio shares will be made in full and fractional shares. In the
interest of economy and convenience, certificates for shares will generally not
be issued.
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INVESTOR SERVICES
Automatic Investment Plan. Investors may make regular monthly or quarterly
investments in the Portfolio through automatic withdrawals of specified amounts
from their bank account once an automatic investment plan is established.
Individual participants of qualified retirement plans may make regular
investments in the Portfolio through payroll deductions in accordance with
procedures adopted by the plan sponsor or administrator. Further details about
this service and an application form are available from the Transfer Agent or
from your plan sponsor or administrator.
Automatic Reinvestment. Dividends and capital gain distributions are reinvested
in additional shares at no sales charge unless you indicate otherwise on the
account application. You may elect to have dividends and capital gain
distributions paid in cash.
Cross-Reinvestment. You may cross-reinvest dividends or dividends and capital
gain distributions paid by one Portfolio into shares of any other Institutional
Portfolio, subject to conditions outlined in the Statement of Additional
Information and the applicable provisions of the qualified retirement plan.
Exchange Privilege. Shares of a Portfolio may be exchanged into shares of any
other Institutional Portfolio by writing to the Transfer Agent, State Street
Bank and Trust Company, Attention: Nicholas-Applegate Mutual Funds, P.O. Box
8326, Boston, Massachusetts 02266-8326. Please specify the name of the
applicable series, the number of shares or dollar amount to be exchanged and
your name and account number. Shares may also be exchanged by telephoning the
Transfer Agent at (800) 551-8043 or by sending the Transfer Agent a facsimile at
(617) 774-2651, between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a
day when the New York Stock Exchange is open for normal trading (see "Telephone
Privilege" below). The Trust's exchange privilege is not intended to afford
shareholders a way to speculate on short-term market movements. Accordingly the
Trust reserves the right to limit the number of exchanges an investor or
participant may make in any year, to avoid excessive Portfolio expenses.
Individual participants of qualified retirement plans may exchange shares
(depending upon the provisions of the plan) by written or telephone request
through the plan sponsor or administrator. Such participants may exchange shares
only for shares of other Institutional Portfolios that are included in their
plan. In addition, the exchange privilege may not be available to investors who
are eligible to purchase shares of a Portfolio as a result of agreements between
the Distributor and certain broker-dealers, financial planners and similar
institutions.
Before effecting an exchange, you should obtain the currently effective
prospectus of the series into which the exchange is to be made. All exchanges
will be made on the basis of the relative
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net asset values of the two series next determined after a completed request is
received. Exchange purchases are subject to the minimum investment requirements
of the series being purchased. An exchange will be treated as a redemption and
purchase for tax purposes.
Telephone Privilege. Investors may exchange or redeem shares by telephone if
they have elected the telephone privilege on their account applications.
Participants in qualified retirement plans may make telephone requests only
through their plan sponsor or administrator and only if such service is offered
under the plan. Investors should realize that by electing the telephone
privilege, they may be giving up a measure of security that they may have if
they were to exchange or redeem their shares in writing. Furthermore, in periods
of severe market or economic conditions, telephone exchanges or redemptions may
be difficult to implement, in which case investors should mail or send by
overnight delivery a written exchange or redemption request to the Transfer
Agent. Overnight deliveries should be sent to the Transfer Agent, Attention:
Nicholas-Applegate Mutual Funds, 2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171. Requests for telephone exchanges or redemptions received
before 4:00 P.M. (Eastern time) on a day when the New York Stock Exchange is
open for normal trading will be processed as of the close of trading on that
day. Otherwise, processing will occur on the next business day. All exchanges or
redemptions will be made on the basis of the relative net asset values of the
two series next determined after a completed request is received.
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
Portfolio or its agents will be liable for any loss, liability or cost which
results from acting upon instructions of a person reasonably believed to be an
investor with respect to the telephone privilege.
Automatic Withdrawal Plan. An automatic withdrawal plan may be established by an
investor or by a qualified retirement plan sponsor or administrator for its
participants subject to the requirements of the plan and applicable Federal law.
Individual participants of qualified retirement plans must establish automatic
withdrawal plans with the plan sponsor or administrator rather than the Trust.
Automatic withdrawals of $250 or more may be made on a monthly, quarterly,
semi-annual or annual basis if you have an account of at least $15,000 when the
automatic withdrawal plan begins. Withdrawal proceeds will normally be received
prior to the end of the period designated. All income dividends and capital gain
distributions on shares under the Automatic Withdrawal Plan must be reinvested
in additional shares of the Portfolio. For the protection of investors and the
Trust, wiring instructions must be on file prior to executing any request for
the wire transfer of automatic withdrawal proceeds.
Account Statements. An account is opened in accordance with applicable
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from the Transfer Agent (for qualified retirement plans,
such statements will be provided by the plan sponsor or administrator).
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Reports to Investors. Each Portfolio will send its investors annual and
semi-annual reports. The financial statements appearing in annual reports will
be audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Portfolio may provide one annual and semi-annual report
and annual prospectus per household. In addition, quarterly unaudited financial
data are available from the Portfolios upon request.
Investor Inquiries. Investor inquiries should be addressed to the Trust, P.O.
Box 82169, San Diego, California 92138-2169, or by telephone, at (800) 551-8643
(toll free). Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
The services referred to above are available only in states where the Portfolio
to be purchased may be legally offered and may be terminated or modified at any
time upon 60 days' written notice. Investors seeking to add to, change or cancel
their selection of available services should contact their plan administrator or
sponsor, or the Transfer Agent at the address and telephone number provided
above.
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REDEEMING SHARES
How to Redeem Shares. Shares of a Portfolio may be redeemed by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention:
Nicholas-Applegate Mutual Funds, P.O. Box 8326, Boston, Massachusetts
02266-8326. Redemptions by participants in qualified retirement plans must be
made in writing to the plan sponsor or administrator rather than the Trust.
Please specify the name of the Portfolio, the number of shares or dollar amount
to be sold and your name and account number. The price received for the shares
redeemed is at the next determined net asset value for the Portfolio shares
after the redemption request is received by the Transfer Agent. No charge will
be imposed by the Trust or the Transfer Agent for redemptions.
The signature on a redemption request must be exactly as names appear on the
Portfolio's account records, and the request must be signed by the minimum
number of persons designated on the account application that are required to
effect a redemption. Requests by participants of qualified retirement plans must
include all other signatures required by the plan and applicable Federal law.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. If the proceeds of the redemption exceed
$50,000, are to be paid to a person other than the record owner, are to be sent
to an address other than the address on the Transfer Agent's records, or are to
be paid to a corporation, partnership, trust or fiduciary, the signature(s) on
the redemption request may be required to be guaranteed by an "eligible
guarantor", which includes a bank or savings and loan association that is
federally insured or a member firm of a national securities exchange.
Redemptions by Telephone. If an election is made on the account application (or
subsequently in writing), redemptions of shares may be requested by contacting
the Transfer Agent by telephone at (800) 551-8043 or by facsimile at (617)
774-2651 between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading. Investors should
state the name of the Portfolio, the number of shares or dollar amount to be
sold and their name and account number. Participants of qualified retirement
plans may make telephonic or facsimile redemption requests through their plan
sponsor or
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administrator, provided that such service is offered under the plan and
satisfactory arrangements have been made with the Transfer Agent. Redemption
requests received by the Transfer Agent before 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading will be processed
that day. Otherwise, processing will occur on the next business day. See
"Shareholder Services--Telephone Privilege" above.
Redemption Payments. Payment for shares presented for redemption will ordinarily
be wired to your bank one business day after redemption is requested, but may
take up to seven days after receipt by the Transfer Agent of a written or
telephonic redemption request except as indicated below. Such payment may be
postponed or the right of redemption suspended at times when the New York Stock
Exchange is closed for other than customary weekends and holidays, when trading
on such Exchange is restricted, when an emergency exists as a result of which
disposal by a Portfolio of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Portfolio fairly to determine the
value of its net assets, or during any other period when the Securities and
Exchange Commission, by order, so permits. Payment for redemption of recently
purchased shares will be delayed until the Transfer Agent has been advised that
the purchase check has been honored, up to 15 calendar days from the time of
receipt of the purchase check by the Transfer Agent. Such delay may be avoided
by purchasing shares by wire or by certified or official bank check.
Involuntary Redemption. In order to reduce expenses of a Portfolio, the Trust
may redeem all of the shares of any investor whose account has a net asset value
of less than $10,000 due to redemptions other than a shareholder who is a
participant in a qualified retirement plan. The Trust will give such investors
60 days' prior written notice in which to purchase sufficient additional shares
to avoid such redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust intends to qualify each Portfolio as a regulated investment company
under the Internal Revenue Code. Accordingly, the Portfolios will not be subject
to federal income taxes on its net investment income and capital gains, if any,
that they distribute to their investors. All dividends out of net investment
income, together with distributions of short-term capital gains, will be taxable
as ordinary income to the investors whether or not reinvested. Any net long-term
capital gains distributed to investors will be taxable as such to the investors,
whether or not reinvested and regardless of the length of time an investor has
owned his shares.
The Portfolios declare and pay monthly dividends of net investment income. The
Portfolios make distributions at least annually of their net capital gains, if
any. In determining amounts of capital gains to be distributed by a Portfolio,
any capital loss carryovers from prior years will be offset against its capital
gains. Under U.S. Treasury Regulations, the Portfolios are required to withhold
and remit to the U.S. Treasury 31% of the dividends, capital gains and
redemption proceeds on the accounts of those investors who fail to furnish their
correct tax identification numbers on IRS Form W-9 (or IRS Form W-8, in the case
of certain foreign investors) with the required certifications regarding the
investor's status under the federal income tax law or who are subject to backup
withholding for failure to include payments of interest or dividends on their
returns. Notwithstanding the foregoing, dividends of net income and short-term
capital gains to a foreign investor will generally be subject to U.S.
withholding at the rate of 30% (or lower treaty rate).
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The Trust may elect to "pass through" to a Portfolio's shareholders the amount
of foreign income taxes paid by the Portfolio. The Trust will make such an
election only if it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of the Portfolio will be required to
include in their gross income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
The Funds are not required to pay federal income taxes on their net investment
income and capital gains, as they are treated as partnerships for tax purposes.
Any interest, dividends and gains or losses of a Fund will be deemed to have
been "passed through" to the corresponding Portfolio and other investors in the
Fund, regardless of whether such interest, dividends or gains have been
distributed by the Fund or losses have been realized by the Portfolio and such
other investors.
Investors should consult their own tax advisers regarding specific questions as
to federal, state or local taxes. See "Taxes" in the Statement of Additional
Information.
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GENERAL INFORMATION
Performance Information. From time to time the Trust may advertise each
Portfolio's total return and yield. These figures are based on historical
earnings and are not intended to indicate future performance. Total return shows
how much an investment in the Portfolio would have increased (or decreased) over
a specified period of time (I.E., one, five or ten years or since inception of
the Portfolio) assuming that all distributions and dividends by the Trust to
investors of the Portfolio were reinvested on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes which may be payable by the investor. Yield will be calculated on a 30-day
period pursuant to a formula prescribed by the Securities and Exchange
Commission (the "Commission"). The Trust also may include comparative
performance information in advertising or marketing Portfolio shares. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Inc., other industry publications, business periodicals, rating
services and market indices. See "Appendix: Prior Performance of Investment
Adviser," and "Prior Performance" in the Statement of Additional Information.
Further information about the performance of the Portfolios will be contained in
the Trust's Annual Reports to Shareholders, which may be obtained without charge
by calling (800) 551-8643.
Description of Shares. The Portfolios are series of Nicholas-Applegate Mutual
Funds, a diversified, open-end management investment company. The Trust was
organized in December 1992 as a Delaware business trust. The Trust is authorized
to issue an unlimited number of shares of each Portfolio. Shares of a Portfolio,
when issued, are fully paid, nonassessable, fully transferable and redeemable at
the option of the holder. Shares of a Portfolio are also redeemable at the
option of the Trust under certain circumstances. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of a Portfolio is entitled to its portion of all of the Portfolio's assets after
all debts and expenses of the Portfolio have been paid. Pursuant to the Trust's
Declaration of Trust, the Board of Trustees of the Trust may authorize the
creation of additional series, and classes within series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.
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Investors of the Portfolios are entitled to one vote for each full share held
and fractional votes for fractional shares held, and will vote by series except
as otherwise required by law or when the Board of Trustees of the Trust
determines that a matter to be voted upon affects only the interests of
investors of a particular series. Shares of the Trust do not have cumulative
voting rights for the election of Trustees. The Trust does not intend to hold
annual meetings of its investors unless otherwise required by law. The Trust
will not be required to hold meetings of investors unless the election of
Trustees or any other matter is required to be acted on by investors under the
Investment Company Act. Investors have certain rights, including the right to
call a meeting upon the request of 10% of the outstanding shares of a Portfolio,
for the purpose of voting on the removal of one or more Trustees.
Master Trust. The Funds are series of Nicholas-Applegate Investment Trust, an
open-end management investment company organized as a Delaware business trust in
December 1992. The trustees and officers of the Master Trust are described in
the Statement of Additional Information. Whenever a Portfolio is requested to
vote on matters pertaining to the corresponding Fund or the Master Trust in its
capacity as a shareholder of such Fund, the Trust will hold a meeting of its
investors and will cast its vote as instructed by such investors or, in the case
of a matter pertaining exclusively to the corresponding Fund, as instructed
particularly by investors of the Portfolio and other series of the Trust which
invest in the Fund. The Trust will vote shares for which it has received no
voting instructions in the same proportion as the shares for which it does
receive voting instructions.
Additional Information. This Prospectus, including the Statement of Additional
Information which has been incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by the Trust
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Master Trust has also filed a Registration Statement with the
Commission. Copies of the Trust's and Master Trust's Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
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APPENDIX
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INVESTMENT POLICIES, STRATEGIES AND RISKS
The investment policies and strategies of the Portfolios (as implemented through
their investment in corresponding Funds) encompass the following securities,
techniques and risk considerations.
Short-Term Investments. Each of the Funds may invest in short-term investments
to maintain liquidity for redemptions or during periods when, in the opinion of
the Investment Adviser, attractive investments are temporarily unavailable.
Under normal circumstances, no more than 10% of a Fund's total assets will be
retained in cash and cash equivalents. However, each Fund may invest without
restriction in short-term investments for temporary defensive purposes, such as
when the securities markets or economic conditions are expected to enter a
period of decline. Short-term investments in which the Funds may invest include
U.S. Treasury bills or other U.S. Government or Government agency or
instrumentality obligations; certificates of deposit; bankers' acceptances; time
deposits; high quality commercial paper and other short-term high grade
corporate obligations; shares of money market mutual funds; or repurchase
agreements with respect to such securities. The High Yield Bond Fund may also
invest in high quality preferred stocks for such purposes. These instruments are
described below. The Funds will only invest in short-term investments which, in
the opinion of the Investment Adviser present minimal credit and interest rate
risk.
U.S. Government Obligations. Securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities in which each of the Funds may
invest include U.S. Treasury securities, which differ only in their interest
rates, maturities and times of issuance. Treasury bills have initial maturities
of one year or less; Treasury notes have initial maturities of one to ten years;
and Treasury bonds generally have initial maturities of more than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow money from the Treasury; others, such as those
issued by the Federal National Mortgage Association, by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to U.S.
Government-sponsored agencies and instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Funds will
invest in securities issued or guaranteed by U.S. Government agencies and
instrumentalities only when the Investment Adviser is satisfied that the credit
risk with respect to the issuer is minimal.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. Each of the
Funds may invest in certificates of deposit, time deposits and bankers'
acceptances issued by domestic banks, domestic branches of foreign banks, and
savings and loan corporations, and in similar instruments issued by foreign
banks, foreign branches of domestic banks, and foreign branches of foreign
banks, each of which at the date of investment has capital, surplus and
undivided profits as of the date of its most recent published financial
statements in excess of $100 million, or less than $100 million if the principal
amount of such bank obligations is insured by the Federal Deposit Insurance
Corporation. Certificates of deposit are certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of
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time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer; these instruments reflect the obligation both
of the bank and of the drawer to pay the face amount of the instrument upon
maturity.
Commercial Paper. Each of the Funds may invest in commercial paper of domestic
entities which is rated (or guaranteed by a corporation the commercial paper of
which is rated) in the two highest rating categories by at least two nationally
recognized statistical rating organizations ("NRSROs"), including "P-1" or "P-2"
by Moody's or "A-1" or "A-2" by S&P, or, if rated by only one NRSRO, in such
NRSRO's two highest grades, or, if not rated, is issued by an entity which the
Investment Adviser, acting pursuant to guidelines established by the Master
Trust's Board of Trustees, has determined to be of minimal credit risk and
comparable quality. The High Yield Fund may also invest in such commercial paper
issued by foreign entities. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs.
Zero Coupon Securities. Each of the Funds may invest up to 50% of its net assets
in "zero coupon" securities issued or guaranteed by the U.S. and foreign
governments and their agencies and instrumentalities. For example, U.S. 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 Funds do not receive
the income currently in cash, the Funds may have to sell other portfolio
investments to obtain cash needed by the related Portfolios to make income
distributions.
The Funds may also invest in zero coupon corporate securities, which are similar
to U.S. Government zero coupon securities but are issued by companies. They have
an additional risk that the issuing company may fail to pay interest or repay
principal on the obligations.
Variable Rate Demand Securities. Each of the Funds may purchase floating and
variable rate demand notes and bonds, which are obligations ordinarily having
stated maturities in excess of one year, but which permit the holder to demand
payment of principal at any time, or at specified intervals not exceeding one
year, in each case upon not more than 30 days' notice. Variable rate demand
notes include master demand notes, which are obligations that permit a Fund to
invest fluctuating amounts, which may change daily without penalty. The interest
rates on these notes are adjusted at designated intervals or whenever there are
changes in the market rates of interest on which the interest rates are based.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Such obligations frequently are not rated by credit rating agencies and a
Fund may invest in obligations which are not so rated
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only if the Investment Adviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the Fund
may invest. The Investment Adviser will monitor the creditworthiness of the
issuers of such obligations and their earning power and cash flow, and will also
consider situations in which all holders of such notes would redeem at the same
time. Investment by a Fund in floating or variable rate demand obligations as to
which it cannot exercise the demand feature on not more than seven days' notice
will be subject to the Fund's limit on illiquid securities of 15% of net assets
if there is no secondary market available for these obligations.
Corporate Debt Securities. Each of the Funds may invest in non-convertible
corporate debt obligations of varying maturities (such as debentures, bonds and
notes) over a cross-section of industries. The value of a debt security changes
as interest rates fluctuate, with longer-term securities fluctuating more widely
in response to changes in interest rates than those of shorter-term securities.
A decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
The Funds may also invest in loans and other direct debt instruments, which are
interests in amounts owed to another party by a company, government, or other
borrower. These investments may be interests in, or assignments of, a loan and
may be acquired from banks or brokers that have made the loan or are members of
a lending syndicate. No more than 5% of a Fund's net assets will be invested in
direct debt instruments of the same borrower. In addition, such instruments are
subject to the Funds' limitations on investments in illiquid securities. Such
instruments have additional risks beyond conventional debt securities, because
they may entail less legal protection for the Fund or there may be a requirement
that the Fund supply additional cash to a borrower on demand.
Convertible Securities and Warrants. Each of the Funds may invest in debt and
equity securities which may be exchanged for, converted into, or exercised to
acquire a predetermined number of shares of the issuer's common stock at the
option of the holder during a specified time period (such as convertible
preferred stocks, convertible debentures and warrants). Convertible securities
generally pay interest or dividends and provide for participation in the
appreciation of the underlying common stock but at a lower level of risk because
the yield is higher and the security is senior to common stock. Convertible
securities may also include warrants which give the holder the right to purchase
at any time during a specified period a predetermined number of shares of common
stock at a fixed price but which do not pay a fixed dividend. Investments in
warrants involve certain risks, including the possible lack of a liquid market
for resale, potential price fluctuations as a result of speculation or other
factors, and the failure of the price of the underlying security to reach or
have reasonable prospects of reaching a level at which the warrant can be
prudently exercised, in which event the warrant may expire without being
exercised, resulting in a loss of a Fund's entire investment therein. As a
matter of operating policy, neither Fund will invest more than 5% of its net
assets in warrants.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the
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convertible security is governed principally by its investment value. To the
extent the market price of the underlying common stock approaches or exceeds the
conversion price, the price of the convertible security will be increasingly
influenced by its conversion value.
Like other debt securities, the market value of convertible 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. Fluctuations in the value of a
Fund's investments will be reflected in its and the corresponding Portfolio's
net asset value per share. A convertible security may be subject to redemption
at the option of the issuer at a price established in the instrument governing
the convertible security. If a convertible security held by a Fund is called for
redemption, the Fund will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
Junk Bond Considerations. Each of the Funds may invest without limitation in
debt securities rated below "Baa" by Moody's, below "BBB" by S&P or below
investment grade by other recognized rating agencies, or in unrated securities
determined by the Investment Adviser to be of comparable quality if the
Investment Adviser believes that the financial condition of the issuer or the
protection afforded to the particular securities is stronger than would
otherwise be indicated by such low ratings or the lack thereof. Securities rated
below "Baa" or "BBB" or equivalent ratings, commonly referred to as "junk
bonds," are subject to greater risk of loss of income and principal than higher
rated bonds and are considered to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic conditions or rising
interest rates. Junk bonds are also generally considered to be subject to
greater market risk in times of deteriorating economic conditions and to wider
market and yield fluctuations than higher-rated securities. Junk bonds may also
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities. The market for such
securities may be thinner and less active than that for higher-rated securities,
which can adversely affect the prices at which these securities can be sold. To
the extent that there is no established secondary market for lower-rated
securities, a Fund may experience difficulty in valuing such securities and, in
turn, its assets. In addition, adverse publicity and investor perceptions about
junk bonds, whether or not based on fundamental analysis, may tend to decrease
the market value and liquidity of such securities.
Legislation has been and could be adopted limiting the use, or tax and other
advantages, of junk bonds which could adversely affect their value. Under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989, for
example, federally insured savings and loan associations were required to divest
their investments in non-investment grade corporate debt securities by July 1,
1994. Such legislation could have a material adverse effect on the market for,
and prices of, such securities.
The Investment Adviser will try to reduce the risk inherent in the Funds'
investment in such securities through credit analysis, diversification and
attention to current developments and trends in interest rates and economic
conditions. However, there can be no assurance that losses will not occur. Since
the risk of default is higher for lower-rated bonds, the Investment Adviser's
research and credit analysis are a correspondingly important aspect of its
program for managing the Funds' investments in such debt securities. The
Investment Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations, or
has improved or is expected to improve in the future.
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The Funds may purchase securities bearing the lowest ratings issued by Moody's,
S&P or another rating agency, or determined by the Investment Adviser to be of
comparable quality. Debt securities with such ratings are in payment default,
the issuer of such securities may be in bankruptcy, and the securities may be
regarded as having extremely poor prospects of attaining higher ratings.
Non-rated securities will also be considered for investment when the Investment
Adviser believes that the financial condition of the issuers of such securities,
or the protection afforded by the terms of the securities themselves, limit the
risk to a Fund to a degree comparable to that of rated securities which are
consistent with the Fund's investment objective and policies. See "Appendix:
Corporate Bond Ratings" for a description of credit ratings.
Credit ratings evaluate the safety of principal and interest payments of
securities, not their market value. 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. As credit rating agencies may fail to timely change
credit ratings of securities to reflect subsequent events, the Investment
Adviser will also monitor issuers of such securities to determine if such
issuers will have sufficient cash flow and profits to meet required principal
and interest payments and to assure their liquidity. If the rating of a debt
security held by a Fund is downgraded, the Investment Adviser will determine
whether it is in the best interests of the Fund to continue to hold such
security in its investment portfolio.
Synthetic Convertible Securities. Each of the Funds 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, a 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. A Fund will not invest more than 15%
of its net assets in such synthetic securities and other illiquid securities.
See "Illiquid Securities" below.
Eurodollar and Yankee Dollar Instruments. Each of the Funds 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."
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
issuer. ADRs, in registered form, are designed for use in U.S. securities
markets. The Funds may also invest in European and Global Depository
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Receipts ("EDRs" and "GDRs"), which, in bearer form, are designed for use in
European and foreign securities markets, and in other instruments representing
securities of foreign companies. Such depository receipts may be sponsored by
the foreign issuer or may be unsponsored. Unsponsored depository receipts are
organized independently and without the cooperation of the foreign issuer of the
underlying securities; as a result, available information regarding the issuer
may not be as current as for sponsored depository receipts, and the prices of
unsponsored depository receipts may be more volatile than if they were sponsored
by the issuers of the underlying securities.
Index and Currency-Linked Securities. Each of the Funds 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 Funds may also invest in "equity
linked" and "currency-linked" debt securities. At maturity, the principal amount
of an equity-linked debt security is exchanged for common stock of the issuer or
is payable in 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 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-Backed Securities. Each of the Funds may invest in U.S. mortgage-backed
securities. Mortgage-backed securities represent direct or indirect
participations in or obligations collateralized by and payable from mortgage
loans secured by real property. Each mortgage pool underlying mortgage-backed
securities will consist of mortgage loans evidenced by promissory notes secured
by first mortgages or first deeds of trust or other similar security instruments
creating a first lien on real property. An investment in mortgage-backed
securities includes certain risks. Mortgage-backed securities are often subject
to more rapid repayment than their stated maturity dates would indicate as a
result of the pass-through or prepayments of principal on the underlying loans,
which may increase the volatility of such investments relative to similarily
related debt securities. During periods of declining interest rates, prepayment
of loans underlying mortgage-backed securities can be expected to accelerate and
thus impair a Fund's ability to reinvest the returns of principal at comparable
yields. During periods of rising interest rates, reduced prepayment rates may
extend the average life of mortgage-backed securities and increase a Fund's
exposure to rising interest rates. Accordingly, the market values of such
securities will vary with changes in market interest rates generally and in
yield differentials among various kinds of U.S. Government securities and other
mortgage-backed securities.
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The Funds may invest in mortgage pass-through securities, which are fixed or
adjustable rate mortgage-backed securities that provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The Funds may also invest in complex investments such as collateralized mortgage
obligations ("CMOs") and stripped mortgage-backed securities. Some of these
securities may have a structure that makes their reaction to interest rates and
other factors difficult to predict, making their value highly volatile. These
securities may also be subject to prepayment risk. CMOs are multiple class
mortgage-backed securities which provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or of other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
adjustable interest rate and a final distribution date. In most cases, payments
of principal are applied to the CMO classes in the order of their respective
stated maturities, so that no principal payments will be made on a CMO class
until all other classes leaving an earlier stated maturity date are paid in
full. Sometimes, however, CMO classes are "parallel pay" (i.e., payments of
principal are made to two or more classes concurrently). Stripped securities are
the separate income or principal components of a debt security. Their risks are
similar to those of other debt securities, although they may be more volatile
and the values of certain types of stripped securities may move in the same
direction as interest rates.
Other Real Estate-Related Instruments. Each of the Funds may invest in real
estate-related instruments such as securities of real estate investment trusts
and real estate financings. Real estate-related instruments are sensitive to
factors such as changes in real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and the
management skill and creditworthiness of the issuer. Real estate-related
instruments may also be affected by tax and regulatory requirements, such as
those relating to the environment.
Asset-Backed Securities. Each of the Funds may invest in U.S. asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sale contracts, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Asset-backed securities may also be collateralized by a portfolio
of U.S. Government securities, but are not direct obligations of the U.S.
Government, its agencies or instrumentalities. Payments or distributions of
principal and interest on asset-backed securities may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution, or other credit enhancements
may be present; however, privately issued obligations collateralized by a
portfolio of privately issued asset-backed securities do not involve any
government-related guaranty or insurance.
Asset-backed securities can be structured in several ways, the most common of
which has been a "pass-through" model. A certificate representing a fractional
undivided beneficial interest in a trust or corporation created solely for the
purpose of holding the trust's assets is issued to the asset-backed security
holder. The certificate entitles the holder to receive a percentage of the
interest and principal payments on the terms and according to the schedule
established by the trust instrument. A servicing agent collects amounts due on
the underlying assets for the account of the trust, which distributes such
amounts to the security holders. As an alternative structure, the issuer of
asset-backed securities effectively transforms an asset-backed pool into
obligations comprised of several different maturities. Instead of holding an
undivided interest
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in trust assets, the purchaser of the asset-backed security holds a bond
collateralized by the underlying assets. The bonds are serviced by cash flows
from the underlying assets, a specified fraction of all cash received (less a
fixed servicing fee) being allocated first to pay interest and then to reduce
principal.
Asset-backed securities present certain risks similar to and in addition to
those presented by mortgage-backed securities. Asset-backed securities generally
do not have the benefit of a security interest in collateral that is comparable
to mortgage assets and there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities. Asset-backed securities, however, are not generally subject to the
risks associated with prepayments of principal on the underlying loans.
Equity Securities. Each of the Funds may invest in equity securities, including
common stocks, preferred stocks, convertible securities and warrants. Common
stocks, the most familiar type of equity securities, represent an equity
(ownership) interest in a corporation. Preferred stocks also represent an
ownership interest in a corporation, but pay dividends which have a preference
over dividends paid to the common shareholders of the corporation and have a
preference over common stock upon liquidation of the corporation. See
"Convertible Securities and Warrants" for a description of convertible
securities and warrants.
The Funds may invest in equity securities of companies of any size. These may
include equity securities of growth companies, cyclical companies, companies
with smaller market capitalizations (i.e., $500 million or less at the time of
purchase) or companies believed to be undergoing a basic change in operations or
markets which could result in a significant improvement in earnings. Although
equity securities have a history of long-term growth in value, their prices
fluctuate based on changes in the issuer's financial condition and prospects and
on overall market and economic conditions. Small companies and new companies
often have limited product lines, markets or financial resources, and may be
dependent upon one or few key persons for management. The securities of such
companies may be subject to more volatile market movements than securities of
larger, more established companies, both because the securities typically are
traded in lower volume and because the issuers typically are more subject to
changes in earnings and prospects. To the extent of such investments, a
Portfolio's net asset value can be expected to experience above-average
fluctuations, as above-average risk is assumed by the corresponding Fund in
investing in such growth companies in seeking higher than average growth in
capital.
Eurodollar Convertible Securities. Each of the Funds may invest in Eurodollar
convertible securities, which are fixed income securities of a U.S. issuer or a
foreign issuer that are issued outside the United States and are convertible
into or exchangeable for equity securities of the same or a different issuer.
Interest and dividends on Eurodollar securities are payable in U.S. dollars
outside of the United States. The Funds may invest without limitation in
Eurodollar convertible securities that are convertible into or exchangeable for
foreign equity securities listed, or represented by ADRs listed, on the New York
Stock Exchange or the American Stock Exchange or convertible into or
exchangeable for publicly traded common stock of U.S. companies. The Funds may
also invest up to 15% of its total assets invested in convertible securities,
taken at market value, in Eurodollar convertible securities that are convertible
into or exchangeable for foreign equity securities which are not listed, or
represented by ADRs listed, on such exchanges.
Foreign Investment Considerations. There are special risks associated with the
Funds' investments in securities of foreign companies and governments, which add
to the usual risks inherent in domestic investments. Such special risks include
fluctuations in foreign exchange
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rates, political or economic instability in the country of issue, and the
possible imposition of exchange controls or other laws or restrictions. In
addition, securities prices in foreign markets are generally subject to
different economic, financial, political and social factors than are the prices
of securities in United States markets. With respect to some foreign countries
there may be the possibility of expropriation or confiscatory taxation,
limitations on liquidity of securities or political or economic developments
which could affect the foreign investments of a Fund. Moreover, securities of
foreign issuers generally will not be registered with the Securities and
Exchange Commission and such issuers generally will not be subject to the
Commission's reporting requirements. Accordingly, there is likely to be less
publicly available information concerning certain of the foreign issuers of
securities held by a Fund than is available concerning U.S. companies. Foreign
companies are also generally not subject to uniform accounting, auditing and
financial reporting standards or to practices and requirements comparable to
those applicable to U.S. companies. There may also be less government
supervision and regulation of foreign broker-dealers, financial institutions and
listed companies than exists in the United States. The Fund will not invest in
securities denominated in a foreign currency unless, at the time of investment,
such currency is considered by the Investment Adviser to be fully exchangeable
into United States dollars without legal restriction. See "Investment
Objectives, Policies and Risks--Foreign Investments" in the Statement of
Additional Information.
Special Considerations Regarding Emerging Markets Investments. Investments by
the Funds in securities issued by the governments of emerging or developing
countries, and of companies within those countries, involve greater risks than
other foreign investments. Investments in emerging or developing markets involve
exposure to economic and legal structures that are generally less diverse and
mature (and in some cases the absence of developed legal structures governing
private and foreign investments and private property), and to political systems
which can be expected to have less stability, than those of more developed
countries. The risks of investment in such countries may include matters such as
relatively unstable governments, higher degrees of government involvement in the
economy, the absence until recently of capital market structures or
market-oriented economies, economies based on only a few industries, securities
markets which trade only a small number of securities, restrictions on foreign
investment in stocks, and significant foreign currency devaluations and
fluctuations.
Emerging markets can be substantially more volatile than both U.S. and more
developed foreign markets. Such volatility may be exacerbated by illiquidity.
The average daily trading volume in all of the emerging markets combined is a
small fraction of the average daily volume of the U.S. market. Small trading
volumes may result in a Fund being forced to purchase securities at
substantially higher prices than the current market, or to sell securities at
much lower prices than the current market.
Over-the-Counter Securities. Securities owned by the Funds may be traded in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of securities trading on a national
securities exchange. As a result, disposition by the Funds of portfolio
securities to meet redemptions by shareholders or otherwise may require the
Funds to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
Short Sales. The Investment Adviser believes that its growth equity management
approach, in addition to identifying equity securities the earnings and prices
of which it expects to grow at a rate above that of the S&P 500, also identifies
securities the prices of which can be expected to
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decline. Therefore, each Fund is authorized to make short sales of securities it
owns or has the right to acquire at no added cost through conversion or exchange
of other securities it owns (referred to as short sales "against the box") and
to make short sales of securities which it does not own or have the right to
acquire. A short sale that is not made "against the box" is a transaction in
which a Fund sells a security it does not own in anticipation of a decline in
market price. When a Fund makes a short sale, the proceeds it receives are
retained by the broker until the Fund replaces the borrowed security. In order
to deliver the security to the buyer, the Fund must arrange through a broker to
borrow the security and, in so doing, the Fund becomes obligated to replace the
security borrowed at its market price at the time of replacement, whatever that
price may be.
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 special risk
considerations and may be considered a speculative technique. Since a Fund in
effect profits from a decline in the price of the securities sold short without
the need to invest the full purchase price of the securities on the date of the
short sale, the Fund's net asset value per share, and that of the corresponding
Portfolio, will tend to increase more when the securities it has sold short
decrease in value, and to decrease more when the securities it has sold short
increase in value, than would otherwise be the case if it had not engaged in
such short sales. Short sales theoretically involve unlimited loss potential, as
the market price of securities sold short may continuously increase, although
the Fund may mitigate such losses by replacing the securities sold short before
the market price has increased significantly. Under adverse market conditions a
Fund might have difficulty purchasing securities to meet its short sale delivery
obligations, and might have to sell portfolio securities to raise the capital
necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales. The value of securities of
any issuer in which a Fund maintains a short position which is "not against the
box" may not exceed the lesser of 2% of the value of the Fund's net assets or 2%
of the securities of such class of the issuer.
If 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. 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.
In the view of the Commission, a short sale involves the creation of a "senior
security" as such term is defined in the Investment Company Act, unless the sale
is "against the box" and the securities sold are placed in a segregated account
(not with the broker), or unless the Fund's obligation to deliver the securities
sold short is "covered" by placing in a segregated account (not with the broker)
cash or U.S. Government 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 cash or U.S. Government securities required to be deposited as collateral
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 and U.S. Government
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 Master Trust's Board of Trustees has determined that a
Fund will not
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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.
A Fund's ability to enter into short sales transactions is limited by the
requirements of the Internal Revenue Code with respect to the corresponding
Portfolio's qualification as a regulated investment company. See "Dividends,
Distributions and Taxes" in the Statement of Additional Information.
When-Issued Securities and Firm Commitment Agreements. The Funds may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions in which the payment obligation and interest
rate are fixed at the time of the transaction but the settlement is delayed).
Delivery and payment for these securities typically occur 15 to 45 days after
the commitment to purchase. No interest accrues to the purchaser during the
period before delivery. There is a risk in these transactions that the value of
the securities at settlement may be more or less than the agreed upon price, or
that the party with which a Fund enters into such a transaction may not perform
its commitment. The Funds will normally enter into these transactions with the
intention of actually receiving or delivering the securities. The Funds may sell
the securities before the settlement date.
To the extent a Fund engages in any of these transactions it will do so for the
purpose of acquiring securities for its portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage. The Funds
will segregate liquid assets such as cash, U.S. Government securities and other
liquid high quality debt securities in an amount sufficient to meet their
payment obligations with respect to these transactions. 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 contracts.
"Roll" Transactions. The Funds 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, a 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 transaction 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 Funds will engage in roll transactions for the purpose of acquiring
securities for their portfolios consistent with their investment objectives and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered borrowings by the Funds for purposes
of the percentage limitations applicable to borrowings. See "Borrowings" below.
Each Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities and other liquid debt and equity
securities in an amount sufficient to meet its payment obligations with respect
to these transactions. A 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.
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Foreign Exchange Contracts. Since each Fund may invest in securities denominated
in currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the values of its portfolio securities and the unrealized
appreciation or depreciation of its investments. The rate of exchange between
the U.S. dollar and other currencies is determined by forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors.
A Fund may enter into derivative positions such as foreign exchange forward
contracts or currency futures or options contracts for the purchase or sale of
foreign currency to "lock in" the U.S. dollar price of the securities
denominated in a foreign currency or the U.S. dollar equivalent of interest to
be paid on such securities, or to hedge against the possibility that the
currency of a foreign country in which the Fund has investments may suffer a
decline against the U.S. dollar. A forward currency contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. For example, a Fund may purchase a
particular currency or enter into a forward currency contract to preserve the
U.S. dollar price of securities it intends to or has contracted to purchase.
Alternatively, a Fund might sell a particular currency on either a spot (cash)
basis at the rate then prevailing in the currency exchange market or on a
forward basis by entering into a forward contract to purchase or sell currency,
to hedge against an anticipated decline in the U.S. dollar value of securities
it intends or has contracted to sell. This method of attempting to hedge the
value of a Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. The Funds are not obligated to engage in any such currency hedging
operations, and there can be no assurance as to the success of any hedging
operations which a Fund may implement. Although the strategy of engaging in
foreign currency transactions could reduce the risk of loss due to a decline in
the value of the hedged currency, it could also limit the potential gain from an
increase in the value of the currency.
Options. Each Fund may purchase exchange-listed and over-the-counter covered
"put" and "call" options with respect to debt securities and currencies which
are otherwise eligible for purchase by such Fund, and broadly-based indexes.
Such options will be purchased for hedging purposes, subject to the following
restrictions: the aggregate premiums on call options purchased by a Fund may not
exceed 5% of the market value of net assets of the Fund as of the date the call
options are purchased, and the aggregate premiums on put options may not exceed
5% of the market value of the net assets of the Fund as of the date such options
are purchased. In addition, a Fund will not purchase or sell options if,
immediately thereafter, more than 25% of its net assets would be hedged. A "put"
gives a holder the right, in return for the premium paid, to require the writer
of the put to purchase from the holder a security at a specified price. A "call"
gives a holder the right, in return for the premium paid, to require the writer
of the call to sell a security to the holder at a specified price.
Put and call options are derivative securities traded on United States and
foreign exchanges, including the American Stock Exchange, Chicago Board Options
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock
Exchange. Additionally, the Funds may purchase options not traded on a
securities exchange, which may bear a greater risk of nonperformance than
options traded on a securities exchange. Options not traded on an exchange are
considered dealer options and generally lack the liquidity of an exchange traded
option. Accordingly, dealer options may be subject to the Funds' restriction on
investment in
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<PAGE>
illiquid securities, as described below. Dealer options may also involve the
risk that the securities dealers participating in such transactions will fail to
meet their obligations under the terms of the option.
Each Fund may also write listed and over-the-counter covered options on up to
25% of the value of its net assets. Call options written by a Fund give the
holder the right to buy the underlying securities from the Fund at a stated
exercise price; put options written by a Fund give the holder the right to sell
the underlying security to the Fund. A call option is covered if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration upon conversion or
exchange of securities currently held by the Fund. A put option is covered if
the Fund maintains cash or cash equivalents equal to the exercise price in a
segregated amount with its Custodian. If an option written by the Fund expires
unexercised, the Fund realizes a gain equal to the premium received at the time
the option was written. If an option purchased by the Fund expires unexercised,
the Fund realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option written by a Fund may
be closed out by an offsetting purchase or sale of an option of the same series.
The Fund will realize a gain from a closing purchase transaction if the cost of
the closing transaction is less than the premium received from writing the
option; if it is more, the Fund will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium paid to
purchase the option, the Fund will realize a gain; if it is less, the Fund will
realize a loss.
Futures Contracts. Each Fund may purchase and sell futures contracts as a hedge
against changes in interest rates and market prices and currency fluctuations.
Each Fund may also purchase and sell related options on futures contracts. A
financial or currency futures contract obligates the seller of the contract to
deliver and the purchaser of the contract to take delivery of the type of
financial instrument or currency called for in the contract at a specified
future time (the settlement date) for a specified price. Although the terms of a
contract call for actual delivery or acceptance of the financial instrument or
currency, the contracts normally will be closed out before the delivery date
without delivery or acceptance taking place. Futures options possess many of the
same characteristics as options on securities and indices. A futures option
gives the holder, in return for the premium paid, the right to buy (call) from
or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. A futures option may be closed out before exercise or
expiration by an offsetting purchase or sale of a futures option of the same
series.
Financial and currency futures contracts are derivative instruments traded on
United States commodities and futures exchanges, including the Chicago
Mercantile Exchange, the New York Futures Exchange, the Kansas City Board of
Trade, the Chicago Board of Trade and the International Monetary Market, as well
as commodity and securities exchanges located outside the United States,
including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
The Funds will not engage in transactions in futures contracts for speculation,
but only as a hedge against the risk of unexpected changes in interest rates or
other matters. As a general rule, a Fund will not purchase or sell futures if,
immediately thereafter, more than 25% of its net assets would be hedged. In
addition, neither Fund may purchase or sell futures or related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
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<PAGE>
existing futures positions and premiums paid for such options would exceed 5% of
the market value of the Fund's net assets. In instances involving the purchase
of futures contracts by a Fund, an amount of cash and cash equivalents equal to
the market value of the futures contracts will be deposited in a segregated
account with the Fund's Custodian or with a broker to collateralize the position
and thereby insure that the use of such futures is unleveraged. See "Investment
Objectives, Policies and Risks--Futures Contracts and Related Options" in the
Statement of Additional Information.
Interest Rate and Currency Swaps. For hedging purposes, each 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 a 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.
A 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 net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each swap is accrued on a daily basis, and an
amount of cash or high-quality liquid securities having an aggregate net asset
value at least equal to the accrued excess is maintained in a segregated account
by the Master Trust's custodian. If a 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. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless the
unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). 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 standardized documentation has not yet been
developed; accordingly, they are less liquid than swaps, and caps and floors
purchased by a Fund are considered to be illiquid assets.
Special Hedging Considerations. Special risks are associated with the use of
options, futures contracts and swap transactions as hedging techniques. There
can be no guarantee of a correlation between price movements in the hedging
vehicle and in the portfolio securities being hedged. A lack of correlation
could result in a loss on both the hedged securities in a Fund and the hedging
vehicle, so that the Fund's return might have been better had hedging not been
attempted. In addition, a decision as to whether, when and how to use options,
futures or swaps involves the exercise of skill and judgment which are different
from those needed to select portfolio securities, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior,
currency fluctuations or interest rate trends. If the Investment Adviser is
incorrect in its forecasts regarding interest rate trends,
36
<PAGE>
currency fluctuations or other relevant factors, a Fund may be in a worse
position than if the Fund had not engaged in options, futures or swap
transactions. The loss incurred by a Fund in writing options on futures and
entering into futures and swap transactions is potentially unlimited. The
Investment Adviser is experienced in the use of options, futures and swap
transactions as an investment technique.
In the event of a default by the other party to an over-the-counter option
transaction or a futures or swap transaction, a Fund might incur a loss. In
addition, there can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out an option position or futures or swap contract.
Most futures exchanges and boards of trade limit the amount of fluctuation in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a Fund from liquidating an unfavorable
position and a Fund would remain obligated to meet margin requirements until the
position is closed. See "Investment Objectives, Policies and Risks--Options on
Securities and Securities Indices" and "--Futures Contracts and Related Options"
in the Statement of Additional Information.
A Fund's ability to enter into options, futures contracts and swap transactions
is limited by the requirements of the Internal Revenue Code with respect to the
corresponding Portfolio's qualification as a regulated investment company. See
"Taxes" in the Statement of Additional Information.
Non-Hedging Strategic Transactions (Strategic Income Fund). Each Fund's options,
futures and swap transactions will generally be entered into 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
markets, 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,
the Strategic Income Fund may enter into options, futures and swap transactions
to enhance potential gain in circumstances where hedging is not involved. The
Fund's net loss exposure resulting from transactions entered into for such
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," and to the same types of risks as described above under "Special Hedging
Considerations."
Closed-End Funds. Closed-end funds in which the Funds may invest are registered
closed-end investment companies with publicly traded shares and which hold
various types of portfolio securities in which the Funds may invest directly.
The extent to which a Fund may invest in closed-end funds is limited by the
Investment Company Act and various state securities or "blue sky" laws.
Accordingly, as a fundamental policy, neither of the Funds will own more than 3%
of the outstanding voting stock of any closed-end investment company, will
invest more than 10% of its total assets in securities issued by closed-end
investment companies nor, together with other investment companies managed by
the Investment Adviser, will own more
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<PAGE>
than 10% of any closed-end investment company. Assets of the Funds invested in
closed-end funds are subject to advisory and other fees imposed by the
closed-end fund, as well as to fees imposed by the Funds.
Repurchase Agreements. Each Fund may invest up to 25% of its net assets in
repurchase agreements, in which the Fund purchases securities and the seller
agrees to repurchase them from the Fund at a mutually agreed-upon time and
price. The period of maturity is usually overnight or a few days, although it
may extend over a number of months. The resale price is in excess of the
purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the security. Each Fund's
repurchase agreements will at all times be fully collateralized in an amount at
least equal to 102% of the purchase price, including accrued interest earned on
the underlying securities. The instruments held as collateral are valued daily
and, if the value of the instruments declines, the Fund will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Fund may incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by a Fund may be delayed or limited. A Fund will only enter into
repurchase agreements involving securities in which it could otherwise invest
and with selected financial institutions and brokers and dealers which meet
certain creditworthiness and other criteria.
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. A Fund will maintain in a segregated account with the Custodian cash,
U.S. Government securities or other appropriate liquid, high-grade debt
obligations in an amount sufficient to cover its obligations under these
agreements with broker-dealers (no such collateral is required on such
agreements with banks). Under the 1940 Act, these agreements are considered
borrowings by the Funds, and are subject to the percentage limitations on
borrowings described below. The agreements are subject to the same types of
risks as borrowings.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933
("restricted securities"), securities which are otherwise not readily marketable
such as over-the-counter, or dealer traded, options, and repurchase agreements
having a maturity of more than seven days. Mutual funds do not typically hold a
significant amount of restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and the Fund might not be able to dispose of restricted or other securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933, including
repurchase agreements, commercial paper, 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
38
<PAGE>
not be indicative of the liquidity of such investments. If such securities are
subject to purchase by institutional buyers in accordance with Rule 144A
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, the Investment Adviser, pursuant to guidelines adopted by the Master
Trust's Board of Trustees, may determine that such securities are not illiquid
securities notwithstanding their legal or contractual restrictions on resale,
based on factors such as the frequency of trades and quotes for the securities,
the number of dealers and others wishing to purchase and sell the securities,
and the nature of the security and the marketplace trades. In all other cases,
however, securities subject to restrictions on resale will be deemed illiquid.
Investing in restricted securities eligible for resale pursuant to Rule 144A
could have the effect of increasing the level of illiquidity in the Funds to the
extent that qualified institutional buyers become for a time uninterested in
purchasing such securities.
Securities Lending. To increase its income, each Fund may lend its portfolio
securities to financial institutions such as banks and brokers if the loan is
collateralized in accordance with applicable regulatory requirements. The Master
Trust's Board of Trustees has adopted an operating policy that limits the amount
of loans made by a Fund to not more than 30% of the value of the total assets of
the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured a letter of credit.
Such loans involve risks of delay in receiving additional collateral or in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially. However, such securities
lending will be made only when, in the Investment Adviser's judgment, the income
to be earned from the loans justifies the attendant risks. Loans are subject to
termination at the option of the Fund or the borrower.
Borrowing. Each Fund may borrow money from banks in amounts up to 20% of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes or for the clearance of transactions. In addition, the
Strategic Income Fund may borrow from banks to buy securities, so long as its
total borrowings for this and other purposes do not exceed 33 1/3% of the value
of its total assets. Borrowing involves special risk considerations. Since
substantially all of a Fund's assets fluctuate in value, whereas the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund's
agreement with its lender, the asset value per share of the Fund will tend to
increase more when its portfolio securities increase in value, and to decrease
more when its portfolio assets decrease in value, than would otherwise be the
case if the Fund did not borrow funds. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market conditions, a Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales. All borrowings by a Fund will be made
only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all borrowings.
If such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law.
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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 of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds 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 as medium-grade obligations (I.E., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds 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 speculative 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
regarded 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
modifier 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.
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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 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 vulnerability 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.
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PRIOR PERFORMANCE OF INVESTMENT ADVISER
The following table sets forth the Investment Adviser's composite performance
data relating to the historical performance of institutional private accounts
managed by the Investment Adviser, since the dates indicated, that have
investment objectives, policies, strategies and risks substantially similar to
those of the High Yield Bond and Strategic Income Institutional Portfolios. The
data is provided to illustrate the past performance of the Investment Adviser in
managing substantially similar accounts as measured against specified market
indices and does not represent the performance of the High Yield Bond and
Strategic Income Portfolios. Investors should not consider this performance data
as an indication of future performance of the High Yield Bond and Strategic
Income Institutional Portfolios or of the Investment Adviser.
The Investment Adviser's composite performance data shown below were calculated
in accordance with recommended standards of the Association for Investment
Management and Research ("AIMR"*), retroactively applied to all time periods.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns reflect the deduction of investment advisory fees, brokerage
commissions and execution costs paid by the Investment Adviser's institutional
private accounts, without provision for federal or state income taxes. Custodial
fees, if any, were not included in the calculation. The Investment Adviser's
composites include all actual, fee-paying, discretionary institutional private
accounts managed by the Investment Adviser that have investment objectives,
policies, strategies and risks substantially similar to those of the High Yield
Bond and Strategic Income Portfolios. Securities transactions are accounted for
on the trade date and accrual accounting is utilized. Cash and equivalents are
included in performance returns. The monthly returns of each of the Investment
Adviser's composites combine the individual accounts' returns (calculated on a
time-weighted rate of return that is revalued whenever cash flows exceed $500)
by asset-weighing each individual account's asset value as of the beginning of
the month. Quarterly and yearly returns are calculated by geometrically linking
the monthly and quarterly returns, respectively. The yearly returns are computed
by geometrically linking the returns of each quarter within the calendar year.
The institutional private accounts that are included in the Investment Adviser's
composites are not subject to the same types of expenses to which the High Yield
Bond and Strategic Income Portfolios are subject nor to the diversification
requirements, specific tax restrictions and investment limitations imposed on
the High Yield Bond and Strategic Income Portfolios by the Investment Company
Act or Subchapter M of the Internal Revenue Code. Consequently, the performance
results for each of the Investment Adviser's composites could have been
adversely affected if the institutional private accounts included in the
composite had been regulated as investment companies under the federal
securities laws.
- --------------
* AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
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<PAGE>
The investment results of the Investment Advisers composites presented below are
unaudited and are not intended to predict or suggest the returns that might be
experienced by the High Yield Bond or Strategic Income Institutional Portfolios
or an individual investing in such Portfolios. Investors should also be aware
that the use of a methodology different from that used below to calculated
performance could result in different performance data.
<TABLE>
<CAPTION>
Strategic Income Performance
High Yield Bond Performance -------------------------------------------------
-------------------------------------------------------------- Lehman Bros.
Investment Lehman Bros. Merrill Lynch First Boston Investment Mortgage- First Boston
Adviser's High Yield High Yield High Yield Adviser's Backed Securities High Yield
Year Composite Index(1) Master Index(2) Index(3) Composite Index(4) Index(3)
- -------------- ------------- --------------- --------------- ------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994(5)....... 1.45% 0.95% 0.88% 0.09%
1995.......... 19.38 19.17 19.89 17.36
1996(5),(6)... 9.36 3.48 2.85 3.77 5.34% 0.35% 3.77%
Last
year(6)...... 12.51 9.68 9.37 9.97
Since
inception(6)... 13.32 10.23 10.10 9.22 5.34* 0.35* 3.77*
</TABLE>
- ----------------
(1) The Lehman Brothers High Yield Index includes all U.S. domestic fixed income
securities having a maximum quality rating of Ba1 by Moody's (including
defaulted issues), a minimum principal amount outstanding of $100 million,
and a remaining term to maturity of at least one year, other than
payment-in-kind securities and Eurobonds. The Index reflects the
reinvestment of income, if any, but does not reflect fees, dealer markups,
or other expenses of investing.
(2) The Merrill Lynch High Yield Master Index includes all publicly placed
nonconvertible, coupon-bearing U.S. domestic debt securities with a
remaining term to maturity of at least one year, with par amounts
outstanding of at least $10 million at the start and close of the
performance measurement period, other than floating rate debt, equipment
trust certificates and Title 11 securities. Issues must be rated as less
than investment grade by Standard & Poor's or Moody's, but not in default.
The index reflects the reinvestment of income, if any, but does not reflect
fees, dealer markups, or other expenses of investing.
(3) The First Boston High Yield Index includes over 180 U.S. domestic issues
with an average maturity range of seven to ten years and with a minimum
issue size of $100 million. The Index reflects the reinvestment of income,
if any, but does not reflect fees, dealer markups, or other expenses of
investing.
(4) The Lehman Brothers Mortgage-Backed Securities Index is composed of all
fixed-rate, securitized mortgage pools of GNMA, FNMA and the FHLMC,
including GNMA Graduated Payment Mortgages, with a principal amount of at
least $50 million. The Index reflects the reinvestment of income, if any,
but does not reflect fees, dealer markups, or other expenses of investing.
(5) Commencement of investment operations is April 1, 1994 for the High Yield
Bond Composite and January 1, 1996 for the Strategic Income Composite.
(6) Through June 30, 1996.
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<PAGE>
INSTINCPRO896
<PAGE>
NICHOLAS-APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
INSTITUTIONAL INCOME PORTFOLIOS
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
February 11, 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 "Portfolio" and
collectively the "Portfolios"): Nicholas-Applegate High Yield Bond
Institutional Portfolio (the "High Yield Bond Portfolio") and Nicholas-Applegate
Strategic Income Institutional Portfolio (the "Strategic Income Portfolio").
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
Portfolios' Prospectus and should be read in conjunction with each such
Prospectus. The Prospectus may be obtained without charge by calling or writing
the Trust at the address and phone number given above.
TABLE OF CONTENTS
Page
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GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVES, POLICIES AND RISKS. . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 23
TRUSTEES AND PRINCIPAL OFFICERS. . . . . . . . . . . . . . . . . . . . . . . 23
INVESTMENT ADVISER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ADMINISTRATOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . 30
PURCHASE AND REDEMPTION OF PORTFOLIO SHARES. . . . . . . . . . . . . . . . . 31
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, INDEPENDENT
ACCOUNTANTS AND LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . 40
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
APPENDIX A: DESCRIPTION OF SECURITIES RATINGS. . . . . . . . . . . . . . . . .A1
APPENDIX B: FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .B1
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GENERAL INFORMATION
The Trust and the Master Trust were organized in December 1992 as
business trusts under the laws of Delaware. The Trust offers shares of numerous
portfolios with differing sales load, shareholder service plan and distribution
plan arrangements, including Series A portfolios, Series B portfolios, Series C
portfolios, Institutional portfolios and Qualified Portfolios. This Statement
of Additional Information contains information regarding two Portfolios, the
High Yield Bond Portfolio and the Strategic Institutional Income Portfolio.
The various portfolios of the Trust seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
of the Nicholas-Applegate Investment Trust (the "Master Trust"), an open-end
management investment company organized as a Delaware business trust. The
Master Trust offers shares of a number of separate series (each a "Fund" and
collectively the "Funds") to the portfolios and other investment companies and
institutional investors, including the High Yield Bond Fund, in which the High
Yield Bond Portfolio invests, and the Strategic Income Fund, in which the
Strategic Income Portfolio invests.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of each
Portfolio's investment objective and policies as set forth in the Portfolios'
Prospectus. As each Portfolio seeks to achieve its investment objective by
investing all of its assets in a corresponding Fund with the same investment
objective as the Portfolio, the following discussion describes the various
investment policies and techniques employed by the Funds. There can be no
assurance that the investment objective of any of the Funds or Portfolios can be
achieved.
CORPORATE DEBT SECURITIES
Each Fund invests in non-convertible debt securities of foreign and
domestic companies over a cross-section of industries. The debt securities in
which the Funds may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
RISK OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities. Yields on short, intermediate, and long-term securities depend
on a variety of factors, including the general condition of the money and bond
markets, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with short maturities and lower
yields. The market prices of debt securities usually vary, depending upon
available yields. An increase in interest rates will generally reduce the value
of such portfolio investments, and a decline in interest rates will generally
increase the value of such portfolio investments. The ability of the Funds to
achieve their investment objectives also depends on the continuing ability of
the issuers of the debt securities in which the Funds invest to meet their
obligations for the payment of interest and principal when due.
SHORT-TERM INVESTMENTS
Each of the Funds invests in any of the following securities and
instruments:
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BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Each Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.
A Fund holding instruments of foreign banks or financial institutions
may be subject to additional investment risks that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. See "Foreign Investments" below. Such risks include
future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that a Fund
may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in their 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.
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Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
MONEY MARKET FUNDS
The Funds may under certain circumstances invest a portion of their
assets in money market funds. The Investment Company Act prohibits the Funds
from investing more than 5% of the value of their total assets in any one
investment company, or more than 10% of the value of their total assets in
investment companies as a group, and also restricts their investment in any
investment company to 3% of the voting securities of such investment company.
In addition to the advisory and other fees paid by the Funds, an investment in a
money market mutual fund will involve payment by a Fund of its pro rata share of
advisory and administrative fees charged by such fund.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit 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 also invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay principal and
interest in a timely manner may be affected by a number of factors, including
its cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each of the Funds may acquire variable and floating rate instruments.
Such instruments are frequently not rated by credit rating agencies; however,
unrated variable and floating rate instruments purchased by a Fund will be
determined by the Investment Adviser under guidelines established by the Master
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Trust's Board of Trustees to be of comparable quality at the time of the
purchase and rated instruments eligible for purchase by the Fund. In making
such determinations, the Investment Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will monitor their financial condition. An active secondary market may not exist
with respect to particular variable or floating rate instruments purchased by
the Fund. The absence of such an active secondary market could make it
difficult for the Fund to dispose of the variable or floating rate instrument
involved in the event of the issuer of the instrument defaulting on its payment
obligation or during periods in which the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss to
the extent of the default. Variable and floating rate instruments may be
secured by bank letters of credit.
PARTICIPATION INTERESTS
The Funds may invest in participation interests, subject to the
limitation on investments by the Funds in illiquid investments. Neither Fund
currently intends 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 a 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, a 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 agreement, 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.
MORTGAGE-RELATED SECURITIES
Each of the Funds may invest in U.S. 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 Funds 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
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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 CMO in which the
Funds may invest is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the first class has been retired.
FOREIGN INVESTMENTS
Each of the Funds may invest in securities of foreign issuers that are
not publicly traded in the United States. The Funds may also invest in
depository receipts.
DEPOSITORY RECEIPTS. American Depository Receipt ("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.
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The Funds may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of foreign entities
that may be fixed-rate par bonds or floating-rate discount bonds and are
generally collateralized in full as to principal due at maturity by U.S.
Treasury zero coupon obligations that have the same maturity as the Brady Bonds.
However the Funds may also invest in uncollateralized Brady Bonds. Brady Bonds
are generally viewed as having three or four valuation components: (i) any
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute what is referred to as the "residual risk" of such bonds).
In the event of a default with respect to collateralized Brady Bonds as a result
of which the payment obligations of the issuer are accelerated, the zero coupon
U.S. Treasury securities held as collateral for the payment of principal will
not be distributed to investors, nor will such obligations be sold and the
proceeds distributed. The collateral will be held by the collateral agent to
the scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have ben due on the Brady Bonds in the normal
course. In addition, in light of the residual risk of Brady Bonds and, among
other factors, the history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds may be viewed as speculative.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, diversification and balance of
payments position. The internal politics of certain foreign countries may not
be as stable as those of the United States. Governments in certain foreign
countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective economies. Action by
these governments could include restrictions on foreign investment,
nationalization, expropriation of goods or imposition of taxes, and could have a
significant effect on market prices of securities and payment of interest. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by the trade policies and economic conditions
of their trading partners. Enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
CURRENCY FLUCTUATIONS. Each Fund may invest in securities denominated
in foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
MARKET CHARACTERISTICS. The Investment Adviser expects that most
foreign securities in which the Funds invest will be purchased in
over-the-counter markets or on exchanges located in the countries in which the
principal offices of the issuers of the various securities are located, if that
is the best available market. Foreign exchanges and markets may be more
volatile than those in the United States. While growing in volume, they usually
have substantially less volume than U.S. markets, and the Funds' portfolio
securities may be less liquid and more volatile than U.S. Government securities.
Moreover, settlement practices for transactions in foreign markets may differ
from those in United States markets, and may include delays beyond periods
customary in the United States. Foreign security trading practices, including
those involving securities settlement where Fund assets may be released prior to
receipt of payment or securities, may expose the Fund to increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer.
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Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of the
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest payable on certain of the Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolios'
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction of U.S. federal income tax purposes for his proportionate share of
such foreign taxes paid by the Funds.
COSTS. To the extent that the Funds invest in foreign securities, the
expense ratios of the Fund 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.
PREFERRED STOCKS
The High Yield Bond Fund may invest in preferred stocks. Preferred
stock, unlike common stock, offers a stated dividend rate payable from a
corporation's earnings. Such preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline. Dividends on some preferred stock may be
"cumulative," requiring all or a portion of prior unpaid dividends to be paid
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
distribution of a corporation's assets in the event of a liquidation are
generally subordinate to the rights associated with a corporation's debt
securities.
CONVERTIBLE SECURITIES AND WARRANTS
The Funds may invest in convertible securities and warrants. A
convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in an issuer's capital
structure, but are usually subordinated to similar non-
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convertible securities. While providing a fixed income stream (generally higher
in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do no
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
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 and currencies which are
otherwise eligible for purchase by the Fund, and related indexes, subject to
certain restrictions.
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). For example, purchasing put options may be used as a
portfolio investment strategy when the Investment Adviser perceives significant
short-term risk but substantial long-term appreciation for the underlying
security. The put option acts as an insurance policy, as it protects against
significant downward price movement while it allows full participation in any
upward movement. If a Fund is holding a security which it feels has strong
fundamentals, but for some reason may be weak in the near term, the Fund may
purchase a put option on such security, thereby giving itself the right to sell
such security at a certain strike price throughout the term of the option.
Consequently, the Fund will exercise the put only if the price of such security
falls below the strike price of the put. The difference between the put's
strike price and the market price of the underlying security on the date the
Fund exercises the put, less transaction costs, will be the amount by which the
Fund will be able to hedge against a decline in the underlying security. If
during the period of the option the market price for the underlying security
remains at or above the put's strike price, the put will expire worthless,
representing a loss of the price the Fund paid for the put, plus transaction
costs. If the price of the underlying security increases, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for the
put option less any amount for which the put may be sold.
If 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. For example, a Fund may purchase a call option on a security it intends
to buy in the future, to seek to protect the Fund against an increase in the
price of the security. The Fund will exercise a call option only if the price
of the underlying security is above the strike price at the time of exercise.
If during the option period the market price for the underlying security remains
at or below the strike price of the call option, the option will expire
worthless, representing a loss of the price paid for the option, plus
transaction costs. If the call option has been purchased to hedge against an
increase in the price of the underlying security and the price of the underlying
security thereafter falls, the price of the security when purchased will be
increased by the premium paid for the call option less any amount for which such
option may be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the
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option previously purchased. A Fund generally will purchase only those options
for which the Investment Adviser believes there is an active secondary market to
facilitate closing transactions.
WRITING PUT AND CALL OPTIONS. Each Fund may also write covered put
and call options.
A put option is "covered" if a Fund holds cash or liquid high-grade
debt securities in a segregated account with the Custodian in an amount
sufficient to acquire the security, or holds a put option on the same security
or index with the same or a greater exercise price (or with a lesser price and
with the balance maintained as cash or liquid high grade debt securities). The
writer of a put option receives a premium and gives the purchaser the right to
require the writer to buy the security underlying the option at the exercise
price.
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 put option
will permit a Fund to permit the cash or other segregated collateral for other
investment purposes or to write another put option on the underlying security
with either a different exercise price, expiration date or both. Effecting a
closing transaction in the case of a written call option will permit the Fund to
write another call option on the underlying security with either a different
exercise price, expiration date or both; in addition, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. A Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund. Similarly,
because increases in the market price of a put option will generally reflect
decreases in the market price of the underlying security, any loss to the Fund
resulting from the repurchase of a put option is likely to be offset in whole or
in part by the depreciation of the underlying security if it were to be
purchased by the Fund.
INDEX OPTIONS. Each Fund may also purchase put and call options which
respect to the Standard & Poor's 500 Stock Price Index and other securities
indices. Such options may be purchased as a hedge against changes resulting
from market conditions in the values of securities which are held in a Fund's
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portfolio or which it intends to purchase or sell, or when they are economically
appropriate for the reduction of risks inherent in the ongoing management of the
Fund.
The distinctive characteristics of options on indices create certain
risks that are not present with options generally. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular security, 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 security prices in the markets generally rather than movements in the
price of a particular security. Accordingly, successful use by a Fund of
options on an index would be subject to the Investment Adviser's ability to
predict correctly movements in the direction of the markets generally. This
requires different skills and techniques than predicting changes in the price of
individual securities.
Index prices may be distorted if trading of certain securities
included in the index is interrupted. Trading of index options also may be
interrupted in certain circumstances, such as if trading were halted in a
substantial number of securities included in the index. If this were to occur,
the Fund would not be able to close out options which it had purchased, and if
restrictions on exercise were imposed, the Fund might be unable to exercise an
option it holds, which could result in substantial losses to the Fund. It is
the policy of the Funds to purchase put or call options only with respect to an
index which the Investment Adviser believes includes a sufficient number of
securities to minimize the likelihood of a trading halt in the index.
RISKS OF TRANSACTIONS IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of option of underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or clearing corporation may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which a Fund may enter into options transactions may be limited by the
Internal Revenue Code requirements for qualification of the corresponding
Portfolio as a regulated investment company. See "Taxes."
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will not
be available. For example, there may be no daily price fluctuation limits in
such exchanges or markets, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the Fully Discretionary Fund
as an option writer could lose amounts substantially in excess of its initial
investment, due
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to the margin and collateral requirements typically associated with such option
writing. See "Dealer Options" below.
DEALER OPTIONS. The Funds will engage in transactions involving
dealer options as well as exchange-traded options. Certain risks are specific
to dealer options. While a Fund might look to a clearing corporation to
exercise exchange-traded options, if the Fund were to purchase a dealer option
it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, a Fund may generally be able to
realize the value of a dealer option it has purchased only by exercising or
reselling the option to the dealer who issued it. Similarly, when a Fund writes
a dealer option, the Fund may generally be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to whom the Fund originally wrote the option. While the Funds will seek
to enter into dealer options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with the Funds,
there can be no assurance that a 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 option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency
of the other party, a Fund may be unable to liquidate a dealer option. With
respect to options written by a Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because a
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement
may impair the Fund's ability to sell portfolio securities at a time when such
sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities. A
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, each 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, each Fund will change its treatment of such
instruments accordingly.
FOREIGN CURRENCY OPTIONS
Each Fund may buy or sell put and call options on foreign currencies.
A put or call option on a foreign currency gives the purchaser of the option to
right to sell or purchase a foreign currency at the exercise price until the
option expires. The Fund will use foreign currency options separately or in
combination to control currency volatility. Among the strategies employed to
control currency volatility is an option collar. An option collar involves the
purchase of a put option and the simultaneous sale of 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 and in-
the-money strike price. Foreign currency options are derivative securities.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Fund to reduce foreign currency risk
using such options.
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As with other kinds of option transactions, the writing of an option
on foreign currency will constitute only a partial hedge, up to the amount of
the premium received. The Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of an exchange rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
Each Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund
might purchase a particular currency or enter into a forward currency contract
to preserve the U.S. dollar price of securities it intends to or has contracted
to purchase. Alternatively, it might sell a particular currency on either a
spot or forward basis to hedge against an anticipated decline in the dollar
value of securities it intends to or has contracted to sell. Although this
strategy could minimize the risk of loss due to a decline in the value of the
hedged currency, it could also limit any potential gain from an increase in the
value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds may invest in futures contracts and options on
futures contracts as a hedge against changes in market conditions, interest
rates or currency exchange rates. The Funds will trade in such derivative
securities for bona fide hedging purposes and (in the case of the Strategic
Income Fund) otherwise, in accordance with the rules of the Commodity Futures
Trading Commission ("CFTC"). Each Fund will segregate cash, U.S. Government
securities, or other high quality liquid debt or equity securities 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.
No price is paid or received by a Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
will be required to deposit in a segregated account with its Custodian an amount
of cash, U.S. Government securities, or other high quality liquid debt or equity
securities equal to approximately 5% of the contract amount. This amount is
known as initial margin. The margin requirements for foreign futures contracts
may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to a Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying 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 a
Fund has purchased an index futures contract and the price of the underlying
index has risen, that position will have increased in value and the Fund will
receive from the broker a variation margin payment equal to that increase in
value. Conversely, when the Fund has purchased an index futures contract and
the price of the underlying index has declined, the position will be less
valuable and the Fund will be required to make a variation margin payment to the
broker.
At any time prior to expiration of a futures contract, a 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
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determination of variation margin is made on closing the position. Additional
cash is paid by or released to the Fund, which realizes a loss or gain.
STOCK INDEX FUTURES. The High Yield Bond Fund may invest in futures
contracts on stock indices. Currently, stock index futures contracts can be
purchased or sold with respect to the S&P 500 Stock Price Index on the Chicago
Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade. Foreign financial and
stock index futures are traded on foreign exchanges including the London
International Financial Futures Exchange, the Singapore International Monetary
Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Funds may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by a Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by a Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. A Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
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FOREIGN CURRENCY FUTURES CONTRACTS. Each Fund may use foreign
currency futures 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 the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. The Fund
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, 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.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct
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forecast of general trends by the Investment Adviser may still not result in a
successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. Each of the Funds may purchase options
on the futures contracts they can purchase or sell, as described above. A
futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract at
a specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder or writer of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. There is no
guarantee that such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also
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entails the risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option. Depending on the pricing
of the option compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or may not be less
risky than ownership of the futures contract or such securities. In general,
the market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Funds because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS.
Except as otherwise described in the Portfolios' Prospectus, 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 Funds. A Fund may
not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. A Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
Upon the purchase of futures contracts by a Fund, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and may be changed by the Trustees of the Master
Trust if applicable law permits such a change and the change is consistent with
the overall investment objective and policies of the Fund.
The extent to which a Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment company.
See "Taxes."
INTEREST RATE AND CURRENCY SWAPS
INTEREST RATE SWAPS. As indicated in the Prospectus, 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
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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.
SWAP OPTIONS. Each 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 a 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. Each Fund may also 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, a Fund relies on the other party to the transaction to perform its
obligations pursuant to the underlying agreement. If there were a default by
the other party to the transaction, 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 each 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 a 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 a Fund's ability to enter into other transactions at
a time when doing so might be advantageous.
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
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<PAGE>
extent that the proceeds from a sale of the underlying securities is less than
the repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the Fund's rights with respect to such securities to
be delayed or limited. Repurchase agreements are considered to be loans under
the Investment Company Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each of the Funds may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
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
The Trust has entered into a Credit Agreement on behalf of its various
Portfolios with several banks and Chemical Bank, as administrative agent for the
lenders, to borrow up to $50,000,000 from time to time for purposes of meeting
shareholder redemption requests without the necessity of requiring the Funds to
sell portfolio securities, at times when the Investment Adviser believes such
sales are not in the best interests of the Portfolio's shareholders, in order to
provide the Portfolios with cash to meet such redemption requests. The Credit
Agreement expires on April 10, 1997, unless renewed by the parties.
Under the Credit Agreement, each Portfolio may borrow, repay and
reborrow amounts (collectively, the "Revolving Credit Loans") in increments of
$50,000, provided the Revolving Credit Loans outstanding at any time aggregate
at least $350,000 (the "Credit Facility"). The Trust will pay a commitment fee
at the rate of 0.10% per annum of the average daily unused portion of the Credit
Facility, and may at any time terminate the Credit Agreement or reduce the
lenders' commitment thereunder in increments of $2,500,000.
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<PAGE>
While outstanding, the Revolving Credit Loans will bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or (ii)
the prime rate of interest of Chemical Bank. If, as a result of changes in
applicable laws, regulations or guidelines with respect to the capital adequacy
of any lender, the return on such lender's capital is reduced, the Trust may be
required to adjust the rate of interest to compensate such lender for such
reduction. Each Revolving Credit Loan is payable in thirty days, and may be
prepaid at any time in increments of $100,000 without premium or penalty. No
Portfolio is liable for repayment of a Revolving Credit Loan to any other
Portfolio.
The Credit Agreement contains, among other things, covenants that
require each Portfolio to maintain certain minimum ratios of debt to net worth;
limit the ability of the Trust to incur other indebtedness and create liens on
its assets or guarantee obligations of others; merge or consolidate with, or
sell its assets to, others; make material changes in its method of conducting
business; make distributions to shareholders in excess of the requirements of
Subchapter M of the Internal Revenue Code in the event of a default under the
Credit Agreement; or make changes in fundamental investment policies. The
Credit Agreement also contains other terms and conditions customary in such
agreements, including various events of default.
LENDING PORTFOLIO SECURITIES
Each of the Funds may lend its portfolio securities in an amount not
exceeding 30% of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund
to reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Internal Revenue Code.
ILLIQUID SECURITIES
Neither Fund 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. The Investment Adviser will
monitor the amount of illiquid securities in the Fund's portfolio, under the
supervision of the Master Trust's Board of Trustees, to ensure compliance with
the Fund's investment restrictions.
Each Fund may invest in foreign securities that are restricted against
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions. Unless these securities are acquired directly
from the issuer or its underwriter, the Fund treats such foreign securities
whose principal market is abroad as not subject to the investment limitation on
securities subject to legal or contractual restrictions on resale.
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Portfolios, and the Master Trust, on
behalf of the corresponding Funds, have adopted the following fundamental
policies that cannot be changed without the affirmative vote of a
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<PAGE>
majority of the outstanding shares of the appropriate Portfolio or Fund,
respectively (as defined in the Investment Company Act). Whenever a Portfolio is
requested to vote on a change in the investment restrictions of a Fund, the
Trust will hold a meeting of its shareholders and will cast its vote as
instructed by the shareholders. If the investment restrictions of a Fund are
changed, the corresponding Portfolio may withdraw its investment in the Fund if
the Trust's Board of Trustees determines that withdrawal is in the best
interests of the Portfolio and its shareholders, but only upon shareholder
approval. Upon such withdrawal, the Trust's Board would consider alternative
investments, including investing all of the Portfolio's assets in another
investment company with the same investment objective, policies and restrictions
as the Portfolio or hiring an investment adviser to manage the Portfolio's
assets in accordance with the investment objectives, policies and restrictions
of the Portfolio described in the Portfolio's Prospectus and in this Statement
of Additional Information.
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
No Portfolio or Fund:
1. May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Portfolio or Fund's total assets may be
invested without regard to this restriction and a Portfolio will be permitted to
invest all or a portion of its assets in a corresponding Fund or other
diversified, open-end management investment company with substantially the same
investment objective, policies and restrictions as the Portfolio. This
restriction also does not apply to investments by a Portfolio or Fund in
securities of the U.S. Government or any of its agencies and instrumentalities.
2. May purchase more than 10% of the outstanding voting securities,
or of any class of securities, of any one issuer, or purchase the securities of
any issuer for the purpose of exercising control or management, except that a
Portfolio will be permitted to invest all or a portion of its assets in a
corresponding Fund or other diversified, open-end management investment company
with substantially the same investment objective, policies and restrictions as
the Portfolio.
3. May invest 25% or more of the market value of its total assets in
the securities of issuers in any one particular industry, except that a
Portfolio will be permitted to invest all or a portion of its assets in a
corresponding Fund or other diversified, open-end management investment company
with substantially the same investment objective, policies and restrictions as
the Portfolio. This restriction does not apply to investments by a Portfolio or
Fund in securities of the U.S. Government or its agencies and instrumentalities.
4. May purchase or sell real estate. However, a Portfolio or Fund
may invest in securities secured by, or issued by companies that invest in, real
estate or interests in real estate.
5. May make loans of money, except that a Portfolio or Fund may
purchase publicly distributed debt instruments and certificates of deposit and
enter into repurchase agreements. Each Portfolio and Fund reserves the
authority to make loans of its portfolio securities in an aggregate amount not
exceeding 30% of the value of its total assets.
6. May borrow money on a secured or unsecured basis, except that (a)
the High Yield Bond Fund may borrow 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, and (b) the
Strategic Income Portfolio or Fund may borrow up to 33 1/3% of the value of its
total assets for temporary,
B-21
<PAGE>
extraordinary or emergency purposes, for the clearance of transactions, or to
purchase securities. Pursuant to the Investment Company Act, borrowings will
only be made from banks and will be made only to the extent that the value of
the Fund's total assets, less its liabilities other than borrowings, is equal to
at least 300% of all borrowings (including the proposed borrowing). If such
asset coverage of 300% is not maintained, the Portfolio or Fund will take prompt
action to reduce its borrowings as required by applicable law.
7. May pledge or in any way transfer as security for indebtedness
any securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Portfolios or
Funds from engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
9. May invest more than 15% 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 as set forth in
restriction 6 above.
11. May invest in securities of other investment companies, except
(a) that a Portfolio may invest all or a portion of its assets in a
corresponding Fund or other diversified, open-end management investment company
with the same investment objective, policies and restriction as the Portfolio,
(b) in compliance with the Investment Company Act and applicable state
securities laws, or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Portfolio or Fund.
12. May issue senior securities, except that a Portfolio or Fund may
borrow money as permitted by restrictions 6 and 7 above. This restriction shall
not prohibit the Portfolios or Funds from engaging in 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 or Portfolio
may invest in 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) not more than 25% of a Fund's net assets would be hedged,
and (iv) not more than 25% of a Fund's net assets are used as cover for options
written by the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the
Boards of Trustees of the Trust, no Portfolio or Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships, although
a Portfolio or a Fund may invest in the securities of companies which invest in
or sponsor such programs.
2. May purchase any security if as a result the Portfolio or Fund
would then have more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors) having a record of
less than three years of continuous operation, except (a) that a Portfolio may
invest all or a portion
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<PAGE>
of its assets in a corresponding Fund or other diversified, open-end management
investment company with the same investment objective, policies and restrictions
as the Portfolio in compliance with the Investment Company Act, or (b) as part
of a merger, consolidation, acquisition or reorganization involving the
Portfolio or Fund.
3. May purchase securities of any issuer if any officer or trustee
of the Portfolio or Fund, or an office or director of ICAC, the Distributor, or
the Investment Adviser, owning more than 1/2 of 1% of the outstanding securities
of such issuer, own in the aggregate more than 5% of the outstanding securities
of such issuer.
4. May lend any securities from its portfolio unless the value of
the collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market daily.
5. May invest in warrants, valued at the lower of cost or market, in
excess of 5% of the market value of the Portfolio's or Fund's net assets, or in
excess of 2% of the market value of the Portfolio's or Fund's net assets if such
warrants are not listed on the New York Stock Exchange or the American Stock
Exchange, as of the date of investment.
BLUE SKY RESTRICTIONS
In order to permit the sale of shares of a Portfolio in certain
states, the Boards of Trustees of the Trust and the Master Trust may, in its
sole discretion, adopt additional restrictions on investment policies more
restrictive than those described above. Should either of such Boards determine
that any such restrictive policy is no longer in the best interests of such
respective trust or its investors, the Trust may cease offering shares of a
Portfolio in the state involved and the Boards of Trustees may revoke such
restrictive policy. Moreover, if the states involved no longer require any such
restrictive policy, the Board of Trustees may, at their sole discretion, revoke
such policy.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of South Dakota, that (i) neither Fund will
invest more than 10% of its total assets in interests in real estate investment
trusts, (ii) neither Fund will invest more than 15% of its total assets in
equity securities of issuers which are not readily marketable, in securities of
issuers which the Portfolio or Fund is restricted from selling without
registration under the Securities Act (other than restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act that have been
determined by the Master Trust's Board of Trustees to be liquid based upon the
trading markets for the securities), and securities of unseasoned issuers
referred to in restriction 2 above (these restrictions will not affect the
ability of a Portfolio to invest in securities of a corresponding Fund or other
diversified, open-end management investment companies with the same investment
objectives, policies and restrictions as the Portfolio), and (iii) the Master
Trust will provide adequate notice to the Trust of changes in these investment
restrictions to enable the Trust to provide at least 30 days advance notice of
such changes to its shareholders.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of Ohio, that no Fund will invest more than 50%
of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years continuous operation or
securities of issuers which are restricted as to disposition (including without
limitation securities issued pursuant to Rule 144A under the Securities Act of
1933).
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<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1996, the following persons held of record more
than 5% of the outstanding shares of the Portfolios: High Yield Bond
Portfolio -- Sherryl A. Nicholas, Trustee of Sherryl A. Nicholas Revocable
Trust, P.O. Box 2295, Rancho Santa Fe, California 92067 (86.0%); Dennis W.
Conner, 720 Gateway Center Drive, Suite E, San Diego, California 92102 (6.09%).
Strategic Income Portfolio -- Sherryl A. Nicholas, Trustee of Sherryl A.
Nicholas Revocable Trust, P.O. Box 2295, Rancho Santa Fe, California 92067
(93.7%). As of such date, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of each of the Portfolios.
TRUSTEES AND PRINCIPAL OFFICERS
TRUST
The names and addresses of the Trustees and principal officers of the
Trust, including their positions and principal occupations during the past five
years, are shown below. Trustees whose names are followed by an asterisk are
"interested persons" of the Trust (as defined by the Investment Company Act).
Unless otherwise indicated, the address of each Trustee and officer is 600 West
Broadway, 30th Floor, San Diego, California 92101.
FRED C. APPLEGATE, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES. 885
La Jolla Corona Court, La Jolla, California. President, Hightower Management
Co., a financial management firm (since January 1992); formerly President,
Nicholas-Applegate Capital Management (from August 1984 to December 1991).
Director of Nicholas-Applegate Fund, Inc. (since 1987). Mr. Applegate's
interests in Nicholas-Applegate Capital Management, Inc., the general partner of
the Investment Adviser, were acquired by Mr. Nicholas in 1991 and 1992.
ARTHUR B. LAFFER, TRUSTEE.*/ 5405 Morehouse Drive, Suite 340, San
Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an economic
consulting firm (since 1979); Chairman, Laffer Advisors Incorporated, economic
consultants (since 1981); Director, Nicholas-Applegate Fund, Inc. (since 1987);
Director, U.S. Filter Corporation (since March 1991), 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 or its affiliates received
$100,000 in 1995 and $100,000 in 1994 from the Investment Adviser as
compensation for consulting services provided from time to time to the
Investment Adviser.
CHARLES E. YOUNG, TRUSTEE. UCLA, 2147 Murphy Hall, Los Angeles,
California. Chancellor, UCLA (since 1968); Director, Nicholas-Applegate Fund,
Inc. (since 1992); Director, Intel Corp. (since 1974), Academy of Television
Arts and Sciences Foundation (since October 1988), Los Angeles World Affairs
Council (since 1977) and Town Hall of California (since 1982).
JOHN D. WYLIE, PRESIDENT. Partner (since January 1994), Chief
Investment Officer - Investor Services Group (since December 1995), and
Portfolio Manager (since January 1990), Nicholas-Applegate Capital Management.
Mr. Wylie is also the President of the Master Trust.
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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);
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 a Vice President of the Master
Trust.
E. BLAKE MOORE, JR., SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities (since
1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989 to 1993).
Mr. Moore is also the Secretary of the Master Trust.
Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $14,000 for services rendered as a Trustee of the Trust, and $1,000 for
each meeting attended ($2,000 per Committee meeting for Committee chairmen).
Each Trustee is also reimbursed for out-of-pocket expenses incurred as a
Trustee.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1996, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
Pension or
Retirement
Benefits Estimated Total
Accrued as Annual Compensation
Aggregate Part of Benefits from Trust and
Compensation Trust Upon Trust Complex
Name from Trust Expenses Retirement Paid to Trustee
- --------------------------------------------------------------------------------
Fred C. Applegate $ 15,000 None N/A $ 29,000 (45*)
Arthur B. Laffer $ 15,500 None N/A $ 31,500 (45*)
Charles E. Young $ 15,000 None N/A $ 31,000 (45*)
* Indicates number of funds in Trust complex, including the Portfolios.
MASTER TRUST
The names and addresses of the Trustees and principal officers of the
Master Trust, including their positions and principal occupations during the
past five years, are shown below. The positions and principal occupations of
the officers during the past five years, are set forth above. Trustees whose
names are followed by an asterisk are "interested persons" of the Master 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.
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ARTHUR E. NICHOLAS, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.*/
Managing Partner and Chief Investment Officer, Nicholas-Applegate Capital
Management, since 1984, and Director and Chairman of the Board, Nicholas-
Applegate Securities. Director and Chairman of the Board of Directors of
Nicholas-Applegate Fund, Inc., a registered open-end investment company, since
1987.
DANN V. ANGELOFF, TRUSTEE. 727 West Seventh Street, Los Angeles,
California. President, The Angeloff Company, corporate financial advisers
(since 1976); Director, Nicholas-Applegate Fund, Inc. (since 1987); Trustee
(1979 to 1987) and University Counselor to the President (since 1987),
University of Southern California; Director, Public Storage, Inc., a real estate
investment trust (since 1980), and Leslies Poolmart, a distributor of swimming
pool services and products (since 1996).
WALTER E. AUCH, TRUSTEE*. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio communications
company (since 1987); Fort Dearborn Fund (since 1987); Brinson Funds (since
1994), Smith Barney VIP Fund (since 1988), Smith Barney Advisers Fund (since
1981), and Smith Barney Trak Fund (since 1992), registered investment companies;
Pimco Advisors, LP, an investment manager (since 1994); and Banyan Realty Fund
(since 1987), Banyan Strategic Land Fund (since 1987), Banyan Strategic Land
Fund II (since 1988), and Banyan Mortgage Fund (since 1988), real estate
investment trusts. Formerly Chairman and Chief Executive Officer, Chicago Board
Options Exchange (1979 to 1986) and Senior Executive Vice President, Director
and Member of the Executive Committee, PaineWebber, Inc. (until 1979). Mr. Auch
is considered to be an "interested person" of the Master Trust under the 1940
Act because he is a director of a company which has a broker-dealer subsidiary.
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991), and research associate, Harvard School of Education (since 1996);
Director, Nicholas-Applegate Fund, Inc. (since 1987), Emerging Germany Fund
(since 1991), Premiere Radio Networks, Inc. (since 1991), Moovies, Inc. (since
1995). Formerly Managing Director of Global Equity Transactions Group and
member of Board of Directors, Prudential Securities (from 1986 to June 1991).
DARLENE DEREMER, TRUSTEE.* 155 South Street, Wrentham, Massachusetts.
President and Founder, DeRemer Associates, a marketing consultant for the
financial services industry (since 1987); Vice President, PBHG Funds, Inc.
(since 1995); formerly Vice President and Director, Asset Management Division,
State Street Bank and Trust Company (from 1982 to 1987), and Vice President, T.
Rowe Price & Associates (1979 to 1982); Director, Jurika & Voyles Fund Group
(since 1994), Nicholas-Applegate Strategic Opportunities Ltd. (since 1994),
Nicholas-Applegate Securities International (since 1994), and King's Board
Montessori School (Since 1995); Member of Advisory Board, Financial Women's
Association (since 1995). Ms. DeRemer is considered to be an "interested
person" of the Master Trust under the 1940 Act because DeRemer Associates
received $100,736 in 1995 and $54,247 in 1994 from the Investment Adviser as
compensation for consulting services provided in connection with its
institutional business.
GEORGE F. KEANE, TRUSTEE. 450 Post Road East, Westport, Connecticut.
President Emeritus and Senior Investment Adviser, The Common Fund, a non-profit
investment management organization representing educational institutions (since
1993), after serving as its President (from 1971 to 1992); Member of Investment
Advisory Committee, New York State Common Retirement Fund (since 1982); Director
and Chairman of the Investment Committee, United Negro College Fund (since
1987); Director, Investor Responsibility Research Center (since 1987); Director,
United Educators Risk Retention Group (since 1989); Director, RCB Trust Company
(since 1991); Director, School, College and University Underwriters Ltd. (since
1986); Trustee, Fairfield University (since 1993); Director, The Bramwell Funds,
Inc. (since 1994); Chairman of the Board, Trigen Energy Corporation (since
1994); Director, Universal Stainless & Alloy Products, Inc. (since 1994).
Formerly President, Endowment Advisers, Inc. (from August 1987 to December
1992).
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JOHN D. WYLIE, PRESIDENT.
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER.
PETER J. JOHNSON, VICE PRESIDENT.
E. BLAKE MOORE, JR., SECRETARY.
Each Trustee of the Master Trust who is not an officer or affiliate of the
Master Trust, the Investment Adviser or the Distributor receives an aggregate
annual fee of $14,000 for services rendered as a Trustee of the Master Trust,
and $1,000 for each meeting attended ($2,000 per Committee meeting for Committee
chairmen). Each Trustee is also reimbursed for out-of-pocket expenses incurred
as a Trustee.
The following table sets for the aggregate compensation paid by the
Master Trust for the fiscal year ended March 31, 1996, to the Trustees who are
not affiliated with the Investment Adviser and the aggregate compensation paid
to such Trustees for service on the Master Trust's board and that all other
funds in the "Master Trust complex" (as defined in Schedule 14A under the
Securities Exchange Act of 1934):
Pension or Total
Retirement Compensation
Benefits Estimated from Master
Aggregate Accrued as Annual Trust and
Compensation Part of Benefits Master Trust
from Master Master Trust Upon Complex Paid
Name Trust Expenses Retirement to Trustee
- --------------------------------------------------------------------------------
Dann V. Angeloff $ 15,500 None N/A $ 32,500 (13*)
Walter E. Auch $ 15,000 None N/A $ 15,000 (12*)
Theodore J. Coburn $ 15,000 None N/A $ 29,000 (13*)
Darlene DeRemer $ 15,000 None N/A $ 15,000 (12*)
George F. Keane $ 15,000 None N/A $ 15,000 (12*)
* Indicates total number of funds in Master Trust complex, including the Funds.
INVESTMENT ADVISER
The Trust has not engaged the services of an investment adviser with
respect to the Portfolios because the Portfolios invest all of their assets in
corresponding Funds. The Investment Adviser to the Master Trust is
Nicholas-Applegate Capital Management, a California limited partnership, with
offices at 600 West Broadway, 30th Floor, San Diego, California 92101.
The Investment Adviser was organized in 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
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Capital Management Holdings, Inc., a California corporation owned by Mr.
Nicholas. The Investment Adviser currently has fourteen partners (including Mr.
Nicholas) who manage a staff of approximately 350 employees, including 28
portfolio managers.
Personnel of the Investment Adviser may invest in securities for their
own accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Funds, establishes
procedures for personal investing, and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance, and
participation in initial public offerings is prohibited. In addition,
restrictions on the timing of personal investing in relation to trades by the
Funds and on short-term trading have been adopted.
THE INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement between the Master Trust and
the Investment Adviser with respect to the Funds, the Master Trust retains the
Investment Adviser to manage the Funds' investment portfolios, subject to the
direction of the Master Trust's Board of Trustees. The Investment Adviser is
authorized to determine which securities are to be bought or sold by the Funds
and in what amounts.
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by a Fund
or the Master Trust in connection with the matters to which the Investment
Advisory Agreement relates, except for liability resulting from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of the Investment Adviser's reckless disregard of its duties and
obligations under the Investment Advisory Agreement. The Master Trust has
agreed to indemnify the Investment Adviser against liabilities, costs and
expenses that the Investment Adviser may incur in connection with any action,
suit, investigation or other proceeding arising out of or otherwise based on any
action actually or allegedly taken or omitted to be taken by the Investment
Adviser in connection with the performance of its duties or obligations under
the Investment Advisory Agreement or otherwise as an investment adviser of the
Master Trust. The Investment Adviser is not entitled to indemnification with
respect to any liability to the Master Trust or its shareholders by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or of its reckless disregard of its duties and obligations under the
Investment Advisory Agreement.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to any Fund by the
Master Trust (by the Board of Trustees of the Master Trust or vote of a majority
of the outstanding voting securities of the Fund, as defined in the Investment
Company Act) or the Investment Adviser upon not more than 60 days' written
notice, without payment of any penalty. The Investment Advisory Agreement
provides that it will continue in effect with respect to each Fund for a period
of more than two years from its execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.
EXPENSE LIMITATION
The Investment Adviser has agreed to defer its management fees payable
by each Fund, and to absorb other expenses payable by each Fund and Portfolio
(including administrative fees and distribution expenses for the Portfolio, and
the Portfolio's allocable share of the operating expenses of the corresponding
Fund, but excluding interest, taxes, brokerage commissions and other costs
incurred in connection with portfolio securities transactions, organizational
expenses and other capitalized expenditures and extraordinary expenses), to
ensure that the operating expenses for the Portfolios do not exceed the amounts
specified in the Portfolios' prospectus. Amounts payable pursuant to these
arrangements are settled monthly.
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ADMINISTRATOR
The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, ICAC is
responsible for performing all administrative services required for the daily
business operations of the Trust, subject to the supervision of the Board of
Trustees of the Trust. ICAC has no supervisory responsibility over the
investment operations of the Portfolios. The management or administrative
services of ICAC for the Trust are not exclusive under the terms of the
Administration Agreement and ICAC is free to, and does, render management and
administrative services to others. ICAC also serves as the administrator for
the Master Trust.
For its services, ICAC receives under the Administration Agreement
$35,000 for each grouping of five similar portfolios (e.g., Core Growth
Portfolio A, Portfolio B, Portfolio C, Institutional and Qualified Portfolios),
$20,000 for each grouping 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. As a result, ICAC currently receives aggregate
compensation at the rate of $250,000 per year for all of the series of the
Trust. Such fees will be allocated among the series in each grouping based on
relative net asset values. For its services to the Master Trust, ICAC receives,
pursuant to an Administration Agreement, a monthly fee at the following annual
rates: 0.05% on the first $100 million of aggregate net assets of the Funds,
0.04% on the next $150 million, 0.03% on the next $300 million, 0.02% on the
next $300 million, and 0.01% on the portion of aggregate net assets of the Funds
in excess of $850 million. ICAC will receive a minimum of $150,000 per year
allocated among the Funds based on average net assets.
In connection with its management of the affairs of the Trust, ICAC
pays the salaries and expenses of all its personnel and pays all expenses
incurred in connection with managing the ordinary course of the business of the
Trust, other than expenses assumed by the Trust as described below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with ICAC or the
Investment Adviser, (c) out-of-pocket travel expenses for the officers and
Trustees of the Trust and other expenses of Board of Trustees' meetings, (d) the
fees and certain expenses of the Custodian, (e) the fees and expenses of the
Transfer and Dividend Disbursing Agent that relate to the maintenance of each
shareholder account, (f) the charges and expenses of the Trust's legal counsel
and independent accountants, (g) brokerage commissions and any issue or transfer
taxes chargeable to Trustees and officers of the Trust in connection with
securities transactions, (h) all taxes and corporate fees payable by the Trust
to federal, state and other governmental agencies, (i) the fees of any trade
association of which the Trust may be 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
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<PAGE>
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 Portfolios. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management, Holdings, L.P., the
general partner of the Investment Adviser.
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Portfolios,
but is not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. Pursuant to the
Distribution Agreement, the Trust has agreed to indemnify the Distributor to the
extent permitted by applicable law against certain liabilities under the
Securities Act.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Master Trust's Board of
Trustees, the Investment Adviser is primarily responsible for the execution of
the Funds' portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser will seek to obtain the
best price and execution for the Funds, taking into account such factors as
price, size of order, difficulty and risk of execution and operational
facilities of the firm involved. Fixed income securities in which the Funds
invest are generally 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
allocation of orders among dealers are reviewed periodically by the Board of
Trustees of the Master Trust.
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<PAGE>
The Funds have no obligation to deal with any dealer or group of
dealers in executing transactions in portfolio securities. Subject to obtaining
the best price and execution, broker-dealers who sell shares of the Portfolios
or provide supplemental research, market and statistical information and other
research services and products to the Investment Adviser may receive orders for
transactions by the Funds. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement, and
the expenses of the Investment Adviser are not necessarily reduced as a result
of the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Master Trust, and not all such
information, services and products are used by the Investment Adviser in
connection with the Funds. Similarly, such information, services and products
provided to the Investment Adviser by brokers and dealers through whom other
clients of the Investment Adviser effect securities transactions may be useful
to the Investment Adviser in providing services to the Funds. The Investment
Adviser is authorized to pay higher commission on brokerage transactions for the
Funds to brokers in order to secure the information, services and products
listed above, subject to review by the Board of Trustees of the Master Trust
from time to time as to the extent and continuation of this practice.
Although investment decisions for the Master Trust are made
independently from those of the other accounts managed by the Investment
Adviser, investments of the kind made by the Funds may often also be made by
such other accounts. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Funds and one or more other
accounts managed by the Investment Adviser, available investments are allocated
in the discretion of the Investment Adviser by such means as, in its judgment,
result in fair treatment. The Investment Adviser aggregates orders for
purchases and sales of securities of the same issuer on the same day among the
Funds and its other managed accounts, and the price paid to or received by the
Funds and those accounts is the average obtained in those orders. In some
cases, such aggregation and allocation procedures may affect adversely the price
paid or received by the Funds or the size of the position purchased or sold by
the Funds.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's commission or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid.
PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the Portfolios may be purchased and redeemed at their net
asset value without any initial or deferred sales charge. The price paid for
purchase and redemption of shares of the Portfolios is based on the net asset
value per share, which is calculated once daily at the close of trading
(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, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas Day. The offering price
is effective for orders received by the Transfer Agent prior to the time of
determination of net asset value. Dealers are responsible for promptly
transmitting purchase orders to the Transfer Agent. The Trust reserves the right
in its sole discretion to suspend the continued offering of the Portfolios'
shares and to reject purchase orders in whole or in part when such rejection is
in the best interests of the Trust and the affected Portfolios. Payment
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for shares redeemed will not be made more than seven days after receipt of a
written or telephone request in appropriate form, except as permitted by the
1940 Act and the rules thereunder.
SHAREHOLDER SERVICES
The services offered by the Trust to shareholders of the Portfolios
can vary, depending on the needs of the qualified retirement plan or other
institutional investor, and should be arranged by contacting the Trust, the
Distributor, ICAC or the Transfer Agent.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of a Portfolio, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. Whenever a transaction takes place
in the Shareholder Investment Account, the shareholder will be mailed a
statement showing the transaction and the status of the Account. No
certificates will be issued for shares of the Portfolios.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable
Portfolio at net asset value. An investor may direct the Transfer Agent in
writing not less than five full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the dealer. Any shareholder who receives a cash payment representing a dividend
or distribution may reinvest such distribution at net asset value by returning
the check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of a Portfolio on a monthly or
quarterly basis on any day of the month or quarter by authorizing his or her
bank account to be debited to invest specified dollar amounts in shares of the
Portfolio. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to participants of the Automatic
Investment Plan. Participation in the Plan will begin within 30 days after
receipt of the account application. If the investor's bank account cannot be
charged due to insufficient funds, a stop-payment order or closing of the
account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer Agent. Further information
about this program and an application form can be obtained from the Transfer
Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in a Portfolio may elect to cross-reinvest dividends or
dividends and capital gain distributions paid by that Portfolio (the "paying
Portfolio") into any other Institutional Portfolio (the "receiving Portfolio")
subject to the following conditions: (i) the aggregate value of the
shareholder's account(s) in the paying Portfolio(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving Portfolio
equals or exceeds that Portfolio's minimum initial investment requirement), (ii)
as long as
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the value of the account in the receiving Portfolio is below that Portfolio's
minimum initial investment requirement, dividends and capital gain distributions
paid by the receiving Portfolio must be automatically reinvested in the
receiving Portfolio, (iii) there is no cross-reinvestment from a Portfolio to a
portfolio of any series other than the Institutional Portfolios, and (iv) if
this privilege is discontinued with respect to a particular receiving Portfolio,
the value of the account in that Portfolio must equal or exceed the Fund's
minimum initial investment requirement or the Portfolio will have the right, if
the shareholder fails to increase the value of the account to such minimum
within 90 days after being notified of the deficiency, automatically to redeem
the account and send the proceeds to the shareholder. These cross-reinvestments
of dividends and capital gain distributions will be at net asset value (without
a sales charge).
AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Portfolio of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of a Portfolio
redeemed, but when the Master Trust makes payment to a Portfolio in readily
marketable investment securities, the Trust reserves the right to make payment
wholly or partly in shares of such securities. In such cases, a shareholder may
incur brokerage costs in converting such securities to cash. However, the Trust
has elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, pursuant to which it is obligated to pay in cash all requests for
redemptions by any shareholder of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser of $250,000 or 1% of the net
asset value of the Trust at the beginning of such period.
NET ASSET VALUE
The net asset value of a share of a Portfolio is calculated by
dividing (i) the value of the securities held by the Portfolio (I.E., the value
of its investments in a Fund), plus any cash or other assets, minus all
liabilities (including accrued estimated expenses on an annual basis), by (ii)
the total number of shares of the Portfolio outstanding. The net asset value of
an interest in a Fund is calculated in the same manner. The value of the
investments and assets of the Portfolio or a Fund is determined each business
day. 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.
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In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are traded adopt different
trading hours on either a permanent or temporary basis, the Boards of Trustees
of the Trust and the Master Trust will reconsider the time at which net asset
value is computed. In addition, the asset value of the Portfolio or the Fund
may be computed as of any time permitted pursuant to any exemption, order or
statement of the Commission or its staff.
Long-term debt obligations are valued at quoted bid prices for such
securities or, if such prices are not available, at prices for securities of
comparable maturity, quality and type; however, when the Investment Adviser
deems it appropriate, prices obtained for the day of valuation from a bond
pricing service will be used, as discussed below. Debt securities with
maturities of 60 days or less are valued at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from the
sixty-first day prior to maturity, their value on the sixty-first day prior to
maturity if their term to maturity from date of purchase by the Portfolio or the
Fund is more than 60 days, unless this is determined by the Board of Trustees of
the Master Trust not to represent fair value. Repurchase agreements are valued
at cost plus accrued interest.
U.S. Government securities are traded in the over-the-counter market
and are valued at the 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.
Options, futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale or settlement price as of the close of
such exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. If an options or futures exchange closes later
than 4:00 p.m. New York time, the options or futures traded on it are valued
based on the sale price, or on the mean between the bid and ask prices, as the
case may be, as of 4:00 p.m. New York time.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of business
day in New York. In addition, foreign securities trading may not take place on
all business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the New
York Stock Exchange will not be reflected in the calculation of net asset value
unless the Board of Trustees of the Master Trust deems that the particular event
would materially affect net asset value, in which case an adjustment will be
made. Assets or liabilities initially expressed in terms of foreign currencies
are translated prior to the next determination of the net asset value into U.S.
dollars at the spot exchange rates at 1:00 p.m. New York time or at such other
rates as the Investment Adviser may determine to be appropriate in computing net
asset value.
Securities and assets for which market quotations are not readily
available, or for which the Master Trust's Board of Trustees or persons
designated by the Board determine that the foregoing methods do not accurately
reflect current market value, are valued at fair value as determined in good
faith by or under the direction of the Master Trust's Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of
Trustees.
The Master Trust may use a pricing service approved by its Board of
Trustees. Prices provided by such a service represent evaluations of the mean
between current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers and other market data. Such services may
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use electronic data processing techniques and/or a matrix system to determine
valuations. The procedures of such services are reviewed periodically by the
officers of the Master Trust under the general supervision and responsibility of
its Board of Trustees, which may replace a service at any time if it determines
that it is in the best interests of the Funds to do so.
TAXES
MASTER TRUST'S TAX STATUS
Each Fund of the Master Trust will be treated as a partnership rather
than as a regulated investment company or a corporation under the Internal
Revenue Code (the "Code"). As a partnership under the Code, any interest,
dividends and gains or losses of the Master Trust attributable to each Fund will
be deemed to have been "passed through" to the Trust and other investors in such
Fund, regardless of whether such interest, dividends or gains have been
distributed by the Fund or such losses have been realized and recognized by the
Trust and other investors. Therefore, to the extent a Fund were to accrue but
not distribute any interest, dividends or gains, the Trust and other investors
in the Fund would be deemed to have realized and recognized their proportionate
shares of interest, dividends, gains or losses realized and recognized by the
Fund without receipt of any corresponding distribution. However, the Master
Trust will seek to minimize recognition by investors in the Funds of interest,
dividends, gains or losses allocable to the Funds without a corresponding
distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify each Portfolio as a regulated
investment company under Subchapter M of the Code, and intends that each
Portfolio will remain so qualified.
As a regulated investment company, a Portfolio will not be liable for
federal income tax on its income and gains provided it distributes all of its
income and gains currently. Qualification as a regulated investment company
under the Code requires, among other things, that each Portfolio (a) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, certain foreign currencies and certain options,
futures, and forward contracts on foreign currencies held less than three
months; (c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Portfolio's assets is represented by
cash, U.S. Government securities and securities of other regulated investment
companies, and other securities (for purposes of this calculation generally
limited, in respect of any one issuer, to an amount not greater than 5% of the
market value of the Portfolio's assets and 10% of the outstanding voting
securities of such issuer) and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government or
foreign government securities or the securities of other regulated investment
companies), or two or more issuers which the Trust controls and which are
determined to be engaged in the same or similar trades or businesses; and
(d) distribute at least 90% of its investment company taxable income (which
includes dividends, interest, and net short-term capital gains in excess of net
long-term capital losses) each taxable year.
A Portfolio generally will be subject to a nondeductible excise tax of
4% to the extent that it does not meet certain minimum distribution requirements
as of the end of each calendar year. To avoid the tax, a Portfolio must
distribute during each calendar year an amount equal to the sum of (1) at least
98% of its
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ordinary income and net capital gain (not taking into account any capital gains
or losses as an exception) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (and adjusted for certain ordinary
losses) for the twelve month period ending on October 31 of the calendar year,
and (3) all ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Portfolio in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Portfolio during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid the excise tax, the Portfolios intend to make timely distributions of
their income in compliance with these requirements and anticipate that they will
not be subject to the excise tax.
Dividends paid by a Portfolio from ordinary income, and distributions
of the Portfolio's net realized short-term capital gains, are taxable to its
shareholders as ordinary income. Distributions to corporate shareholders will
be eligible for the 70% dividends received deduction to the extent that the
income of the Portfolios is derived from dividends on common or preferred stock
of domestic corporations. Dividend income earned by a Portfolio will be
eligible for the dividends received deduction only if the Portfolio and
corresponding Fund have satisfied a 46-day holding period requirement with
respect to the underlying portfolio security (91 days in the case of dividends
derived from preferred stock). In addition, a corporate shareholder must have
held its shares in the Portfolio for not less than 46 days (91 days in the case
of dividends derived from preferred stock) in order to claim the dividend
received deduction. Not later than 60 days after the end of its taxable year,
the Portfolio will send to its shareholders a written notice designating the
amount of any distributions made during such year which may be taken into
account by its shareholders for purposes of such deduction provisions of the
Code. Net capital gain distributions are not eligible for the dividends
received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to a Portfolio's shareholders as long-term capital
gains, regardless of the holding period of such shareholders. Such
distributions of net capital gains will be designated by the Portfolio as a
capital gains distribution in a written notice to its shareholders which
accompanies the distribution payment. Any loss on the sale of shares held for
less than six months will be treated as a long-term capital loss for federal tax
purposes to the extent a shareholder receives net capital gain distributions on
such shares. The maximum federal income tax rate applicable to long-term
capital gains is currently 28% for individual shareholders and 35% for corporate
shareholders. Dividends and distributions are taxable as such whether received
in cash or reinvested in additional shares of a Portfolio.
Any loss realized on a sale, redemption or exchange of shares of a
Portfolio by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period (beginning 30 days before the disposition of
shares). Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares.
A shareholder who acquires shares of a Portfolio and sells or
otherwise disposes of such shares within 90 days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares for
purposes of calculating gain or loss realized upon a sale or exchange of shares
of the Portfolio if the shareholder acquires shares in a Portfolio of the Trust
pursuant to a reinvestment right that reduces the sales charges in the
subsequent acquisition of shares.
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SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from a Portfolio provided that certain conditions are satisfied.
Interest received on repurchase agreements collateralized by U.S. Government
obligations normally is not exempt from state taxation. The Trust will inform
shareholders annually of the percentage of income and distributions derived from
direct U.S. Government obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
the Portfolio is considered tax exempt in their particular states.
With respect to investments that are sold at original issue discount
and thus do not make periodic cash interest payments, a Fund and the
corresponding Portfolio will be required to include as part of their current
income the imputed interest on such obligations even though the Fund and the
Portfolio have not received any interest payment on such obligations during that
period. The Fund may have to sell portfolio securities to distribute such
imputed income, which may occur at a time when the Investment Adviser would not
have chosen to sell such securities and which may result in a taxable gain or
loss.
SECTION 1256 CONTRACTS. Many of the options, futures contracts and
forward contracts used by the Funds are "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Funds at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized and the resulting gain or loss is
treated as ordinary or 60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Portfolios.
In addition, losses realized by the Portfolio on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing the straddle
rules have been promulgated, the tax consequences of transactions in options,
futures and forward contracts to the Portfolio are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by the
Portfolio which is taxed as ordinary income when distributed to shareholders.
The Portfolios may make one or more of the elections available under
the Code which are applicable to straddles. If the Portfolios make any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because applications of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to the shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options,
futures, and forward contracts held less than three months and the qualifying
income and diversification requirements applicable to the Portfolios'
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<PAGE>
and the Funds' assets may limit the extent to which the Funds will be able to
engage in transactions in options, futures contracts or forward contracts.
SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of disposition also are treated as ordinary gain or loss.
These gains and losses, referred to under the Code as "section 988" gains or
losses, may increase or decrease the amount of the Portfolio's investment
company taxable income to be distributed to the shareholders.
SWAPS. No definitive guidance currently exists with respect to the
classification of interest rate swaps and cross-currency swaps as securities or
foreign currencies for purposes of certain of the tests described above.
Accordingly, to avoid the possibility of disqualification as a regulated
investment company, each Fund will limit its positions in swaps to transactions
for the purpose of hedging against interest rate or currency fluctuation risks,
and will treat swaps as excluded assets for purposes of determining compliance
with the diversification test.
FOREIGN TAX. Income received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. In addition, the Investment Adviser intends to manage the
Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
the Fund will be eligible to elect to "pass-through" to the Portfolio's
shareholders the amount of foreign income and similar taxes paid by the Fund.
Each shareholder will be notified within 60 days after the close of the
Portfolio's taxable year whether the foreign taxes paid by the Fund will be
"pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income will flow through to
shareholders of the Portfolio. With respect to such election, gains from the
sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign currency
denominated debt securities, receivables and payables will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, and to certain
other types of income. Shareholders may be unable to claim a credit for the
full amount of their proportion at share of the foreign taxes paid by the Fund.
The foreign tax credit is modified for purposes of the federal alternative
minimum tax and can be used to offset only 90% of the alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
SHORT SALES. Generally, capital gain or loss realized by 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
property substantially identical to that sold short was held by the Fund for the
long-term holding period as of the date of the short sale, any loss on closing
the short position will be long-term capital loss. These special rules do
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<PAGE>
not apply to substantially similar property to the extent such property exceeds
the property used by the Fund to close its short position.
ORIGINAL ISSUE DISCOUNT. Some of the debt securities (with a fixed
maturity date of more than one year from the date of issuance) that may be
acquired by the Funds may be treated as debt securities that are issued
originally at a discount. Generally, the amount of the original issue discount
("OID") is treated as interest income and is included in income over the term of
the debt security, even though payment of that amount is not received until a
later time, usually when the debt security matures. A portion of the OID
includable in income with respect to certain high-yield corporation debt
securities may be treated as a dividend for federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Funds in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Funds may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing the recognition of income.
Some of the debt securities (with a fixed maturity date of one year or
less from the date of issuance) that may be acquired by the Funds may be treated
as having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, a Fund will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. The Fund may make one or more of the elections applicable to
the debt securities having acquisition discount, or OID, which could affect the
character and timing of recognition of income.
The Portfolios generally will be required to distribute dividends to
shareholders representing discount on debt securities that is currently
includable in income, even though cash representing such income may not have
been received by the Funds. Cash to pay such dividends may be obtained from
sales proceeds of securities held by the Funds.
OTHER TAX INFORMATION
The Portfolios may be required to withhold for U.S. federal income
taxes 31% of all taxable distributions payable to shareholders who fail to
provide the Portfolios with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal tax liability.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of a
Portfolio with respect to distributions by the Portfolio may differ from federal
tax treatment. Distributions to shareholders may be subject to additional state
and local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
B-39
<PAGE>
PERFORMANCE INFORMATION
The Trust may from time to time advertise total returns and yields for
the Portfolios, compare Portfolio performance to various indices, and publish
rankings of the Portfolios prepared by various ranking services. Any
performance information should be considered in light of the Portfolio's and
Fund's investment objectives and policies, characteristics and quality of the
its portfolio, and the market conditions during the given time period, and
should not be considered to be representative of what may be achieved in the
future.
TOTAL RETURN
The total return for a Portfolio is computed by assuming a
hypothetical initial payment of $1,000. It is assumed that all investments are
made at net asset value (as opposed to market price) and that all of the
dividends and distributions by the Portfolio over the relevant time periods are
invested at net asset value. It is then assumed that, at the end of each
period, the entire amount is redeemed without regard to any redemption fees or
costs. The average annual total return is then determined by calculating the
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption. Total return does not take into account any
federal or state income taxes.
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or fractional
portion thereof) of a hypothetical $1,000 payment made at the
beginning of the period.
Total returns for the Portfolios for the period from inception of
operations on July 31, 1996 through December 31, 1996 were as follows: High
Yield Bond Portfolio -- 11.13%; Strategic Income Portfolio -- 9.20%.
YIELD
The yield for a Portfolio (other than the Money Market Portfolios) is
calculated based on a 30-day or one-month period, according to the following
formula:
6
Yield = 2[{a - b + 1) -1]
-----
{c x d }
For purposes of this formula, "a" is total dividends and interest
earned during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
Yields for the Portfolios for the thirty-day period ending
December 31, 1996 were as follows: High Yield Bond Portfolio -- 6.3804%;
Strategic Income Portfolio -- 8.3524%.
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<PAGE>
COMPARISON TO INDICES AND RANKINGS
Performance information for a Portfolio may be compared to various
unmanaged indices, such as: the Lehman Brothers Government/Corporate Bond Index,
the Lehman Brothers Aggregate Bond Index, and the Salomon Brothers Broad Index
(for the Fully Discretionary Portfolio); the Merrill Lynch 1 to 3-Year Treasury
Index (for the Short-Intermediate Portfolio); and indices prepared by Lipper
Analytical Services. Unmanaged indices (I.E., other than Lipper) generally do
not reflect deductions for administrative and management costs and expenses.
Performance rankings are prepared by a number of mutual fund ranking
entities that are independent of the Trust and its affiliates. These entities
categorize and rank funds by various criteria, including fund type, performance
over a given period of years, total return, standardized yield, variations in
sales charges and risk\reward considerations.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Portfolios and Funds and in that capacity maintains
certain financial and accounting books and records pursuant to agreements with
the Trust and Master Trust. PFPC Inc., 103 Bellevue Parkway, Wilmington,
Delaware, an affiliate of the Custodian, provides additional accounting services
to the Portfolios and Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor,
North Quincy, Massachusetts, 02171, serves as the Dividend Disbursing Agent and
as the Transfer Agent for the Portfolios and Funds. The Transfer Agent provides
customary transfer agency services to the Trust, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, and related functions. The Dividend
Disbursing Agent provides customary dividend disbursing services to the Trust,
including payment of dividends and distributions and related functions.
The following act as sub-transfer agents for the Portfolios:
Financial Data Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville,
Florida 32246; and William M. Mercer Plan Participant Services, Inc., 1417 Lake
Cook Road, Deerfield, Illinois 60015.
Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles,
California 90071, serves as the independent accountants for the Trust and Master
Trust, and in that capacity examines the annual financial statements of the
Trust and Master Trust.
Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust and Master Trust. It
also acts as legal counsel for the Investment Adviser and Distributor.
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<PAGE>
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 52 series of shares -- nine A
Portfolios, nine B Portfolios, nine C Portfolios, fifteen Institutional
Portfolios, one Money Market Portfolio and nine Qualified Portfolios.
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 Portfolio's
fundamental investment policies would be voted upon only by shareholders of that
Portfolio, as would the approval of any advisory or distribution contract for
the Portfolio. However, all shares of the Trust may vote together in the
election or selection of Trustees, principal underwriters and accountants for
the Trust.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of the series of
the Trust affected by the matter. Under Rule 18f-2, a series is presumed to be
affected by a matter, unless the interests of each series in the matter are
identical or the matter does not affect any interest of such class or series.
Under Rule 18f-2 the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to a Portfolio only if approved by a majority of its outstanding shares.
However, the rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by the shareholders of the Trust
voting without regard to Portfolio.
As used in the Portfolios' Prospectus and in this Statement of
Additional Information, the term "majority," when referring to approvals to be
obtained from shareholders of a Portfolio, means the vote of the lesser of (i)
67% of the shares of the Portfolio represented at a meeting if the holders of
more than 50% of the outstanding shares of the Portfolio are present in person
or by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio.
The term "majority," when referring to the approvals to be obtained from
shareholders of the Trust, means the vote of the lesser of (i) 67% of the
Trust's shares represented at a meeting if the holders of more than 50% of the
Trust's outstanding shares are present in person or by proxy, or (ii) more than
50% of the Trust's outstanding shares. Shareholders are entitled to one vote
for each full share held and fractional votes for fractional shares held.
Unless otherwise provided by law (for example, by Rule 18f-2 discussed above) or
by the Trust's Declaration of Trust or Bylaws, the Trust may take or authorize
any action upon the favorable vote of the holders of more than 50% of the
outstanding shares of the Trust.
Whenever a Portfolio or the Trust is requested to vote on a matter
with respect to the Master Trust, the Trust will hold a meeting of its
shareholders and will cast its votes as instructed by such shareholders and, in
the case of a matter affecting only a Fund, as instructed by the shareholders of
the corresponding Portfolio(s).
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Investment Company Act.
Each share of a Portfolio represents an equal proportional interest in
the Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to
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the Portfolio as are declared in the discretion of the Trustees. In the event
of the liquidation or dissolution of the Trust, shareholders of a Portfolio are
entitled to receive the assets attributable to the Portfolio that are available
for distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Trustees in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
DECLARATIONS OF TRUST
In accordance with Delaware law and in connection with the tax
treatment sought by the Master Trust, the Master Trust's Declaration of Trust
provides that its investors will be personally and jointly and severally
responsible (with rights of contribution INTER SE in proportion to their
respective ownership interests in the Master Trust) for the Master Trust's
liabilities and obligations in the event that the Master Trust fails to satisfy
such liabilities and obligations. However, to the extent assets are available
from the Master Trust, the Master Trust will indemnify each investor from any
claim or liability to which the investor may become subject solely by reason of
his or her having been an investor, and will reimburse the investor for all
legal and other expenses reasonably incurred by him or her in connection with
any such claim or liability.
The Declarations of Trust of both the Trust and Master Trust provide
that obligations of the Trust and the Master Trust are not binding upon their
respective Trustees, officers, employees and agents individually and that the
Trustees, officers, employees and agents will not be liable to the trusts or
their respective investors for any action or failure to act, but nothing in the
Declarations of Trust protect a Trustee, officer, employee or agent against any
liability to the trusts or their respective investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declarations of Trust also provide that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Portfolio or Fund shall be enforceable against the assets and
property of such Portfolio or Fund only (and, in the case of a Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of a Portfolio, the investors therein).
FINANCIAL STATEMENTS
The financial statements of the Portfolios (unaudited) for the period
from commencement of the Portfolios' operations on July 31, 1996 through
December 31, 1996 are included as Appendix B to this Statement of Additional
Information.
REGISTRATION STATEMENT
The Registration Statement of the Trust and the Master Trust,
including the Portfolios' Prospectuses, the Statements of Additional Information
and the exhibits filed therewith, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Portfolios'
Prospectuses or the Statements of Additional Information as to the contents of
any contract or other document referred to herein or in the Prospectuses are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to these Registration
Statements, each such statement being qualified in all respects by such
reference.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating symbols
of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated PRIME-1
have a superior ability for repayment of short-term promissory obligations.
PRIME-1 repayment ability will often be evidenced by the following
characteristics: (a) leading market positions in well-established industries;
(b) high rates of return on funds employed; (c) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (d) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (e) well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above in the
PRIME-1 category but to a lesser degree. Earning trends and coverage ratios,
while sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting institutions)
have an acceptable ability for repayment of short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and 3 to indicate the relative
degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.
A-1
<PAGE>
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
FITCH INVESTORS SERVICE, INC.
F-1+: Exceptionally strong credit quality. Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for timely
payment.
F-1: Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2: Good credit quality. Commercial paper assigned this rating has
a satisfactory degree of assurance for timely payment but the margin of safety
is not as great as for issuers assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to be
rated below investment grade.
DUFF & PHELPS
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
DUFF 1+ - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2 - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
A-2
<PAGE>
DUFF 3 - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
DUFF 4 - Debt possesses speculative investment characteristics.
DUFF 5 - Issuer has failed to meet scheduled principal and/or interest
payments.
THOMSON BANKWATCH
Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the ratings used by Thomson BankWatch:
TBW-1 - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
TBW-3 - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
IBCA
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
A-3
<PAGE>
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
FITCH INVESTORS SERVICE, INC.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
A-4
<PAGE>
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
BB, B, CCC, CC, AND C - Obligations are assigned one of these ratings
where it is considered that speculative characteristics are present. "BB"
represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
A - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
A-5
<PAGE>
BB, B, CCC, AND CC, - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
D - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-6
<PAGE>
APPENDIX B
FINANCIAL STATEMENTS
B-1
<PAGE>
NICHOLAS - APPLEGATE
HIGH YIELD
BOND PORTFOLIO
FINANCIAL STATEMENTS
December 31, 1996
PAGE
STATEMENT OF ASSETS AND LIABILITIES 1
STATEMENT OF OPERATIONS 2
STATEMENT OF CHANGES IN NET ASSETS 3
<PAGE>
NICHOLAS - APPLEGATE
HIGH YIELD BOND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
UNAUDITED
Institutional
-------------
ASSETS:
Investments in Master, at value* $4,425,572
Receivables:
Shares of beneficial interest sold -
Due from advisor 3,704
Deferred organization costs -
Expense payment reserve 300
Prepaid expenses -
----------
Total assets 4,429,576
----------
LIABILITIES:
Accrued expenses 4,922
Dividend payable 33,036
----------
Total liabilities 37,958
----------
NET ASSETS $4,391,618
----------
----------
Shares of beneficial interest 333,694
----------
----------
NET ASSET VALUE
PER SHARE $13.16
------
------
- ---------------
NET ASSETS CONSISTED OF
THE FOLLOWING:
Paid-in capital 4,186,684
Accumulated net investment deficit (9)
Accumulated net realized gain 50,778
Unrealized apppreciation on investments 154,165
----------
$4,391,618
----------
----------
*COST OF INVESTMENTS IN THE
MASTER TRUST: $3,976,981
----------
----------
-1-
<PAGE>
NICHOLAS - APPLEGATE
HIGH YIELD BOND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1996
UNAUDITED
Institutional
-------------
INVESTMENT INCOME:
Net investment income from
master $155,225
--------
Expenses:
Accounting fees 1,037
Administration fees 2,183
Audit fees 3,120
Co-Administration fees 377
Distribution fees -
Insurance 15
Legal fees 457
Miscellaneous 26
Organization costs -
Registration fees - federal -
Registration fees - state -
Shareholder reporting fees -
Shareholder servicing fees -
Transfer agent fees 1,622
Trustees' fees 749
Reimbursement from advisor (8,323)
Co-Administration fee waived (377)
--------
Total operating expenses 886
Line of credit commitment fee 33
--------
Total expenses 919
--------
Net investment income 154,306
--------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from security transactions 139,201
Change in unrealized appreciation on investments 154,165
--------
Net gain on investments 293,366
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $447,672
--------
--------
-2-
<PAGE>
NICHOLAS - APPLEGATE
HIGH YIELD BOND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1996
UNAUDITED
Institutional
-------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $154,306
Net realized and unrealized gain
on investments 293,366
----------
Net increase in net assets resulting
from operations 447,672
----------
Distributions to shares of beneficial interest:
Net income* (154,315)
Capital gains** (88,423)
----------
Total dividend distributions (242,738)
----------
Transactions in shares of benefecial interest:
Proceeds from sales 4,256,318
Value of shares issued in reinvestment 20,943
Cost of repurchased shares (90,577)
----------
Increase in net assets derived from
transactions in shares of beneficial interest 4,186,684
----------
Total increase in net assets 4,391,618
NET ASSETS:
Beginning of period -
----------
End of period $4,391,618
----------
----------
Shares of beneficial interest:
Beginning balance -
Shares sold 339,052
Shares reinvested 1,605
Shares repurchased (6,963)
----------
Total shares of beneficial interest outstanding 333,694
----------
----------
- ---------------------------------
* Per share net income distributions $0.37
-----
-----
** Per share capital gains distributions $0.26
-----
-----
-3-
<PAGE>
NICHOLAS - APPLEGATE
STRATEGIC
INCOME PORTFOLIO
FINANCIAL STATEMENTS
December 31, 1996
PAGE
STATEMENT OF ASSETS AND LIABILITIES 1
STATEMENT OF OPERATIONS 2
STATEMENT OF CHANGES IN NET ASSETS 3
STATEMENT OF REALIZED GAIN/LOSS ON INVESTMENT 4
<PAGE>
NICHOLAS - APPLEGATE
STRATEGIC INCOME
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
unaudited
Institutional
-------------
ASSETS:
Investments in Master, at value* $3,874,085
Receivables:
Shares of beneficial interest sold -
Due from advisor 3,693
Deferred organization costs -
Prepaid expenses -
----------
Total assets 3,877,778
----------
LIABILITIES:
Payables:
Investments purchased in Master -
Dividend distributions 23,006
Accrued expenses 4,518
----------
Total liabilities 27,524
----------
NET ASSETS $3,850,254
----------
----------
Shares of beneficial interest 294,955
----------
----------
NET ASSET VALUE
PER SHARE $13.05
------
------
NET ASSETS CONSISTED OF
THE FOLLOWING:
Paid-in capital 3,679,245
Accumulated net investment deficit (50)
Accumulated net realized gain 38,621
Unrealized apppreciation on investments 132,438
----------
$3,850,254
----------
----------
*COST OF INVESTMENTS IN THE
MASTER TRUST: $3,530,377
----------
----------
-1-
<PAGE>
NICHOLAS - APPLEGATE
STRATEGIC INCOME
STATEMENT OF OPERATIONS
For the period ended December 31, 1996
unaudited
Institutional
-------------
INVESTMENT INCOME:
Net investment income from
master $115,065
----------
Expenses:
Accounting fees 1,003
Administration fees 2,183
Audit fees 3,120
Co-Administration fees 327
Distribution fees -
Insurance 14
Legal fees 412
Miscellaneous 23
Organization costs -
Registration fees - federal -
Registration fees - state -
Shareholder reporting fees -
Shareholder servicing fees -
Transfer agent fees 1,622
Trustees' fees 744
Reimbursement from advisor (8,325)
Co-Administration fee waived (327)
----------
Total operating expenses 796
----------
Add: Line of credit commitment fee 29
----------
Total expenses 825
----------
Net investment income 114,240
----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain from security transactions 96,205
Change in unrealized appreciation on investments 132,438
----------
Net gain on investments 228,643
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $342,883
----------
----------
-2-
<PAGE>
NICHOLAS - APPLEGATE
STRATEGIC INCOME
STATEMENT OF CHANGES IN NET ASSETS
For the period ended December 31, 1996
unaudited
Institutional
-------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $114,240
Net realized and unrealized gain
on investments 228,643
----------
Net increase in net assets resulting
from operations 342,883
----------
Distributions to shares of beneficial interest:
Net income* (114,290)
Capital gains** (57,584)
----------
Total dividend distributions (171,874)
----------
Transactions in shares of benefecial interest:
Proceeds from sales 3,848,709
Value of shares issued in reinvestment 7,455
Cost of repurchased shares (176,919)
----------
Increase in net assets derived from
transactions in shares of beneficial interest 3,679,245
----------
Total increase in net assets 3,850,254
NET ASSETS:
Beginning of period -
----------
End of period $3,850,254
----------
----------
Shares of beneficial interest:
Beginning balance -
Shares sold 308,223
Shares reinvested 576
Shares repurchased (13,844)
----------
Total shares of beneficial interest outstanding 294,955
----------
----------
- ---------------
* Per share net income distributions $0.39
-----
-----
** Per share capital gains distributions $0.20
-----
-----
-3-
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD
BOND FUND
FINANCIAL STATEMENTS
DECEMBER 31, 1996
PAGE
SCHEDULE OF INVESTMENTS 1
STATEMENT OF ASSETS AND LIABILITIES 4
STATEMENT OF OPERATIONS 5
STATEMENT OF CHANGES IN NET ASSETS 6
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD BOND FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Number
of shares Value
--------- -------
<S> <C> <C> <C>
COMMON STOCK 0.3%
- ------------------------------------------
FINANCE COMPANIES
Ocwen Financial (Cost $7,500) 500 $13,375
----------
CONVERTIBLE PREFERRED STOCK 5.1%
- ------------------------------------------
MEDICAL PRODUCTS
** Fresenius Medical Waste
09.000%, 12/01/06 (Cost $225,000) 225 229,219
----------
<CAPTION>
Principal
Amount
---------
<S> <C> <C> <C>
CORPORATE BONDS 92.9%
- ------------------------------------------
BROADCASTING 8.8%
Lodgenet Entertainment - 144A (B1, B)
10.25%, 12/15/08 $200,000 200,000
----------
Telemundo Group, Inc. (B1, B)
07.000%, 02/15/06 200,000 193,250
----------
393,250
----------
BUSINESS SERVICES 2.4%
Iron Mountain, Inc. (B3, B-)
10.125%, 10/01/06 100,000 105,625
----------
FINANCE COMPANIES 5.5%
Ocwen Financial (B1, B+)
11.875%, 10/01/03 225,000 242,719
----------
ENVIRONMENTAL SERVICES 5.9%
Allied Waste Industries, Inc. - 144A (B3, B+)
10.250%, 12/01/08 250,000 263,125
----------
LEISURE/GAMING 4.2%
Majestic Star Casino (B2, B)
12.750%, 05/15/03 175,000 187,250
----------
</TABLE>
** Note: Preferred Stock which is similar to a Corporate Bond
Accrues interest starting November 27, 1996
Payable at six months intervals: September 1 and March 1
-1-
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD BOND FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -------
<S> <C> <C> <C>
CORPORATE BONDS (CONT'D)
- ------------------------------------------
MEDICAL/HEALTH SERVICES 5.7%
Dynacare Inc. (B2 B+)
10.750%, 01/15/08 $250,000 $252,500
----------
OIL/GAS PRODUCTION 4.8%
HS Resources, Inc. - 144A (B2, B)
09.250%, 11/15/06 200,000 204,500
----------
OUTDOOR ADVERTISING COMPANY 4.0%
Lamar Advertising (B1, B)
09.625%, 12/01/06 175,000 180,250
----------
OILFIELD SERVICES/EQUIPMENT 11.8%
Cliffs Drilling Co. (B1, NA)
10.250%, 05/15/03 300,000 318,750
Veritas DGC, Inc. (B1, BB)
09.750%, 10/15/03 200,000 206,000
----------
524,750
----------
OTHER CONSUMER NON-DURABLES 4.6%
Radnor Holdings - 144A (B2, BBB-)
10.000%, 12/01/03 200,000 204,000
----------
RESTAURANTS 8.2%
Foodmaker, Inc. (B1, B)
08.250%, 03/01/99 175,000 179,155
Rolly's Hamburgers (Caa, B-)
09.875%, 06/15/00 150,000 186,500
----------
365,656
----------
SOAPS/COSMETICS 5.3%
Revlon Consumer Products Corp. - B(B3, B-)
10.500%, 02/15/03 225,000 236,250
----------
SPECIALTY CHAINS 3.6%
Compuse, Inc. (B1, B-)
9.500%, 08/15/00 150,000 153,938
----------
</TABLE>
-2-
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD BOND FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -------
<S> <C> <C> <C>
CORPORATE BONDS (CONT'D)
- ------------------------------------------
TELEPHONE 18.4%
Colt Telecom Group, PLC. - UN
12.000%, 12/15/06 $250,000 $150,000
Pricellular Wire - B (B3, CCC+)
0.000% to 11/15/97
14.000%, 11/15/01 200,000 197,000
Sygnet Wireless, Inc. (Caa, CCC+)
11.500%, 10/01/05 250,000 257,811
Teleport Communications Group, Inc. (B1, B)
09.875%, 07/01/06 300,000 213,250
----------
818,061
----------
TOTAL CORPORATE BOND (Cost $3,996,844) 4,131,874
----------
TOTAL INVESTMENTS (Cost $4,229,344) 98.3% 4,374,468
ASSETS IN EXCESS OF OTHER LIABILITIES 1.7% 77,045
----- ----------
NET ASSETS 100.0% $4,451,513
----- ----------
----- ----------
</TABLE>
-3-
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
unaudited
<TABLE>
<S> <C>
ASSETS:
Investments at value (Cost $4,219,344) $4,374,468
Cash 3,317
Receivables:
Interest 80,492
Due from advisor -
Investment securities sold -
Other assets -
Deferred organization costs -
----------
Total assets 4,458,331
----------
LIABILITIES:
Payable:
Investment securities purchased -
Accrued expenses 6,818
----------
Total liabilities 6,818
----------
NET ASSETS $4,451,513
----------
----------
INTERESTS 319,812
----------
----------
- ---------------
<CAPTION>
NET ASSET VALUE PER SHARE:
Net assets / Interests
---------- ---------
<S> <C> <C> <C>
INSTITUTIONAL PORTFOLIO $4,425,572 / 317,948 $13.81
------
------
NACM $25,941 / 1,864 $13.92
---------- --------- ------
TOTAL $4,451,513 / 319,812 $13.92
---------- --------- ------
---------- --------- ------
- ---------------
NET ASSETS CONSISTED OF THE FOLLOWING:
Paid-in capital $4,000,089
Accumulated net investment income 156,196
Accumulated net realized gain 140,104
Unrealized appreciation on investments 155,124
----------
$4,451,513
----------
----------
</TABLE>
-4-
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD BOND FUND
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Interest $168,667
----------
EXPENSES:
Advisory fee 10,669
Administration fee 515
Accounting fee 2,964
Audit fee 429
Custodian fee 1,670
Insurance -
Legal fee 19
Miscellaneous 145
Organization costs -
Trustees' fee 3,540
Reimbursement from advisor (7,500)
----------
Total expenses 12,471
----------
Net investment income 156,195
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions 140,104
Change in unrealized appreciation of investments 155,124
----------
Net gain on investments 295,228
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $451,424
----------
----------
</TABLE>
-5-
<PAGE>
NICHOLAS-APPLEGATE
HIGH YIELD BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
for the period ended December 31, 1996
unaudited
<TABLE>
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $158,196
Net realized and unrealized gain on investments 295,228
----------
Net increase in net assets resulting from operations 451,424
----------
TRANSACTIONS IN INTERESTS:
Contributions from High Yield Bond Institutional Portfolio 4,256,316
Contributions from NACM 25,000
Withdrawals from High Yield Bond Institutional Portfolio (279,335)
Withdrawals from NACM (1,892)
----------
Increase in net assets derived from interest transactions 4,000,089
----------
Total increase in net assets 4,451,513
NET ASSETS:
Beginning of period -
----------
End of period $4,451,543
----------
- ---------------
<CAPTION>
INTERESTS:
Institutional
Portfolio NACM Total
------------- --------- ---------
<S> <C> <C> <C>
Beginning balance - - -
Contributions 338,763 2,000 340,763
Withdrawals (20,815) (136) (20,951)
--------- --------- ---------
Ending balance 317,948 1,864 319,812
--------- --------- ---------
--------- --------- ---------
</TABLE>
-6-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC
INCOME FUND
FINANCIAL STATEMENTS
DECEMBER 31, 1996
PAGE
SCHEDULE OF INVESTMENTS 1
STATEMENT OF ASSETS AND LIABILITIES 6
STATEMENT OF OPERATIONS 7
STATEMENT OF CHANGES IN NET ASSETS 8
STATEMENT OF REALIZED GAINS/LOSSES ON INVESTMENTS 9
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Shares Value
--------- -------
<S> <C> <C> <C>
COMMON STOCK 1.4%
- ------------------------------------------
TELEPHONE
Deutsche Telekom AG ADR 2,600 $52,975
(cost $49,114) ----------
CONVERTIBLE PREFERRED STOCKS 24.1%
- ------------------------------------------
FINANCE COMPANIES 3.5%
Ahmanson H.F. and Company Cv. Pfd. 1,900 132,525
----------
GAS UTILITIES 1.9%
MCN Corp. Pfd (Prides) 2,600 71,825
----------
INTEGRATED OIL COMPANIES 2.3%
Occidental Petroleum Cv. Pfd. 1,500 86,813
----------
INVESTMENT COMPANIES 2.6%
Merrill Lynch & Co Inc. (Strypes), 2001 2,500 100,312
----------
LIFE INSURERS 4.1%
Aetna, Inc. cv. Pfd Class B 2,000 158,750
----------
MEDICAL PRODUCTS 2.7%
** Fresenius Medical Care
09.000%, 12/01/06 100 101,875
----------
METALS 2.6%
AK Steel Holding Corp. Cv. Pfd. 2,800 98,700
----------
SPECIALTY INSURERS 2.3%
American Bankers Insurance Group Pfd - B 1,500 89,531
----------
TELEPHONE 2.1%
Nortel Inversors SA MEDS 2,000 82,000
----------
TOTAL PREFERRED STOCKS
(cost $863,057) 922,331
----------
</TABLE>
** Note: Preferred Stock which is similar to a Corporate Bond
Accrues interest starting November 27, 1996
Payable at six month intervals: September 1 and March 1
-1-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -------
<S> <C> <C> <C>
CONVERTIBLE CORPORATE BONDS 10.1%
- ------------------------------------------
ALCOHOLIC BEVERAGES 3.0%
Grand Metropolitan PLC, Euro (A2, A+)
6.500%, 01/31/00 $100,000 $116,500
(Note: Security held at Chase) ----------
INDUSTRIAL ENGINEERING/CONSTRUCTION 2.5%
Empressas ICA, Sociedad - US (B3, BB-)
5.000%, 03/15/04 135,000 94,669
----------
* MONEY-CENTER BANKS 2.7%
Banmex, Euro 144A (NA, NA)
11.000%, 07/15/03 100,000 101,750
(Note: Security held at Chase) ----------
OTHER PRODUCERS/MANUFACTURING 2.1%
Gencorp Inc. (B1, BB-)
08.000%, 08/01/02 70,000 79,100
----------
TOTAL CONVERTIBLE CORPORATE BONDS
(cost $377,013) 392,019
----------
CORPORATE BONDS 30.5%
- ------------------------------------------
ADVERTISING COMPANIES 2.0%
Lamar Advertising (B1, B)
09.625%, 12/01/06 75,000 77,250
----------
BROADCASTING 2.6%
* Lodgenet Entertainment 144A (B1, B)
10.250%, 12/15/06 100,000 100,000
----------
CONTRACT DRILLING SERVICES 2.8%
Cliffs Drilling Co. - B (B1, NA)
10.250%. 05/15/03 100,000 106,250
----------
FINANCE COMPANIES 2.8%
Ocwen Financial Corp. (B1, B+) 100,000 107,625
11.875%, 10/01/03 ----------
</TABLE>
-2-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -------
<S> <C> <C> <C>
CORPORATE BONDS (CONT'D)
- ------------------------------------------
ENVIRONMENTAL SERVICES 0.6%
* Allied Waste Industries, Inc. 144A (B3, B+)
10.250%, 12/01/08 $25,000 $26,313
----------
LEISURE/GAMING 2.1%
Majestic Star Casino (NA, NA)
12.750%, 05/15/03 75,000 80,250
----------
OILFIELD SERVICES/EQUIPMENT 2.0%
Veritas DGC, Inc. (B1, BB)
09.750%, 10/15/03 75,000 77,250
----------
OTHER COMM/INDUSTRIAL SERVICES 1.4%
Iron Mountain, Inc. (B3, B-)
10.125%, 10/01/05 50,000 52,813
----------
RESTAURANTS 2.0%
Foodmaker, Inc. (B1, B)
09.250%, 03/01/99 75,000 76,781
----------
SPECIALTY CHAINS 2.0%
Compusa, Inc. (B2, B-)
09.500%, 06/15/00 75,000 76,968
----------
SOAPS/COSMETICS 2.0%
Revlon Consumer Products Corp. - B (B3, B-)
10.500%, 02/15/03 75,000 78,750
----------
TELEPHONE 5.0%
Pricellular Wire - B (B3, CCC+)
00.000% to 11/15/97
14.000%, 11.15/01 100,000 98,500
Sygnet Wireless, Inc. (CAA, CCC+)
11.500%, 10/01/06 100,000 103,125
Teleport Communications Group Inc. (B1, B)
09.875%, 07/01/08 100,000 106,625
----------
308,250
----------
TOTAL CORPORATE BONDS
(cost $1,125,309) 1,168,750
----------
</TABLE>
-3-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -------
<S> <C> <C> <C>
AGENCY OBLIGATIONS 30.8%
FEDERAL NATIONAL MORTGAGE ASSOCIATION 12.0%
Pool 2468
10.50%, 12/01/00 $113,378 $119,855
Pool 50319
09.50%, 06/10/05 66,849 70,902
1991 95Z
08.50%, 11/25/05 44,335 44,709
1993 4DD
05.70%, 07/25,15 65,000 63,791
1993 69PE
05,60%, 03/25/17 30,000 29,475
1993 202H
06.00%, 02/25/22 25,000 23,641
1993 160PK
08.50%, 11/25/22 75,000 72,340
1994 30H
06.25%, 11/25/22 35,000 33,633
1993 183K
06.50%, 07/25/23 75,000 69,140
----------
458,346
----------
FEDERAL HOME LOAN MORTGAGE CORPORATION 6.2%
Pool 380003
09.50%, 06/10/02 35,046 36,601
Pool 380062
09.50%, 11/01/04 76,215 80,599
Pool 504019
09.00%, 03/01/06 58,419 60,555
Pool 1356J
05.50%, 10/15/20 35,000 32,353
Pool 1610PM
06.25%, 04/15/22 30,000 28,865
----------
238,973
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 12.6%
Pool 357282
07.50%, 09/15/23 136,621 137,133
Pool 370281
07.50%, 11/15/23 193,840 194,567
Pool 354713
07.50%, 12/15/23 150,001 150,554
----------
482,264
----------
TOTAL AGENCY OBLIGATIONS
(cost $1,236,943) 1,179,583
----------
</TABLE>
-4-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
unaudited
<TABLE>
<CAPTION>
Portfolio
Percentage Value
----------- -------
<S> <C> <C> <C>
TOTAL INVESTMENTS 97.0% $3,715,658
(cost $3,651,436)
OTHER ASSETS IN EXCESS OF LIABILITIES 3.0% 115,140
------ ----------
NET ASSETS 100.0% $3,830,797
------ ----------
------ ----------
</TABLE>
* Denotes 144A Registered
-5-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
unaudited
<TABLE>
<S> <C>
ASSETS:
Investments at value (Cost $3,651,436) $3,784,798
Cash 70,174
Receivables:
Interest 45,086
Due from advisor 351
Investment securities sold --
Dividends 4,454
Principal paydowns 1,706
Fund share sold -
----------
Total assets 3,906,569
----------
LIABILITIES:
Payable:
Investment securities purchased -
Accrued expenses 6,632
----------
Total liabilities 6,632
----------
NET ASSETS $3,899,937
----------
----------
INTERESTS 285,574
----------
----------
- ---------------
NET ASSET VALUE PER SHARE:
Net assets / Interests
---------- ---------
<S> <C> <C> <C>
INSTITUTIONAL PORTFOLIO $3,874,085 / 283,685 $13.66
------
------
NACM $25,852 / 1,889 $13.69
---------- --------- ------
TOTAL $3,899,937 / 285,574 $13.69
---------- --------- ------
---------- --------- ------
- ---------------
NET ASSETS CONSISTED OF THE FOLLOWING:
Paid-in capital 3,553,850
Accumulated net investment income 115,860
Accumulated net realized gain 96,865
Unrealized appreciation on investments 133,362
----------
$3,899,937
----------
----------
</TABLE>
-6-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS
for the period ended December 31, 1996
unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Interest $111,157
Dividend 15,934
----------
Total income 127,091
----------
EXPENSES:
Advisory fee 9,627
Advisory fee waived (9,164)
Administration fee 464
Accounting fee 2,949
Audit fee 387
Custodian fee 3,280
Insurance -
Legal fee 17
Miscellaneous 131
Organization costs -
Trustees' fee 3,540
----------
Total expenses 11,231
----------
Net investment income 115,860
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions 96,865
Change in unrealized appreciation of investments 133,362
----------
Net gain on investments 230,227
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $346,087
----------
----------
</TABLE>
-7-
<PAGE>
NICHOLAS-APPLEGATE
STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
for the period ended December 31, 1996
unaudited
<TABLE>
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $115,860
Net realized and unrealized gain on investments 230,227
----------
Net increase in net assets resulting from operations 346,087
----------
TRANSACTIONS IN INTERESTS:
Contributions from Strategic Income Institutional Portfolio 3,848,709
Contributions from NACM 25,000
Withdrawals from Strategic Income Institutional Portfolio (318,332)
Withdrawals from NACM (1,527)
----------
Increase in net assets derived from interest transactions 3,553,850
----------
Total increase in net assets 3,899,937
NET ASSETS:
Beginning of period -
----------
End of period $3,899,937
----------
- ---------------
INTERESTS:
Institutional
Portfolio NACM Total
------------- --------- ---------
<S> <C> <C> <C>
Beginning balance - - -
Contributions 308,072 2,000 310,072
Withdrawals (24,387) (111) (24,498)
--------- --------- ---------
Ending balance 283,686 1,889 285,574
--------- --------- ---------
--------- --------- ---------
</TABLE>
-8-
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Mutual Funds (the "Trust") is organized as a
diversified, open-end management investment company which offers 46 separate
series comprised of Portfolios A, with an initial sales charge, B, with a back-
end sales charge, C, with a level asset based sales charge, Institutional, with
no load, and Qualified, with no load (each a "Portfolio" and collectively the
"Portfolios"). The 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"), a diversified
open-end management investment company offering seventeen investment vehicles
(the "Funds"). For a description of the investment objectives of each Fund, see
Note A to the accompanying Funds' financial statements.
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
INVESTMENT INCOME
Each Portfolio accrues income, net of expenses, daily on its investment in
the applicable Fund. All of the net investment income (deficit) and realized
and unrealized gains and losses from the security transactions and foreign
currency of the Fund are allocated pro rata among the investors in the Fund at
the time of such determination.
FEDERAL INCOME TAXES
It is the Portfolios' policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of their taxable income to their shareholders.
Accordingly, no federal income tax provisions are required if the Portfolios
continue to comply with such requirements.
The Funds are treated as partnerships for federal income tax purposes. Any
interest, dividends and gains or losses of the Funds will be deemed to have been
"passed through" to the Portfolios.
Net investment income and net realized gains for the year (or period where
appropriate) differ for financial statement and tax purposes primarily because
of one or all of the following: deferral of wash-sale losses, passive foreign
investments, unrealized appreciation/depreciation, and capital loss
carryforwards.
The character of distributions made during the year (or period where
appropriate) from net investment income or net realized gains may differ from
their ultimate characterization for federal income tax purposes due to book/tax
differences in the character of income and expense recognition.
DEFERRED ORGANIZATION COSTS
Organization costs incurred by the Trust have been allocated to certain
Portfolios based upon management's best estimate of the costs applicable to each
Portfolio. These costs have been deferred and will be amortized over a period
of 60 months from the date the Portfolios commenced operations.
In the event that any of the initial shares are redeemed by the holder
during the period of amortization of the Portfolios' organization costs, the
redemption proceeds will be reduced by any such unamortized organization costs
in the same proportion as the number of initial shares being redeemed bears to
the number of those shares outstanding at the time of redemption.
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate" or "Investment Adviser"). The advisory fee is
computed daily for the Funds based upon the percentage of each Fund's average
daily net assets.
EXPENSE LIMITATIONS
Nicholas-Applegate and the Trust have undertaken to limit the Portfolios'
expenses to the following annual levels through December 31, 1996. In
subsequent years, overall operating expenses for each Portfolio will not fall
below the applicable percentage limitation until the Investment Adviser has been
fully reimbursed for fees foregone or expenses paid by the Investment Adviser
under this agreement, as each Portfolio will reimburse the Investment Adviser in
subsequent years when operating expenses (before reimbursement) are less than
the applicable percentage limitation.
High Yield Bond Institutional Portfolio . . . . . . . . . 0.75%
Strategic Income Institutional Portfolio . . . . . . . . 0.75%
These percentages are based on the average net assets of the Portfolios,
exclusive of interest, taxes, brokerage commissions and other costs incurred in
connection with portfolio securities transactions, capital expenditures, and
extraordinary expenses.
The cumulative unreimbursed amounts paid by Nicholas-Applegate on behalf of
the Portfolios, during the periods from inception (respectively) to December 31,
1996 are as follows:
High Yield Bond Institutional Portfolio . . . . . . . . . $ 8,323
Strategic Income Institutional Portfolio. . . . . . . . . $ 8,325
Nicholas-Applegate advanced certain organization costs discussed in Note 1.
As of December 31, 1996, the High Yield Bond Institutional Portfolio and
Strategic Income Institutional Portfolio have no amounts due to Nicholas-
Applegate for organizational costs advanced.
RELATED PARTIES
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
Certain officers of the Trust and the Master Trust are also officers of the
Investment Advisor and the Distributor.
3. INVESTMENT TRANSACTIONS
Additions and reductions in the investments in the respective Master Trust
Funds for the fiscal year ended December 31, 1996, were as follows:
Additions Reductions
(000s) (000s)
--------- ----------
High Yield Bond Institutional Portfolio . . . . . $4,256 $279
Strategic Income Institutional Portfolio. . . . . 3,849 318
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified,
open-end management investment company organized as a Delaware business trust,
is comprised of seventeen investment vehicles (each a "Fund" and collectively
the "Funds") as of December 31, 1996. Each Fund has up to five Portfolios which
have invested in the respective series of the Master Trust to achieve their
investment objective.
The investment objectives of the Funds are as follows:
High Yield Bond Institutional Portfolio seeks to deliver total return via
high current income and long-term capital appreciation from a diversified
portfolio consisting primarily of U.S. corporate fixed income securities.
Strategic Income Institutional Portfolio seeks to provide a high level of
current income and long-term capital appreciation through investment in
convertible, high yield, and mortgage-backed debt securities.
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
SECURITIES TRANSACTIONS
Equity securities are valued at the last sale price (for exchange-listed
securities) or the mean between the last bid and asked price (if lacking any
sales and for over-the-counter securities). Debt securities generally are
valued at the mean between the last bid and asked prices. Securities with
60 days or less remaining to maturity are valued on an amortized cost basis
which approximates market value.
Securities for which market quotations are not readily available are valued
at fair value determined in good faith by or under the direction of the Master
Trust's Board of Trustees.
Securities transactions are recognized on the trade date. Realized gains
and losses from securities transactions are calculated using the first-in,
first-out method. Dividend income is recognized on the ex-dividend date, and
interest income is recorded on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective securities.
The prospectus for the Nicholas-Applegate Mutual Funds describes each Fund's
policies with respect to declaration and payment of dividends and distribution
of capital gains.
FEDERAL INCOME TAXES
The Funds are treated as partnerships for federal income tax purposes. Any
interest, dividends and gains or losses of a Fund will be deemed to have been
"passed through" to the Portfolios.
DEFERRED ORGANIZATION COSTS
Organization costs incurred by the Master Trust have been allocated to the
various Funds based upon management's best estimate of the costs applicable to
each Fund. These costs have been deferred and will be amortized over a period
of 60 months from the date the Funds commenced operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
B. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate"). Nicholas Applegate is compensated for its
services to the Funds in the form of monthly fees at the following annual rates:
for the High Yield Bond Institutional Portfolio, 0.60% of the first $500 million
of the Fund's average net assets, 0.60% of the next $500 million of average net
assets and 0.60% of average net assets in excess of $1 billion, for the
Strategic Income Institutional Portfolio, 0.60% of the first $500 million of the
Fund's average net assets, 0.60% of the next $500 million of average net assets,
and 0.60% of average net assets in excess of $1 billion.
The cumulative unreimbursed amounts paid by Nicholas-Applegate on behalf of
the Funds, during the periods from inception (July 31, 1996) to December 31,
1996 are as follows:
High Yield Bond Fund. . . . . . . . . . . . . . . . . . . $7,500
Strategic Income Fund . . . . . . . . . . . . . . . . . . $9,164
Nicholas-Applegate advanced certain organization costs discussed in Note 1.
As of December 31, 1996, the following Funds have amounts due to Nicholas-
Applegate for organizational costs advanced:
High Yield Bond Fund. . . . . . . . . . . . . . . . . . . $10,689
Strategic Income Fund . . . . . . . . . . . . . . . . . . $9,627
C. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investment securities, other than
short-term obligations, for the fiscal year ended December 31, 1996, were as
follows (in 000's):
Fund Purchases Sales
- ---- --------- ----------
High Yield Bond Fund . . . . . . . . . . . . . . . . . $14,297 $ 10,863
Strategic Income Fund. . . . . . . . . . . . . . . . . $9,201 $5,568
At December 31, 1996, the net unrealized appreciation (depreciation) based
on the cost of investments for Federal income tax purposes was as follows (in
000's):
Tax Gross Gross Net
Cost of Unrealized Unrealized Unrealized
Fund Investments Appreciation Depreciation Depreciation
- ---- ----------- ------------ ------------ ------------
High Yield Bond Fund . . . $ 4,219 $ 159 $4 $155
Strategic Income Fund. . . 3,651 141 8 133
FINANCIAL HIGHLIGHTS
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME FIXED INCOME
INSTITUTIONAL INSTITUTIONAL
------------------- ------------------
8-31-95 + 8-31-95 +
to to
3-31-96 3-31-96
------------------- ------------------
PER SHARE DATA:
Net asset value, beginning of period $ 12.50 $ 12.50
Income from investment operations:
Net investment income 0.45 0.37
Net realized and unrealized gains
on securities 0.47 0.29
----------- -----------
Total from investment operations 0.92 0.66
Less distributions:
Dividends from net investment income (0.44) (0.37)
Distributions from capital gains (0.26) --
----------- -----------
Net asset value, end of period $ 12.72 $ 12.79
----------- -----------
----------- -----------
TOTAL RETURN: 5.49% 5.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $ 4,413 $ 4,726
Ratio of expenses to
average net assets, after
expense reimbursement 0.45%* 0.35%*
Ratio of expenses to
average net assets, before
expense reimbursement 6.45%* 3.17%*
Ratio of net income to average net
assets, after expense reimbursement 6.39%* 5.81%*
Ratio of net income to average net
'assets, before expense reimbursement 2.63%* 4.01%*
Portfolio turnover ** 60.06% 114.38%
Average commission rate
per share ** -- --
* Annualized
** For the corresponding Fund of the Master Trust.
+ Portfolio commenced operations on August 31, 1995.
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
FORM N-1A
PART C: OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. Registrant's unaudited Schedules of Investments as of December 31,
1996, Statements of Assets and Liabilities as of December 31, 1996,
Statements of Changes in Net Assets for the period ended December 31,
1996, and related Notes, with respect to its High Yield Bond
Institutional Portfolio series and its Strategic Income Institutional
Portfolio series, are included in Part B.
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).
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
C-1
<PAGE>
(3) None.
(4) None.
(5) None.
(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).
(7) None.
(8.1) Custodian Services Agreement between Registrant and PNC Bank
dated as of April 1, 1993 (f).
(8.2) Letter agreement between Registrant and PNC Bank dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Custodian Services Agreement (f).
(8.3) Letter agreement between Registrant and PNC Bank dated
August 20, 1993, adding Emerging Growth Portfolio series to
Custodian Services Agreement (f).
(8.4) Letter agreement between Registrant and PNC Bank dated
December 15, 1993, adding International Growth Portfolio
series to Custodian Services Agreement (f).
(8.5) Letter agreement between Registrant and PNC Bank dated April
22, 1994, adding Core Growth Qualified Portfolio series to
Custodian Services Agreement (f).
C-2
<PAGE>
(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).
(9.1) Administration Agreement between Registrant and Investment
Company Administration Corporation dated as of April 1, 1993
(f).
(9.2) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1,
1993 (f).
(9.3) Letter agreement between Registrant and State Street Bank
and Trust Company dated July 19, 1993, adding certain
Institutional (formerly Qualified) Portfolio series to
Transfer Agency and Service Agreement (f).
(9.4) Letter agreement between Registrant and State Street Bank
and Trust Company dated August 20, 1993, adding Emerging
Growth Portfolio Series to Transfer Agency and Service
Agreement (f).
(9.5) Letter agreement between Registrant and State Street Bank
and Trust Company dated December 15, 1993, adding
International Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.6) Letter agreement between Registrant and State Street Bank
and Trust Company dated April 22, 1994, adding Core Growth
Qualified Portfolio series to Transfer Agency and Service
Agreement (f).
(9.7) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Emerging Countries Growth
Portfolio series, Global Growth & Income Portfolio series
and Mini-Cap Growth Portfolio series to Transfer Agency and
Service Agreement (f).
(9.8) Letter agreement between Registrant and State Street Bank
and Trust Company, adding Series B Portfolios to Transfer
Agency and Service Agreement (f).
(9.9) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Fixed Income Portfolio series
to Transfer Agency and Service Agreement (f).
(9.10) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Value Institutional Portfolio
series to Transfer Agency and Service Agreement (a).
C-3
<PAGE>
(9.11) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding High Yield Bond and Strategic
Income Institutional Portfolio series to Transfer Agency and
Service Agreement (b).
(9.12) Form of letter agreement between Registrant and State Street
Bank and Trust Company, adding Large Cap Growth and Core
Growth International Portfolio series to Transfer Agency and
Service Agreement (i).
(9.13) Form of letter agreement between Registrant and State Street
Bank and Trust Company adding Core Growth International
Portfolio C series to Transfer Agency and Service Agreement
(i).
(9.14) Shareholder Service Plan between Registrant and Nicholas-
Applegate Securities (f).
(9.15) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (f).
(9.16) Accounting Services Agreement between Registrant and PFPC
Inc. dated as of April 1, 1993 (f).
(9.17) Letter agreement between Registrant and PFPC Inc. dated July
19, 1993, adding certain Institutional (formerly Qualified)
Portfolio series to Accounting Services Agreement (f).
(9.18) Letter agreement between Registrant and PFPC Inc. dated
August 20, 1993, adding Emerging Growth Portfolio series to
Accounting Services Agreement (f).
(9.19) Letter agreement between Registrant and PFPC Inc. dated
December 15, 1993, adding International Growth Portfolio
series to Accounting Services Agreement (f).
(9.20) Letter agreement between Registrant and PFPC Inc. dated
April 22, 1994, adding Core Growth Qualified Portfolio
series to Accounting Services Agreement (f).
(9.21) Letter agreement between Registrant and PFPC Inc., adding
Emerging Countries Growth Portfolio series, Global Growth &
Income Portfolio series and Mini-Cap Growth Portfolio series
to Accounting Services Agreement (f).
(9.22) Letter agreement between Registrant and PFPC Inc., adding
Series B Portfolios to Accounting Services Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc., adding
Fixed Income Portfolio series to Accounting Services
Agreement (f).
(9.24) Form of letter agreement between Registrant and PFPC Inc.
adding Value Institutional Portfolio series to Accounting
Services Agreement (a).
(9.25) Form of letter agreement between Registrant and PFPC Inc.
adding High Yield Bond and Strategic Income Institutional
Portfolio series to Accounting Services Agreement (b).
(9.26) Form of letter agreement between Registrant and PFPC Inc.
adding Large Cap Growth and Core Growth International
Portfolio series to Accounting Services Agreement (i).
(9.27) Form of letter agreement between Registrant and PFPC Inc.
adding Core Growth International Portfolio C series to
Accounting Services Agreement (i).
(9.28) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated September 27, 1993 regarding
expense reimbursements (f).
C-4
<PAGE>
(9.29) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated December 15, 1993, adding
International Growth Portfolio series to agreement regarding
expense reimbursements (f).
(9.30) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated April 22, 1994, adding Qualified
Portfolio series to agreement regarding expense
reimbursements (f).
(9.31) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Emerging Growth Institutional
Portfolio series, Global Growth & Income Portfolio series
and Mini-Cap Growth Portfolio series to agreement regarding
expense reimbursements (f).
(9.32) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Series B Portfolios to agreement
regarding expense reimbursement (f).
(9.33) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Qualified and Fixed Income
Portfolio series to agreement regarding expense
reimbursement (f).
(9.34) Letter agreement between Registrant and Nicholas-Applegate
Capital Management revising expense reimbursement agreement
with respect to Government Income Portfolios (f).
(9.35) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Value Institutional
Portfolio series to agreement regarding expense
reimbursement (a).
(9.36) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding High Yield Bond and
Strategic Income Institutional Portfolio series to agreement
regarding expense reimbursement (b).
(9.37) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Large Cap Growth and
Core Growth International Portfolio series to agreement
regarding expense reimbursement (i).
(9.38) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Core Growth
International Portfolio C series to agreement regarding
expense reimbursement (i).
(9.39) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (f).
(9.40) Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management (i).
(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).
C-5
<PAGE>
(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).
______________________________
(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.
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.
C-6
<PAGE>
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 31, 1996, the number of record holders of each series of
Registrant was as follows:
Title of Series Number of Record Holders
--------------- ------------------------
Core Growth Portfolio A 6,595
Emerging Growth Portfolio A 11,119
Income & Growth Portfolio A 1,906
Balanced Growth Portfolio A 543
International Growth Portfolio A 185
Worldwide Growth Portfolio A 1,825
Government Income Portfolio A 199
Emerging Countries Portfolio A 1,266
Money Market Portfolio 411
Core Growth Portfolio B 2,082
Emerging Growth Portfolio B 2,427
Income & Growth Portfolio B 502
Balanced Growth Portfolio B 129
International Growth Portfolio B 210
Worldwide Growth Portfolio B 308
Government Income Portfolio B 113
Emerging Countries Portfolio B 1,140
Core Growth Portfolio C 14,254
Emerging Growth Portfolio C 17,314
Income & Growth Portfolio C 5,188
Balanced Growth Portfolio C 1,308
Worldwide Growth Portfolio C 5,795
International Growth Portfolio C 331
Government Income Portfolio C 406
Emerging Countries Portfolio C 1,108
Core Growth Institutional Portfolio 194
Emerging Growth Institutional Portfolio 188
Income & Growth Institutional Portfolio 106
Balanced Growth Institutional Portfolio 22
Worldwide Growth Institutional Portfolio 68
International Growth Institutional Portfolio 74
Emerging Countries Institutional Portfolio 124
Mini Cap Growth Institutional Portfolio 153
Fully Discretionary Institutional Fixed Income Portfolio 12
Short-Intermediate Institutional Fixed Income Portfolio 13
Value Institutional Portfolio 19
High Yield Bond Institutional Portfolio 20
Strategic Income Institutional Portfolio 16
Core Growth Qualified Portfolio 181
Income & Growth Qualified Portfolio 10
Balanced Growth Qualified Portfolio 11
Worldwide Growth Qualified Portfolio 10
Government Income Qualified Portfolio 9
Emerging Growth Qualified Portfolio 10
International Growth Qualified Portfolio 10
Emerging Countries Qualified Portfolio 8
C-7
<PAGE>
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
C-8
<PAGE>
Nicholas-Applegate Securities. The principal business address of such persons
is 600 West Broadway, 30th Floor, San Diego, California 92101, except as
otherwise indicated below.
Positions and Positions and
Name and Principal Offices with Principal Offices with
Business Address Underwriter Registrant
- ------------------ ---------------------- -------------
Arthur E. Nicholas Chairman and President None
Peter J. Johnson Vice President Vice President
Thomas Pindelski Chief Financial Officer Chief Financial Officer
E. Blake Moore, Jr. Secretary Secretary
Todd Spillane Director of Compliance None
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained either at the offices of the Registrant (600 West
Broadway, 30th Floor, San Diego, California 92101); the Investment Adviser to
the Trust and Master Trust, Nicholas-Applegate Capital Management (600 West
Broadway, 30th Floor, San Diego, California 92101); the Administrator for the
Trust and Master Trust, Investment Company Administration Corporation (4455 East
Camelback Road, Suite 261-E, Phoenix, Arizona 85018); the Custodian, PNC Bank
(Airport Business Center, International Court 2, 200 Stevens Drive, Lester,
Pennsylvania 19113); or the Transfer and Dividend Disbursing Agent, State Street
Bank & Trust Company (2 Heritage Drive, 7th Floor, North Quincy, Massachusetts
02171).
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
Registrant hereby undertakes that if it is requested by the holders of at
least 10% of its outstanding shares to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, it will do so and
will assist in communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 5th day
of February, 1997. The undersigned hereby certifies that this Amendment meets
all of the requirements for effectiveness pursuant to Rule 485(b) under the
Securities Act of 1933.
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 February 5, 1997
- ------------------------ Officer
John D. Wylie
s/Thomas Pindelski Principal Financial and February 5, 1997
- ------------------------ Accounting Officer
Thomas Pindelski
Fred C. Applegate* Trustee February 5, 1997
- ------------------------
Fred C. Applegate
Arthur B. Laffer* Trustee February 5, 1997
- ------------------------
Arthur B. Laffer
Charles E. Young* Trustee February 5, 1997
- ------------------------
Charles E. Young
* s/E. Blake Moore, Jr.
- ------------------------
By: E. Blake Moore, Jr.
Attorney In Fact
C-10
<PAGE>
SIGNATURES
Nicholas-Applegate Investment Trust has duly caused this Amendment to
Registration Statement on Form N-1A of Nicholas-Applegate Mutual Funds to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, State of California, on the 5th day of February, 1997. The
undersigned hereby certifies that this Amendment meets all of the requirements
for effectiveness pursuant to Rule 485(b) under the Securities Act of 1933.
NICHOLAS-APPLEGATE INVESTMENT TRUST
By John D. Wylie*
-------------------------
John D. Wylie
President
This Amendment to Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
John D. Wylie* Principal Executive February 5, 1997
- ------------------------- Officer
John D. Wylie
s/Thomas Pindelski Principal Financial February 5, 1997
- ------------------------- and Accounting Officer
Thomas Pindelski
George F. Keane* Trustee February 5, 1997
- -------------------------
George F. Keane
Dann V. Angeloff* Trustee February 5, 1997
- -------------------------
Dann V. Angeloff
Walter E. Auch* Trustee February 5, 1997
- -------------------------
Walter E. Auch
Theodore J. Coburn* Trustee February 5, 1997
- -------------------------
Theodore J. Coburn
Darlene DeRemer* Trustee February 5, 1997
- -------------------------
Darlene DeRemer
Arthur E. Nicholas* Trustee February 5, 1997
- -------------------------
Arthur E. Nicholas
* s/E. Blake Moore, Jr.
- ------------------------
By: E. Blake Moore, Jr.
Attorney in Fact
C-11
<PAGE>
EXHIBIT INDEX
NICHOLAS-APPLEGATE MUTUAL FUNDS
AMENDMENT NO. 41 TO
FORM N-1A REGISTRATION STATEMENT
FILE NO. 811-7428
Exhibit No. Title of Exhibit
- ----------- ----------------
(1.1) Certificate of Trust of Registrant (f).
(1.2) Certificate of Amendment to Certificate of Trust of Registrant
(f).
(1.3) Amended and Restated Declaration of Trust of Registrant (f).
(1.4) Certificate of Trustees dated August 6, 1993, establishing
Emerging Growth Portfolio series (f).
(1.5) Certificate of Trustees dated December 15, 1993, establishing
International Growth Portfolio series (f).
(1.6) Amendment No. 2 to Amended and Restated Declaration of Trust (f).
(1.7) Amendment No. 3 to Amended and Restated Declaration of Trust (f).
(1.8) Amendment No. 4 to Amended and Restated Declaration of Trust (f).
(1.9) Amendment No. 5 to Amended and Restated Declaration of Trust (f).
(1.10) Amendment No. 6 to Amended and Restated Declaration of Trust (f).
(1.11) Amendment No. 7 to Amended and Restated Declaration of Trust (f).
(1.12) Form of Amendment No. 8 to Amended and Restated Declaration of
Trust (f).
(1.13) Amendment No. 9 to Amended and Restated Declaration of Trust (f).
(1.14) Form of Amendment No. 10 to Amended and Restated Declaration of
Trust (b).
(1.15) Amendment No. 11 to Amended and Restated Declaration of Trust
(i).
(1.16) Form of Amendment No. 12 to Amended and Restated Declaration of
Trust (i).
(2.1) Amended Bylaws of Registrant (f).
(2.2) Amendment to Section 2.5 of Bylaws of Registrant (f).
(3) None.
(4) None.
(5) None.
(6.1) Distribution Agreement between Registrant and Nicholas-Applegate
Securities dated as of April 19, 1993 (f).
C-12
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(6.2) Letter agreement between Registrant and Nicholas-Applegate
Securities dated May 17, 1993, adding certain Institutional
(formerly Qualified) Portfolio series and Emerging Growth
Portfolio series to Distribution Agreement (f).
(6.3) Letter agreement between Registrant and Nicholas-Applegate
Securities dated December 15, 1993, adding International Growth
Portfolio series to Distribution Agreement (f).
(6.4) Letter agreement between Registrant and Nicholas-Applegate
Securities dated April 22, 1994, adding Qualified Portfolio
series to Distribution Agreement (f).
(6.5) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Emerging Countries Growth Portfolio series,
Global Growth & Income Portfolio series and Mini-Cap Growth
Portfolio series to Distribution Agreement (f).
(6.6) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Series B Portfolios to Distribution Agreement
(f).
(6.7) Letter agreement between Registrant and Nicholas-Applegate
Securities, adding Fixed Income and Qualified Portfolio series to
Distribution Agreement (f).
(6.8) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding Value Institutional Portfolio series
to Distribution Agreement (a).
(6.9) Form of letter agreement between Registrant and Nicholas-
Applegate Securities, adding High Yield Bond and Strategic Income
Institutional Portfolio series to Distribution Agreement (b).
(6.10) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Large Cap Growth and Core Growth
International Portfolio series to Distribution Agreement (i).
(6.11) Form of letter agreement between Registrant and Nicholas-
Applegate Securities adding Core Growth International Portfolio C
series to Distribution Agreement (i).
(7) None.
(8.1) Custodian Services Agreement between Registrant and PNC Bank
dated as of April 1, 1993 (f).
(8.2) Letter agreement between Registrant and PNC Bank dated July 19,
1993, adding certain Institutional (formerly Qualified) Portfolio
series to Custodian Services Agreement (f).
(8.3) Letter agreement between Registrant and PNC Bank dated August 20,
1993, adding Emerging Growth Portfolio series to Custodian
Services Agreement (f).
(8.4) Letter agreement between Registrant and PNC Bank dated December
15, 1993, adding International Growth Portfolio series to
Custodian Services Agreement (f).
(8.5) Letter agreement between Registrant and PNC Bank dated April 22,
1994, adding Core Growth Qualified Portfolio series to Custodian
Services Agreement (f).
(8.6) Letter agreement between Registrant and PNC Bank, adding Emerging
Countries Growth Portfolio series, Global Growth & Income
Portfolio series and Mini-Cap Growth Portfolio series to
Custodian Services Agreement (f).
C-13
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(8.7) Letter agreement between Registrant and PNC Bank, adding Series B
Portfolios to Custodian Services Agreement (f).
(8.8) Letter agreement between Registrant and PNC Bank, adding Fixed
Income Portfolio series to Custodian Services Agreement (f).
(8.9) Form of letter agreement between Registrant and PNC Bank adding
Value Institutional Portfolio series to Custodian Services
Agreement (a).
(8.10) Form of letter agreement between Registrant and PNC Bank adding
High Yield Bond and Strategic Income Institutional Portfolio
series to Custodian Services Agreement (b).
(8.11) Form of letter agreement between Registrant and PNC Bank adding
Large Cap Growth and Core Growth International Portfolio series
to Custodian Services Agreement (i).
(8.12) Form of letter agreement between Registrant and PNC Bank adding
Core Growth International Portfolio C series to Custodian
Services Agreement (i).
(9.1) Administration Agreement between Registrant and Investment
Company Administration Corporation dated as of April 1, 1993 (f).
(9.2) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated as of April 1, 1993
(f).
(9.3) Letter agreement between Registrant and State Street Bank and
Trust Company dated July 19, 1993, adding certain Institutional
(formerly Qualified) Portfolio series to Transfer Agency and
Service Agreement (f).
(9.4) Letter agreement between Registrant and State Street Bank and
Trust Company dated August 20, 1993, adding Emerging Growth
Portfolio Series to Transfer Agency and Service Agreement (f).
(9.5) Letter agreement between Registrant and State Street Bank and
Trust Company dated December 15, 1993, adding International
Growth Portfolio series to Transfer Agency and Service Agreement
(f).
(9.6) Letter agreement between Registrant and State Street Bank and
Trust Company dated April 22, 1994, adding Core Growth Qualified
Portfolio series to Transfer Agency and Service Agreement (f).
(9.7) Letter agreement between Registrant and State Street Bank and
Trust Company, adding Emerging Countries Growth Portfolio series,
Global Growth & Income Portfolio series and Mini-Cap Growth
Portfolio series to Transfer Agency and Service Agreement (f).
(9.8) Letter agreement between Registrant and State Street Bank and
Trust Company, adding Series B Portfolios to Transfer Agency and
Service Agreement (f).
(9.9) Form of letter agreement between Registrant and State Street Bank
and Trust Company, adding Fixed Income Portfolio series to
Transfer Agency and Service Agreement (f).
(9.10) Form of letter agreement between Registrant and State Street Bank
and Trust Company, adding Value Institutional Portfolio series to
Transfer Agency and Service Agreement (a).
C-14
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(9.11) Form of letter agreement between Registrant and State Street Bank
and Trust Company, adding High Yield Bond and Strategic Income
Institutional Portfolio series to Transfer Agency and Service
Agreement (b).
(9.12) Form of letter agreement between Registrant and State Street Bank
and Trust Company, adding Large Cap Growth and Core Growth
International Portfolio series to Transfer Agency and Service
Agreement (i).
(9.13) Form of letter agreement between Registrant and State Street Bank
and Trust Company adding Core Growth International Portfolio C
series to Transfer Agency and Service Agreement (i).
(9.14) Shareholder Service Plan between Registrant and Nicholas-
Applegate Securities (f).
(9.15) License Agreement dated as of December 17, 1992, between
Registrant and Nicholas-Applegate Capital Management (f).
(9.16) Accounting Services Agreement between Registrant and PFPC Inc.
dated as of April 1, 1993 (f).
(9.17) Letter agreement between Registrant and PFPC Inc. dated July 19,
1993, adding certain Institutional (formerly Qualified) Portfolio
series to Accounting Services Agreement (f).
(9.18) Letter agreement between Registrant and PFPC Inc. dated August
20, 1993, adding Emerging Growth Portfolio series to Accounting
Services Agreement (f).
(9.19) Letter agreement between Registrant and PFPC Inc. dated December
15, 1993, adding International Growth Portfolio series to
Accounting Services Agreement (f).
(9.20) Letter agreement between Registrant and PFPC Inc. dated April 22,
1994, adding Core Growth Qualified Portfolio series to Accounting
Services Agreement (f).
(9.21) Letter agreement between Registrant and PFPC Inc., adding
Emerging Countries Growth Portfolio series, Global Growth &
Income Portfolio series and Mini-Cap Growth Portfolio series to
Accounting Services Agreement (f).
(9.22) Letter agreement between Registrant and PFPC Inc., adding Series
B Portfolios to Accounting Services Agreement (f).
(9.23) Letter agreement between Registrant and PFPC Inc., adding Fixed
Income Portfolio series to Accounting Services Agreement (f).
(9.24) Form of letter agreement between Registrant and PFPC Inc. adding
Value Institutional Portfolio series to Accounting Services
Agreement (a).
(9.25) Form of letter agreement between Registrant and PFPC Inc. adding
High Yield Bond and Strategic Income Institutional Portfolio
series to Accounting Services Agreement (b).
(9.26) Form of letter agreement between Registrant and PFPC Inc. adding
Large Cap Growth and Core Growth International Portfolio series
to Accounting Services Agreement (i).
(9.27) Form of letter agreement between Registrant and PFPC Inc. adding
Core Growth International Portfolio C series to Accounting
Services Agreement (i).
C-15
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(9.28) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated September 27, 1993 regarding expense
reimbursements (f).
(9.29) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated December 15, 1993, adding International
Growth Portfolio series to agreement regarding expense
reimbursements (f).
(9.30) Letter agreement between Registrant and Nicholas-Applegate
Capital Management dated April 22, 1994, adding Qualified
Portfolio series to agreement regarding expense reimbursements
(f).
(9.31) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Emerging Growth Institutional
Portfolio series, Global Growth & Income Portfolio series and
Mini-Cap Growth Portfolio series to agreement regarding expense
reimbursements (f).
(9.32) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Series B Portfolios to agreement
regarding expense reimbursement (f).
(9.33) Letter agreement between Registrant and Nicholas-Applegate
Capital Management, adding Qualified and Fixed Income Portfolio
series to agreement regarding expense reimbursement (f).
(9.34) Letter agreement between Registrant and Nicholas-Applegate
Capital Management revising expense reimbursement agreement with
respect to Government Income Portfolios (f).
(9.35) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Value Institutional
Portfolio series to agreement regarding expense reimbursement
(a).
(9.36) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding High Yield Bond and
Strategic Income Institutional Portfolio series to agreement
regarding expense reimbursement (b).
(9.37) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Large Cap Growth and Core
Growth International Portfolio series to agreement regarding
expense reimbursement (i).
(9.38) Form of letter agreement between Registrant and Nicholas-
Applegate Capital Management, adding Core Growth International
Portfolio C series to agreement regarding expense reimbursement
(i).
(9.39) Credit Agreement among Registrant, Chemical Bank and certain
other banks dated April 10, 1996 (f).
(9.40) Administrative Services Agreement between Registrant and
Nicholas-Applegate Capital Management (i).
(10) Opinion of Counsel (c).
(11) Not applicable.
(12) Not applicable.
(13) Investment Letter of initial investor in Registrant dated
April 1, 1993 (f).
C-16
<PAGE>
Exhibit No. Title of Exhibit
- ----------- ----------------
(14.1) IRA Plan Materials (d).
(14.2) 401(k) Profit-Sharing Plan Materials (d).
(15) Amended Distribution Plan of Registrant (f)
(16) Schedule of Computation of Performance Quotations (c).
(17) Not applicable.
(18) Not applicable.
(19.1) Limited Powers of Attorney of Trustees (d).
(19.2) Limited Power of Attorney of Walter E. Auch (e).
(19.3) Limited Power of Attorney of John D. Wylie (h).
(19.4) Certified Resolution of Board of Trustees of Registrant regarding
Limited Power of Attorney of John D. Wylie (h).
______________________________
(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.
C-17
